Bitcoin mining involves putting computers to run a program and get paid for it.
A very simple explanation: The Bitcoin network thinks of a number. And each computer says a number. The computer that hits the number wins. With this example, we can explain the characteristics of mining.At the same time, you can think of Bitcoin miner as an accountant and miner, because they do two jobs. They dig for the gold of the Internet: Bitcoin. In addition, they confirm the transactions and thus secure the Bitcoin network (accountant).There are countless of these miners scattered all over the world, regardless of time and place – Decentralized.
The miners confirm all Bitcoin transactionsBitcoin is a decentralized virtual currency, which means that it does not have a central authority and that nobody trusts anyone. However, the payments are safe because the chain of blocks helps them to be.The Blockchain is like an Internet diary. It is a chain of successive blocks in which the transactions of those who transfer bitcoins, the amount and the recipient are saved. We can also refer to block chains with the term “accounting book”, which is very successful. There are a couple of features that should be highlighted in this regard.The first key feature of the blockchain is that all true participants in the Bitcoin network store the entire chain of blocks with all the transactions that have always been done and the participants add new blocks continuously at the end of the chain.The second key aspect is that the blockchain is based on cryptography.
The mathematical laws, not the reputation of some people or organizations, dictate the operation of the system and guarantee the good functioning of everything.Finally, all new bitcoins are minted through the mining process (and that is the only way by which you can create a bitcoin).The task of the miners is to “lend” their computers to verify the transaction history of Bitcoin in the so-called online ledger or accounting book of Bitcoin transactions. A transaction in Bitcoins is not considered valid until there is a consensus among the miners who have ceded their computing capacity to the system. The verification process guarantees that the same bitcoin can not be duplicated and maintains the integrity of the entire system. Lending or giving up this computing capacity is vital so that the integrity of the system is guaranteed and for this work the miners are rewarded with the new Bitcoins that are generated.However, the system works as a kind of lottery. A draw that today is held every 10 minutes and pays 25 Bitcoins to the lucky winner.
The more computing power you have made available to the Bitcoin protocol, the more numbers you have bought to participate in the raffle and therefore the more likely you are to be the lucky winner.In order to ensure constant income and not depend so much on the luck factor, many miners have been grouped in the so-called pools. In these pools it is agreed that if one of them is the lucky winner of the next 25 generated bitcoins, they will be distributed proportionally to the hash rate (or mining speed) that the resources that have made available to the pool have contributed.The business of mining Bitcoins is not risk-free if you try to see it from a financial perspective. Your possible profitability in the business will be defined by three factors:RewardThe Bitcoin network pays the one who hits the number. And we can deduce, that to earn more money than others, we just have to say more numbers per second than them. That is, have more computing power than them.
For example: if we have 2 people mining one with 4 calculation power and the other with 2. The one who has 4 calculation power is twice as likely to get the reward.DifficultyThe bitcoin network wants its reward distributed every 10 minutes. For this, what it does is increase the range of the number. That is, it is more complicated to hit a number from 1 to 100 than from 1 to 10. Then, the bitcoin network if you see that rewarding is too fast increases the difficulty. And if the distribution is very slow, the difficulty decreases. In this way, the network is re-adjusted so that as the calculation power of the miners increases, the blocks will not be mined faster.
Mining PoolsThe fourth concept is Mining Pool or Mining Pools. From the previous concepts, we have seen that to mine bitcoins we need many computers to touch us more. To this day, it is very unlikely that if you mine, you will get a reward. To solve this, what many miners do is get together. That is, ten people come together and each one has 10 computers.
And with that computing power, it’s much easier for them to get the reward before anyone else. So to be able to compete against the pools, you’re going to have to be part of one. Once you are part of a mining pool, they will give you your share of each reward you get.In principle, it seems that mining Bitcoins is not a structurally attractive activity as a business.
It requires a high and constant investment in Capital, it is difficult to establish a competitive advantage, the entry barriers are low but the relatively high exit barriers (once the equipment is purchased, you will continue to let it work while you cover the variable costs even if you are never going to recover the investment). In fact, it is quite similar to the traditional mining business, where the profitability of its activity depends to a large extent on the evolution of the price of a material or asset.The big difference is that in the traditional mining sector, investments to enter are much higher, and in many cases over time, cartels or oligopolies have been created that modulate production to maintain a minimum profitability.
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