Tech

What is Bitcoin mining and how does it work?

Aisling Moloney

What is Bitcoin mining and how does it work?
(Picture: Getty)

You may have noticed that cryptocurrency bitcoin is making headlines lately since the value of one bitcoin surpassed £10,000 mark and has kept on rising.

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The online virtual currency has large fluctuations and is a risky investment but some who got in on the bitcoin game early are now millionaires, and the Winklevoss twins who missed out on Facebook just became the world’s first bitcoin billionaires.

What is Bitcoin?

Bitcoin is a cryptocurrency that is not backed by anything like gold, as a normal currency is.

It is just one type of cryptocurrency, there are alternatives to bitcoin such as Altcoin.

It is also decentralised meaning no single authority or institution holds or controls the bitcoins.

Regular currency is controlled by one governing authority such as a central bank. If the country requires more money it can print more money but that devalues the currency and leads to inflation.

You don’t have to buy one bitcoin in whole, the bitcoin is divisible and the smallest amount you can purchase is one hundred millionth of a bitcoin which is called a Satoshi.

Right now £100 will buy you 0.01 bitcoin.

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(Picture: Shutterstock)

How are bitcoin created?

This is where mining comes into the equation – literally.

Only 21 million bitcoins can ever be created in order to protect the value of the bitcoin system.

Bitcoins can be ‘mined’, which is the process of actually creating bitcoins, or they can be bought using regular currency.

Bitcoins can be mined using computer software and a mathematical formula designed by the Bitcoin founder Satoshi Nakamoto, who is anonymous.

Essentially you take your computer and download a program that uses your computer’s horse power to solve certain data processes, then based on how much data you process you, in turn, get paid for doing that work in Bitcoins.

The cryptocurrency, like bitcoin, can then be used to carry out transactions, which gives them monetary value.

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Cameron and Tyler Winklevoss are now staggeringly wealthy as the world’s first bitcoin billionaires (Photo: Getty)

Once a miner has mined bitcoin they can then sell the bitcoin for cash.

They do this by getting a bitcoin wallet, and if you want to buy bitcoin you need to get a bitcoin wallet and then you can transfer bitcoins from wallet to wallet for cash.

Bitcoins are created digitally by a community of people that anyone can join. Each machine that mines bitcoins makes up part of the network and each machine works together.

Bitcoin is a peer-to-peer network meaning everyone who uses bitcoin makes up a small part of the overall bank of bitcoin.

What is Bitcoin mining and how does it work?
(Picture: Getty)

Bitcoins are created when ‘miners’ solve the particular equation and they are then rewarded with bitcoins.

The speed at which miners solve data processes is quicker now, due to better processing hardware in computers.

You can actually get computer processors with chips that are specifically designed for bitcoin mining.

As more miners join the network, it becomes more difficult for an individual to solve the equations and so ‘pools’ of miners pop-up where the workload is shared and the bitcoins are distributed according to who did what.

The cost of mining bitcoins can be super high due to the amount of electricity it takes to mine the bitcoins on your computer.

In this way miners will have to weigh up the costs of electricity against the value of bitcoin in monetary value.

MORE: Bitcoin ‘will go up tenfold by the end of next year’

MORE: Man threw away laptop with bitcoin that is now worth £74 million

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