Bitcoin was introduced as a decentralised peer-to-peer payment system in 2008 by an individual or group under the name “Satoshi Nakamoto”. It is a cryptocurrency, a form of digital currency, and is therefore intangible.
This means that bitcoin is not printed or minted to produce physical cash or coins, instead, new bitcoin is released through a competitive, security-enhancing process called “mining”.
New bitcoins are steadily released into the network through the rewards given to miners who help legitimate and add transactions into the blockchain, a public ledger in the Bitcoin network.
Since bitcoin is intangible, you certainly won’t need to be digging into the earth to reach the desired precious item. Bitcoins are however built into the network and meant to be retrieved. The need to labour and “unearth” the token is therefore still fundamentally there. This labour is just performed very differently.
Before we get to the concept of mining, it is important to understand the Bitcoin blockchain. The blockchain is essentially a public ledger that records all transactions ever made within the Bitcoin network. It will include details such as date, time, and how much bitcoin was exchanged. The blockchain is also continuously tallying the available balance in the network.
Each “block” on the blockchain contains records which need to be confirmed and sealed with sophisticated math, thereby protecting it from being tampered with.
In order to seal a block, a computational problem generated by the Bitcoin network needs to be solved. This computational problem is a “hash”, a 64-digit hexadecimal number that miners will have to accurately guess in order to seal a block. As you can imagine, there are a lot of permutations of this 64-digit hash, so the labour of solving this problem requires dedicated software and computers.
Bitcoin is mined when a miner is the first one to successfully guess the hash and add a transaction into the blockchain, after which they are rewarded with a number of bitcoin tokens. This reward is also called a “block reward”. If two miners manage to guess it at the same time, the network will reward the miner that has done the most work to arrive at the hash.
Miners help to keep the network secure through their labour of adding and legitimising transactions into the blockchain. Since miners are incentivised with bitcoins, this also pulls in more miners to join the network.
The network ensures that a block is added into the blockchain every 10 minutes, and not any earlier. This prevents miners from trying to cheat the system and claim more tokens.
More fascinatingly, however, is how the network is incredibly responsive. The more miners there are, the more secure the network becomes. It is understood that if more miners are in the network, the computational problems are likely to be guessed faster. The Bitcoin network thus will adjust the difficulty of the problems to ensure that bitcoins are not being released faster than the fixed rate of one block reward every ten minutes.
When Bitcoin first started, tokens could be mined with a single laptop. Today, Bitcoin mining requires dedicated specialised computers and warehouses that act as mining farms. The initial difficulty level of 1 is now at 13 trillion.
With our dominant form of physical currency, the government usually decides how much money is printed and when. In comparison, Bitcoin is decentralised and not governed by any central authority. The protocol and software are published openly, and the network is collectively controlled by everyone plugged into it. This means that technically anyone can become a Bitcoin miner!
Due to the present level of difficulty in mining bitcoin, you will need a specialised computer that has been built specifically for the purpose of farming. This computer is called ASIC (Application Specific Integrated Circuit).
You will also need a Bitcoin wallet, mining software, and access to cheap electricity since mining will take a lot of energy. In fact, access to cheap electricity is why a lot of mining farms are operating in China.
Lastly, you would probably need to find a mining pool to increase your chances. Mining solo would probably not be a lucrative deal, though it might be fun just to see how the whole process works!
While a block reward is released every 10 minutes, the reward itself decreases over time (although not necessarily in value, since 1 bitcoin is now worth over $12,000 SGD). This means that the amount of new bitcoins released into the network slows down over time.
The program ensures that each time 210,000 blocks have been added to the blockchain, the block reward is halved. This generally happens once every four years and helps to ensure a steady supply of bitcoins.
Right now miners are rewarded with 12.5 bitcoin per block, but that is expected to be halved very soon to 6.25 bitcoin this May.
In our current form of physical currency, cash can always be printed. There isn’t really a fixed amount of money in circulation. Bitcoin however is entirely different. Much like the gold in the ground, there is a fixed number of it that can be mined.
There are only 21 million bitcoins that can be mined in total from the Bitcoin network and not a single more. This protects it from being devalued from inflation. Since the supply is fixed, each bitcoin gets increasingly valuable as more and more of them are mined.
Currently, about 18 million bitcoins have already been mined!