Mommy, where do bitcoins come from? Bitcoin mining explained

“Mommy, where do Bitcoins come from?” Well, you see, when a bright young Bitcoin catches the eye of an ambitious miner, and because they love each other so much…

Wait, obviously that’s too hard to figure out here. Also, my whole goal is to keep things simple. Anyway, Bitcoins are made by solving complex math problems. This makes it a powerful machine built to solve these math problems. This process is called mining. The people who own these machines to make money mining Bitcoins are called miners. When a batch of problems is solved, it is known as a block. Blocks are verified by other users, and once verified, they are added to what is called the blockchain. This chain continues to grow and a new block is added to it approximately every 10 minutes. This chain is really just a master book that will continue to grow and never end.

The very powerful machines they mine consume a lot of energy and add to the miner’s monthly utility bill. The reason it requires so much power is the math genius involved. It requires the mining machine to perform complex cryptographic algorithms. Once the machine solves a math problem, a block of coins is born. Every time 210,000 blocks are created, the reward for the miner is halved. It takes 4 years to achieve this. So it’s kind of like the Bitcoin Olympics. Currently the block reward is 12 Bitcoins (on June 23, 2020 the reward will be only 6 coins). Those coins go to the miner whose machine was the lucky lottery winner at the time. There is a winner every 10 minutes. There are also a lot of competing miners out there. Said miner now has something of value. He mines enough coins and you pay your electric bill and then some.

There is also another way to get to mine. It’s called cloud mining. With this type of mining, you are paying to use someone else’s network and that significantly reduces your profit. The positive aspects of this method are that it does not require using your electricity or even buying a machine.

Sounds good to me. I want to start mining now. Is it a good idea and can I generate passive income on a regular basis? Possibly. Hold on tight for now and you can make that call later.

Let’s try to break this down.

Going back to the original form of the mining machine, you would have to start by purchasing a quality mining machine. That would set you back about $2,000. Here is a picture of a nice machine (Bitmain’s Antminer S9) capable of creating a high hash rate of 14 TH/s. 1 TH/s is 1,000,000,000,000 hashes per second. This machine does 14 times that. That’s a lot of hashing power. A hash is just a really long number that the machine creates each time it tries to solve the algorithm. Again, to use my lottery analogy, all these machines are out there waiting to be the next winner.

So your chances of winning get harder and harder with more competition. To further complicate this matter, every time you solve one math problem, the next problem becomes more and more difficult to solve. The difficulty of the Bitcoin network changes approximately every two weeks or 2016 blocks. The number of Bitcoins that will ever be created is finite. That number turns out to be 21,000,000. Once we reach that number, another Bitcoin can never be mined again. However, the blockchain itself will continue to expand because it is used to verify every transaction or purchase.

Do you remember the pseudonym Satoshi Nakamoto that I also wrote about? Did you know that today’s math problems are more than 70,000 times harder for machines to solve than when the first Bitcoin was mined in 2009? The estimate is that the final coin will be mined in 2140 because the system halves every four years (210,000 blocks). 16,400,000 coins (78%) have already been mined and every coin from now on will be mined at a much slower rate. Yes, you read that right. Basically 80% was extracted in the first 8 years and it will take more than 100 years to extract the final 20%. If any of my great, great, great-grandchildren are reading this, I hope they feel good about our family’s Bitcoins now valued at 220,000 per Bitcoin. We can all dream well!

Buying a machine to mine or buying a cloud mining contract is risky. While there are some great success stories out there, be sure to research them thoroughly before deciding if mining is right for you. For every person who makes money, there are many people who lose money.

By the way, Coin Market Cap is a great resource to see all the cryptocurrencies out there and their total coins and market cap. You can see the 700+ flying altcoins out there. An altcoin is just another way of saying any cryptocurrency currency other than Bitcoin. By now, you probably know that Bitcoin is like the Rose Bowl, the granddaddy of them all! I would really try to limit my focus and research to the top 10 for now. It’s not that there won’t be one of the near-useless success stories now. It’s just that finding one is like choosing the right penny stock. Sticking with established companies that are being recognized by top analysts is a much safer play. The same goes for the exchange you use to buy, sell, and trade. This is why I use Coinbase to make my trades, as it is the most reliable, secure and convenient exchange. They also have the most thorough vetting process when it comes to adding altcoins.

Here is a summary of the key points of this article:

-Bitcoins are created from mining.

-Mining is done by powerful machines that solve complex mathematical problems. You can also buy contracts called cloud mining if you don’t want to buy a machine.

-The problems become more difficult as coins are mined and the production rate slows down

-As of May 2017, only 72 Bitcoins are mined per hour (12 every 10 minutes)

-On June 23, 2020 this will be halved again to just 6 created every 10 minutes

-About 80% of Bitcoin’s finite 21,000,000 coins have already been mined

-Competition among miners and increasingly complex math problems make it more difficult to profit from mining.

-It is estimated that the final coin will be mined in 2140