Bitcoins are the latest innovation from the tech world. Since their inception in 2009, they have gained worldwide recognition with the number of users ‘mining’ and trading in bitcoins increasing on a daily basis. To understand this phenomenon, there needs to be a systematic break down of information in layman terms.
Bitcoins are a type of ‘crypto-currency’ or virtual currency. It can only be used electronically as there is no physical exchange involved, and it can be used to purchase anything as long as the person you are dealing with works with bitcoins.
Every time a person deals in bitcoins, there is an electronic record of this transaction, sort of like a digital imprint and this keeps a log of the bitcoins in circulation. The general practice is referred to as Bitcoin with a capitalised ‘B’ and the lower case version, bitcoins, indicates the currency used.
Obtaining bitcoins is done in one of two ways. Either you can ‘mine’ them or you can purchase them on Bitcoin exchange websites. Mining them is a longer and more complicated way of procuring bitcoins, with most people preferring to buy the ones already on the market.
Terms to Familiarise Yourself with
There are certain terms that need to be understood before the process of mining can be elaborated upon. Here are some of the main terms.
- Wallet: This is the place where you store your bitcoins, like a virtual alternative to your normal wallet. You can get yourself a wallet online from a number of sites, and it only takes a few minutes to set this up.
- Blockchain: This refers to the complete record of all the bitcoins ever procured, their current ownership and any changes in their ownership. This is the digital (and only) record of bitcoins and is usually updated in real time.
- Miners: These are the people that monitor the blockchain. They are like the bitcoin watchdogs, ensuring that all the transactions are recorded and accounted for and they even approve or disprove transactions in some cases. Another part of their job is to ensure that the bitcoins are being used in a safe manner.
- Pool: These are groups of people that collectively use their abilities to obtain bitcoins. Obtaining them as a solo player can take many years, which is why people prefer to do it in groups.
- Blocks: This is the data that the pools’ referred to above are working to discover. Solo players can find these blocks as well, however the process takes longer. An algorithm is used to discover these.
The Mining Process
The actual process of mining is complicated and completely mathematical. As stated previously, a Bitcoin algorithm that is applied to determine blocks results in obtaining bitcoins. These blocks are not easily available because the initial explorers discovered the main ones. As the number of people mining increases, the ability to discover a block becomes more and more difficult, resulting in people preferring to do this in pools. Here is a step by step guide on how mining takes place.
- The first thing you can do is to get yourself the bitcoin hash algorithm. This is the algorithm used to find the blocks of data.
- You or your group now spend time trying to find a match. When a block is discovered, it will produce a certain pattern in concurrence with the algorithm, which will mean that you have just discovered a new block.
- Once you discover the block, you get a certain number of bitcoins for doing this, and then you go back to square one and start again.
- The problem here is that as the number of newly discovered blocks increases, the amount of bounty you receive decreases resulting in new bitcoin explorers receiving fewer bitcoins every time.
Keep in mind that before you start the process of mining, you need to get yourself a wallet because that is the only place you can store your bitcoins. Every wallet has its own address, which is basically like your bank account number because this is what is used to identify your wallet.
Another important point to be aware of is how mining is measured. Mining is kept track of by ‘hashes’. These hashes are the number of times in a second that an attempt is made to discover a block. As the number of tries increases the chances of finding one decrease, and normal PCs can take about a decade to discover one. It takes supercomputers to perform this process now, and even then it takes about 3 years to discover a new block.
Previously the big players were using FPGA’s (Field Programmable Gate Arrays), in which the hardware does all the work as opposed to the software but even this is now becoming obsolete with the latest revolution. This is called ASIC (Application Specific Integrated Circuits), which are custom built circuits engineered for this purpose. They can discover a block in about six days and these circuits cost 72 bitcoins to purchase if not more.
They also use up a large amount of electricity; so, unless you are willing to invest some hefty capital, you will have to continue to try and mine bitcoins the old school way.