What is Bitcoin Mining?

Unlike precious metals like gold and silver, bitcoin mining is not done with picks, rakes and shovels. They are extracted from the Bitcoin protocol when blocks of bitcoin transactions are verified and validated by miners using specialised mining hardware, hence lending the term mining. Mining is also the process of adding of these new transaction blocks to the blockchain.

And just as important, bitcoin mining is how newly minted bitcoin is released into circulation.

The Bitcoin software was programmed in such a way that:

  1. A certain pre-set number of bitcoin is released into the system with every block of transactions once almost every 10 minutes, to be mined by miners.
  2. The pre-set number of bitcoin is halved every 4 years, leading to a fixed total of 21 million bitcoin to be completely mined by the year 2140.
  3. Miners use mining equipment in the form of purpose-built hardware running special software to solve complex mathematical problems, and are rewarded with the pre-set number of bitcoin with every successful block solved.
  4. Each successful block of transactions is then added to the blockchain.
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Here is a quick 2-minute video to explain what bitcoin mining is:

Basically, that is a summary of what is entailed in bitcoin mining. To elaborate on this further:

Number of Bitcoin Released into the System

When Bitcoin first started in 2009, it was programmed in a way such that 50 new bitcoin would be released into the system with every block, or about once every 10 minutes. Bitcoin did not have any value back then, and was transacted amongst a few people involved in its development, as a way to see it functioning in the real world.

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Halving and 21 Million Bitcoin by the Year 2140

The Bitcoin protocol was coded in such a way that the number of bitcoin released into the system to be mined shall be halved every 4 years (i.e. after 210,000 blocks), starting with 50 bitcoin per block in 2009, eventually halving to 25 bitcoin per block on 28 November 2012, and halving again to its current rate of 12.5 bitcoin per block since 9th July 2016. The next halving to 6.25 bitcoin per block will take place some time in June 2020.

Theoretically,

210,000 blocks x 10 minutes = 2,100,000 minutes = 35,000 hours = 1,458.33 days = 3.99 years

Hence, it takes about 4 years, give or take, to reach 210,000 blocks of transactions, before the next halving occurs.

The Bitcoin protocol was also coded such that only a maximum 21 million bitcoin will ever be produced, and with the halving taking place every 4 years, the last bitcoin (or final part of it) shall be mined by the year 2140. Unlike paper money which can be printed by central banks through expansionary monetary policy which leads to inflation and drop in value of fiat currencies, the Bitcoin protocol creates a finite supply and capped limit of 21 million bitcoin, making bitcoin deflationary, or anti-inflationary by design.

Parallels can be drawn between bitcoin and gold, a commodity which is limited in its supply. If it is known that a particular gold mine will produce the last ever ounce of gold available in this world, what would happen to the price of gold globally all of a sudden? Unfortunately (or fortunately), no one knows for sure, but unlike gold, the last quantity of bitcoin available for mining is known, and as long as there is a market for it, this ensures its increasing value based on its diminishing supply rate and increasing demand. At least, it strives to be.

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