What is bitcoin mining?
Answer: Bitcoin mining is the process by which new bitcoin are introduced to the world. Bitcoin miners all try to solve an extremely difficult maths problem using their computers and the one who solves the problem is awarded the newly minted bitcoin.
Anyone can mine bitcoin, however the hardware required to be the winner has moved from home computers to gaming rigs and on to 10,000’s of dedicated machines called ASIC’s located in giant server farms. So bitcoin mining is no longer a profitable from your house or office. The bitcoin algorithm has a heartbeat that issues a set but decreasing number of bitcoin, roughly every 10 minutes. This started out in 2008 at 50 bitcoin and is halved every 4 years, it currently stands at 6.25 bitcoin per 10 minutes.
If more people decide to mine bitcoin then the maths problem becomes harder to solve and vice versa if the number of miners falls then the maths problem is easier to solve. This is known as the difficulty adjustment factor.
When a miner wins the latest block he/she is given the blockchain reward and is then able to add a new block to the bitcoin blockchain – this block can contain up to 4,000 transactions which will then form part of the public bitcoin blockchain. The miner is also rewarded with the transaction fees associated with all of the transactions in the recent block. Due to the reducing issuance schedule the last bitcoin will be mined sometime in 2140, which means that bitcoin miners will only be rewarded with transaction fees – I suspect another reward mechanism will have been devised by then.
It is possible to join a mining pool, where 1,000’s of other people get together to pool their processor resources to mine bitcoin and the rewards are shared our depending on your effort. It is worth noting that bitcoin mining is considered income in most countries and thus needs to be declared for income tax purposes. [In most countries buying and selling bitcoin is considered a taxable event and comes under capital gains tax – unless you live in Portugal where there is currently no capital gains tax on crypto currencies]
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