How To Mine Bitcoins

Next, we're going to take a more indepth look at how to mine bitcoins, including some technical information. As you know, Bitcoin mining refers to confirming existing Bitcoin transactions (blocks) by figuring out complex math problems. Once confirmed, they become a permanent part of what's known as the block chain - a record of every single Bitcoin transaction since it was first started. Because all the transactions are public - and in chronological order - it's easier to protect the neutrality of the network. At all times, different computers in the network have to agree on the state of the overall system. Doing it this way also makes sure that previous blocks can't be modified. If they were, blocks connected to them would also be invalidated. Other rules exist - coded into the software - to make sure that everything works as it should. Basically, Bitcoin mining is like a lottery in that it prevents any single person from adding consecutive blocks or from replacing sections of the block chain in order to "roll back" their own transactions for one reason or another. It's this competitive side of Bitcoin which makes it so addictive for some people as they try to gobble up all the new bitcoins as they are created when people conduct transactions. If you ask most people, Bitcoin Mining is one of the more difficult aspects of Bitcoin for people to understand. And yet it's crucial to the whole system because it is the only way that new bitcoins are created. Knowing how a currency is created - and understanding the process - is important in helping people trust Bitcoin as a valid currency. To help with this, we're going to go over some of the main concepts of Bitcoin Mining that you should know about.

Hash

The hash is really hard to understand, but at its core it's the result of a complex math problem. While it's relatively easy to reproduce, it's impossible to reverse once completed. It's also difficult to predict the answer.

Block

A block is a series of transactions placed together. Every Bitcoin Block is linked with the one before it in the chain as well as the one that will come after it. The further back a block is in the chain, the more difficult it is for a hacker to corrupt or change the data. Blocks connect with each other to form what is known as the Block Chain - the backbone of the Bitcoin system.

Difficulty

When trying to mine bitcoins, you're going to get a difficulty factor. This number tells you how hard it will be to find a winning hash and collect your bounty of bitcoins. On average, around six blocks should be solved every hour. Adding a random difficulty factor to this ensures that most blocks take around ten minutes to solve. Because new people are joining the network and others are leaving all the time, the difficulty factor is used to ensure that each block takes approximately ten minutes to solve - no matter how many people are connected to the Bitcoin network at the time. So, the more nodes in the Bitcoin network, the harder it is going to be to compute the hash and clear the block. Still, it comes down to luck as to which node in the network actually finds the winning solution first.

Bitcoin Rewards

Another interesting aspect of the Bitcoin network is that the reward for solving a block is controlled very closely. Every so often, the reward is halved so that less bitcoins are put into circulation. While the number started high in the early days of Bitcoin, it currently stands at 25 BTC per block in early 2014. In the year 2140, the halving will stop with bitcoin rewards being at zero finally. Exactly 21 million bitcoins will be in circulation at that time. At this point, the reward for solving the hash and clearing the block will be a part of the transaction fee - which will be a lot less than the current bounty of 25 BTC. In the very early days of Bitcoin, people were able to use their personal computers to mine for bitcoins without any problems. However, as more people started getting involved and they began throwing more and more computing power at the problem, Bitcoin Mining has become more of a team sport, with lone wolves unable to compete with all the others mining bitcoins. Today, application specific integrated circuit (ASIC) processors are custom built just for Bitcoin mining. The other main cost, of course, is electricity to keep the computer running. Most of the electricity is usually spent keeping the computer hardware cool as it crunches the numbers trying to solve hashes. In the beginning a single person could compete if they had a really fast computer with lots of RAM and a great graphics card, but those days are long gone. As large companies have formed and set-up dedicated server farms to mine bitcoins, the individual has very little chance of being able to compete

This is why Bitcoin groups pooling resources have become so popular. Different computers are pooled together to work on solving a block. If someone in the group comes up with the answer, the reward is split among everyone in the group depending on how much processing power they supplied.