Bitcoin Broken Down
The “Explain it to me like I'm five” version we all need to read.
Founded in 2009, Bitcoin remains to be the top digital currency, using a blockchain system to verify and keep track of transactions. Recall that on a blockchain, what’s recorded is recorded. You are unable to alter anything on the network. At the time of writing this, Bitcoin is worth $51,541.50.
For those new to the topic of blockchain or need a refresher, check out my 4-minute article on blockchain for beginners here:
Moving on…
The creators of Bitcoin made 21 million Bitcoins. And they made it in a way where that was a fixed amount — adding more Bitcoins into the blockchain system wasn’t an option.
As of right now, 18 million Bitcoins have already been mined. Leaving a mere 3 million left. The number decreasing every second as the hype around Bitcoin surges.
But why the hype?
Let’s break it down.
How To Hold Possession of a Bitcoin
Technically speaking, there are two ways of owning a Bitcoin: by mining it or by buying it from another party.
Buying
Many people buy their Bitcoins from a brokerage, such as Coinbase. Coinbase is similar to a stock market, but for cryptocurrencies.
Others include Robinhood, which recently added crypto exchange to their portfolio.
The idea is pretty straightforward. You just buy Bitcoin on crypto exchanges on apps like Robinhood and pray that the surge continues and Musk doesn’t come out with yet another tweet that causes the market to crash.
Mining
When Bitcoin first started off, the only way of owning it was to “mine” for them.
What does it mean to mine for something? Think about gold.
Although you are not physically mining in rusty, hollowed-out sedimentary regions, the concept is similar.
Now, to clarify, you’re not technically mining for these Bitcoins. You’re simply verifying transactions on the Bitcoin blockchain. By verifying transactions, miners are helping to prevent the “double spending problem”.
Double Spending Problem
Double spending occurs when a bitcoin owner spends the same bitcoin twice. With digital currency, there is a risk that the holder could make a copy of the digital token and send it to another party while still having the original.
What a Bitcoin miner does is check transactions to make sure that users have not illegitimately tried to spend the same bitcoin.
To mine for bitcoins, you need a GPU, or a graphics processing unit. This is highly popular in the gaming industry, so getting your hands on one of these bad boys was tough.
Especially now, it’s incredibly difficult to find a GPU. GPUs that are initially sold on the market for $1,000 are now being resold for $3,000, and they’re being bought fast!
The higher the GPU, the more computing power and speed the computer has.
But why do you need fast computing power to mine for Bitcoins?
The Mining Process
Once miners have verified 1 MB worth of bitcoin transactions (known as a “block”), those miners have the potential to be rewarded with some quantity of bitcoin.
It’s crucial to note that not everyone who verifies transactions will get paid out.
1 MB of transactions can theoretically be as small as one transaction (though this is not at all common) or several thousand. It depends on how much data the transactions take up.
Earning a Bitcoin
To earn a bitcoin, two conditions need to be met.
- You have to verify 1MB worth of transactions. (Effort)
2. You need to be the first miner to arrive at the correct/closest answer to a numeric problem. This is known as proof of work. It involves solving a puzzle to prevent anybody from gaming the system. (Luck)
But, to clarify:
What they’re actually doing is trying to be the first miner to come up with a 64-digit hexadecimal number (a “hash”) that is less than or equal to the target hash. It’s not advanced math is involved. In other words, it’s literally just a numbers game. You cannot guess the pattern or make a prediction based on previous target hashes.
To have a higher chance of being the first miner to arrive at the answer, one needs to have a high “hash rate”.
Hash Rate
Hashrate is a measure of the computational power per second used when mining. More simply, it is the speed of mining. It is measured in units of hash/second, meaning how many calculations per second can be performed. For example, 1 Mhash/s indicates 1 million hash calculations are done every second.
Miner’s Reward
The rewards for bitcoin mining are reduced by half every four years or every 210,000 blocks. When bitcoin was first mined in 2009, mining one block would earn you 50 BTC. In 2012, this was halved to 25 BTC. By 2016, this was halved again to 12.5 BTC.
The Incentive
To recap, the role of miners is to secure the network and to process every Bitcoin transaction.
Miners achieve this by solving a computational problem that allows them to chain together blocks of transactions (hence Bitcoin’s famous “blockchain”).
The Bitcoin reward that miners receive is an incentive that motivates people to assist in the primary purpose of mining:
to legitimize and monitor Bitcoin transactions.
Because these responsibilities are spread among many users all over the world, Bitcoin is a “decentralized” cryptocurrency or one that does not rely on any central authority like a central bank or government.
Throwdown
Yes, I know. A lot of knowledge bombs compressed into a brief article.
It’s hard to deny that blockchain isn’t making a serious impact on our future. It’s important that we all stay educated on current topics, and hopefully, this article did exactly that for you on the topic of Bitcoin!
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