With over $700 billion in market capitalization, Bitcoin remains the undisputed leader of the cryptocurrency industry. There is a wide discourse, however, regarding the mining process which makes the BTC blockchain functional – mainly regarding its environmental consequences.
Having said that, it is important to understand the mechanics behind Bitcoin mining – especially if you are new to crypto – because it can influence price developments. Below you’ll find some basic principles of the Bitcoin mining process. Bear in mind, it’s prudent to carry out more extensive research on the topic before taking the plunge into your first Bitcoin investment.
Why is Bitcoin mining necessary?
Bitcoin mining has been implemented in order to prevent the “double-spending problem”. This means that every miner actually verifies the transaction and in doing so, they make sure that digital coins are not being spent more than once – since they are exclusively mined.
Clearly, this is not physical mining we are talking about. The notion of Bitcoin mining is actually a metaphor for the computational work that nodes in the network undertake, ultimately aiming to gain rewards. If you want to truly learn how to trade Bitcoin, the mining process can influence your strategy, especially when anticipating long-term price developments.
Bitcoin relies on a Proof-of-Work mechanism, meaning all active miners need to verify the financial transactions conducted on the blockchain. This is in contrast to other cryptos, which rely on a Proof-of-Stake model, which is much more energy efficient.
Miners and hashes
Anyone can become a miner, as long as they have the hardware for it, such as CPUs, GPUs, and ASICs. Supposedly, mining involves solving advanced math puzzles in order to discover these coins, but in reality it’s more of a guesswork.
All miners involved in the Bitcoin ecosystem verify their financial transactions, but only one receives the reward (in the form of Bitcoin) at the end of the day. For that to happen, the miner needs to come up with a 64-digit hexadecimal number (or a “hash”), that is less than or equal to the target hash.
With trillions of possible hashes, miners with the largest hashing power and the ability to consume a whole lot of energy have a higher probability of finding these numbers correctly.
BTC block rewards and supply
Bitcoin miners receive BTC tokens as a reward for completing blocks of verified financial transactions, which are added to the blockchain. Once every 10 minutes, a new block is added to the ledger and the miner who successfully mined it will receive 6.25 BTC as reward.
Block rewards are important, especially since the figure is halved, or cut into half, every 210,00 blocks, which is approximately 4 years. The last halving took place in May 2020 and the next one is scheduled to occur on May 4th, 2024.
The maximum Bitcoin supply is capped at 21 million and as rewards are constantly being reduced, it naturally becomes increasingly difficult to mine new tokens. This means that BTC valuation can be supported for the longer run. Compared to fiat currencies, which are controlled by central banks and artificially inflated by increasing the monetary supply, Bitcoin offers a different – and limited – paradigm.