What is Bitcoin in the simplest sense

Basic knowledge: (crypto) mining - simply explained

With the cryptocurrency boom, mining is also experiencing a hype. The term comes from mining - (gold) prospecting became the name giver. Again and again one reads that miners generate bitcoins. However, it is not that simple.

Note: This article does not claim to be complete. The explanations are a strong simplification of the complex subject of mining. The aim is to make "normal consumers" understand in principle what happens during the process. We do this using the best-known example of use: Bitcoin.

+++ The roots of Bitcoin (Part I): geeks, punks and rebels +++


The "dismantling" is becoming more and more difficult

A vein of gold: If you come across it, you can usually initially get a relatively large amount of gold with relatively little effort. After a while, however, the area with the greatest gold density is excavated. There is still more gold in the mountain, but the effort to mine it is increasing. This mining experience is metaphorically behind crypto mining. In the early days of Bitcoin after 2009 everyone was still able to "mine" Bitcoins with their home PC, today it takes enormous computing power (and massive power consumption) to operate mining sensibly. In low-cost electricity countries, especially China, there are now huge data centers for this purpose, so-called "mining farms".


But how does mining actually work?

In order to understand why Bitcoin mining is becoming more and more complex, you first have to know what actually happens during mining. Because contrary to what is often described in a simplistic way, you do not generate bitcoins. Rather?

The deal: Bitcoin for hash

So that the Bitcoin blockchain, and thus the whole system, can be operated, the individual blocks - lists of the transactions made - must be completed and "sealed" when they are "full" (a simplified explanation of blocks can be found here). To do this, the information from an entire block is added together to form a single code, a complex combination of characters that requires significantly less storage space - a so-called hash. The list of these consecutive hashes is then the actual blockchain. Miners take on exactly this computing power: They calculate the hashes and are rewarded by the system with new, previously unseen bitcoins. Several miners can work on a block at the same time.


And why is Bitcoin mining becoming more and more complex?

The predestination of Satoshi Nakamoto

That this is the case has been predetermined since the start of Bitcoin in 2009. Bitcoin inventor Satoshi Nakamoto (a pseudonym - more information can be found here) laid down certain rules, probably on the assumption that the cryptocurrency would grow strongly. The number of Bitcoins that can ever be created is limited to 21 million. (At the moment there are already around 16.5 million Bitcoins.) At the beginning, new Bitcoins should come onto the market with great frequency. Therefore, at the beginning there were 50 Bitcoins per completed block for miners. However, the algorithm stipulates that this number halves every 210,000 blocks, so that less and less new crypto money enters the market over time. There are currently only 12.5 bitcoins left per completed block.

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The hash is becoming more and more complex

But that's not the only reason. Another is even more relevant for miners. Actually, a hash doesn't require too much computing power. In the beginning, a home PC was sufficient. After all (in the case of Bitcoin) it is about encoding a megabyte (1 MB) of information (the size of a block). In fact, the algorithm constantly artificially increases the complexity of a hash. It goes so far that the aforementioned huge mining farms are now necessary for really lucrative mining. At the moment around 1700 bitcoins are "mined" a day. This results from the fact that a block of 12.5 Bitcoins reward is completed about every ten minutes. This number will continue to decrease, given by the algorithm.


So, as a private person, I can't (no longer) mine?

Mine yourself - yield vs. electricity costs

Even if the requirements are constantly increasing - you can still be there as a private person. This is because several miners can work on a block at the same time and the reward is distributed proportionally. Individual miners also join so-called "mining pools". They have the advantage that the mining yield is more predictable and more regular. Corresponding providers charge fees for this. The most important thing in a private mining computer is the performance of the graphics card. Of course, there are numerous specialized products from several suppliers that are correspondingly efficient. Nevertheless, the ratio of electricity costs to mining income, especially in countries like Austria, with relatively high electricity costs, is not (no longer) very satisfactory.

Cloud mining - controversial investment

For this reason, some providers, also in this country, have now specialized in so-called "cloud mining". They operate a mining farm and sell computing power to individual customers. For users, it is like an investment. However, critics point out that the system can only be lucrative for customers as long as the cryptocurrencies increase in value. But even then it is ultimately better to get out if you invest directly in the currency instead of in cloud mining.

+++ Basic knowledge: The blockchain - simply explained +++

Disclaimer: This article was produced in editorial independence with financial support from the Federal Ministry for Science, Research and Economy (BMWFW) of the Republic of Austria.