How Are New Bitcoins Created and Generated?

Bitcoin is commonly compared to gold because they boast many similarities in the way they are obtained, and both carry a high value. Like gold, new Bitcoins are generated through a process called “mining.” Bitcoins carry a two-fold purpose: to create new Bitcoins and facilitate the processing of transactions within the network.

To further parallel with the precious metal, there are only a limited number of new Bitcoins that can be mined – no greater than 21 million coins. In 2017, close to 17 million coins had already been mined so the race to mine the remaining four million continues.

Mining has become highly competitive with new Bitcoins being created at a fixed and predictable rate. As with the Gold Rush in the 1850s, the more miners that join the network, the more difficult it becomes to make a profit.

How Are New Bitcoins Created?

Miners provide security to the Bitcoin network and related process transactions. Without the miners, the network would be susceptible to attack and the currency worth nothing. The return for processing services and security is new Bitcoins.

Blocks

When a miner positively resolves Bitcoin’s proof of work algorithm, the miner has generated a new block and is given a block reward, which is a set number of Bitcoins per the terms and conditions set by the network. The reward is always new Bitcoins and it is the only way the coins can be generated.

Number of Bitcoins That Can be Created

The reward began at 50 Bitcoins per block but continues to halve every 210,000 blocks. That means all blocks up to 210,000 will be given 50 Bitcoins and block 210,001 will receive 25. According to the Bitcoin difficulty (more on this later), one block is found approximately every 10-minutes so the having occurs every four years. Eventually, the block reward will halve to a point where it is so tiny, no new Bitcoins can be created.

Mining Equipment

Bitcoin mining is the procedure by which records of a new transaction are added to the Blockchain, which is a public ledger of every transaction ever occurring within the Bitcoin network. The name “Blockchain” was created due to new transactions being added in blocks every 10-minutes. The Blockchain ledger is required so the network can confirm valid transactions.

Therefore, to become a miner, you originally only needed a computer and mining software that utilized the computer’s hardware to conduct complicated mathematical calculations. However, in the early years of Bitcoin, mining using personal computers was feasible. Since the network is so competitive, specialized hardware is now required to become profitable.

In 2013, the first Application-Specific Integrated Circuits (ASICs) were introduced to the public as the only hardware specifically designed to mine Bitcoin. Like with any technology, newer and more efficient ASICs were continually being released. The more powerful the equipment, the higher the electricity bills which eat into mining profits.

In summary, miners use mining hardware and software to verify the valid transaction, pack them together into blocks, and solve complicated mathematical problems during the “hashing” process. Once the correct solution is found, approximately every 10-minutes, new blocks are added to the Blockchain ledger and the miner is rewarded with new Bitcoins.

The Hashing Process

Bitcoin utilizes a cryptographic has a function known as SHA-256 as a high-level of encryption. This algorithm allows any size data to become a string within a predefined and specific size. The result is a “hash” with the process of joining the hash function with random inputs being called “hashing.” Until it is calculated, it is unviable to guess what the hash of one input will be.

The miner’s goal is to continuously feed the hash function with different inputs until a specific hash value is received which must fall below a threshold, known as the “difficulty” of the network. The difficulty is adjusted by the system every 2016 blocks, approximately every 14-days, based on the growth or shrinkage of the combined computational network power.

When the network has become more powerful over the past 2016 blocks, the difficulty value is lowered which increases the complexity in finding a valid hash. The opposite occurs when the network shrinks from the previous 2016 blocks.

Given the incredible computation power of the Bitcoin network, trillions of computer-generated guesses are required from across the globe to find the correct hash value. If you are the first to do it then you mined a block and will receive 12.5 Bitcoins, depending on the number of generated blocks to-date. While this may not seem like a massive reward, one Bitcoin was valued at almost $20,000 in December 2017!

What About Counterfeiting New Bitcoins?

Only the new Bitcoins generated by miners can be spent. The system does not allow a user to bring new Bitcoins into the overall supply. Since Bitcoin uses cryptography to confirm every transaction, with all being documented in the Blockchain, only the correct digital signature allows Bitcoins to be spent. Therefore, miners must verify and process this data while attempting to solve the proof of work algorithm. This prevents others from spending Bitcoins they do not own or create new Bitcoins not created within the network.

If an individual were to create a new fork of Bitcoin to give themselves new Bitcoins, these coins would only be valid on the new network fork. The primary Bitcoin chain would view these as un-spendable and invalid since they were not created through the network.

Considerations When Mining 

As with all activities, mining has some mistakes that you should avoid including:

Prepare

It is a huge mistake to start mining without preparation. Since this industry is highly competitive, profitable mining requires extensive preparation and planning. It is an all too common situation where an individual purchased too much mining hardware without calculating the costs to run it and the expected profits. Once they determine they cannot maintain profitable operations using this equipment, they sell it at a huge loss.

Commit

Also, never follow the trendy coin at the moment. This will change at the drop of a hat due to new articles, predictions, forecasts, etc. Often, one coin will become highly overhyped so the number of miners will pour in causing a huge jump in competition. This makes mining more difficult for all to make a profit. Recently, Ethereum was overhyped and many miners jumped on the bandwagon making little profit. It is always advisable to conduct research on the various coins and stick to it through the highs and lows.

Maintain

Always take excellent care of your PC and mining equipment. The mining process projects a huge load onto the processors which are running at full capacity around-the-clock. If proper maintenance and care are not performed, then hardware malfunctions are imminent.

Like every other job and career, Bitcoin mining is not a “get rich quick scheme” where you turn on the hardware, blocks are created every ten minutes and Bitcoins come pouring out of your computer. The reality is mining is difficult and takes effort to become profitable. However, it can be an extremely profitable business in which to partake. Remember to always conduct research for the best coin and equipment, prepare., commit, and maintain to be successful! Happy mining!