Bitcoin mining refers to special computerized techniques used to create new Bitcoins, which are units of an Internet-based, open-source currency known as Bitcoin. A Bitcoin miner is basically someone who makes -- or tries to make -- Bitcoins using special software and a high-powered computer.
Mining Bitcoins involves dedicating the computational power of your computer to help this special digital currency system secure all the transactions on its network ; your computer performs mathematical calculations to "prove" the validity of monetary transactions.
In return for helping secure the currency system, a Bitcoin miner (if they're lucky) is rewarded with new units of the money.
Bitcoin has become an increasingly popular virtual currency since it was created as an experimental system in 2009. It's used to buy and sell goods and services worldwide, even by some people who don't understand how it works.
Bitcoins are controlled and secured by cryptography and software instead of a central bank or authority, as most monetary systems are. The system enables anonymous financial transactions since its decentralized management through a peer-to-peer software program running on computers owned by participants worldwide doesn't identify the buyers and sellers trading with the currency.
Most users buy Bitcoins on special exchanges rather than trying to generate their own, because it's fairly challenging to create units of the currency through so-called Bitcoin mining techniques. But it can be done, and anyone can opt to mine or generate Bitcoins if they take the time to learn how and are willing to throw some computing firepower at it.
Bitcoin Mining: Part of a Game-Like System
To understand mining requires knowledge of this unusual digital currency, which is a decentralized system involving peer-to-peer communication between many computers and relying on the use of public-key encryption to help secure financial transactions.
The peer-to-peer computer network running Bitcoin currency is similar to BitTorrent's file-sharing system.
You can think of Bitcoin currency as a giant online computer game, in which the players or currency participants are communicating in real time with one another via a peer-to-peer computer network.
Their individual computers are running a software program that keeps track of ALL Bitcoin transactions ever mad , via a public log of sorts which is collectively maintained by everyone. The fact that this public ledger keeps a running tally of all transactions means the computing gets fairly intensive because it has to record every time a single unit of the currency transfers hands from one user to another. Since multiple transactions are happening in real time, that involves a lot of computational activity.
The "game" or currency system also involves elaborate software instructions designed to make the monetary trading secure and accurate at all times, so the record or "log" of all Bitcoin transactions is kept up to date.
There is no central government or authority controlling or managing Bitcoin activity or its stored monetary/exchange value. Rather, Bitcoins are controlled by the software program described above, which manages communication between all the users of Bitcoin currency. Individual users determine its value when they buy and sell goods with it.
Each Bitcoin unit has a numerical ID linked to a specific digital address on the network, all managed by the software. The standard Bitcoin software doesn't generate the currency or units of money, it just manages the system to help people trade goods and services using the currency by keeping track of who has each unit or where it is.
The software currency system was invented by someone or a group who go by the name Satoshi Nakamoto. The system was conceptually patterned after a notion that Wei Dai dubbed "CryptoCurrency" in the 1990s.
Bitcoin Miner: Generating New BitcoinsBitcoin mining involves more advanced bitcoin software than that required to buy and spend Bitcoins. Mining requires high-powered computers running a lot of intensive mathematical calculation to solve cryptographic problems and boost the security of the entire currency system.
To "mine" for Bitcoins, a user runs a special program on their computer that will try to solve mathematical problems and compete with others running similar software. New coins are generated mathematically and awarded to computers successfully running the "mining" or problem-solving software that manages the public/private key encryption challenges used to secure Bitcoins. The mining software involves processing encryption keys to confirm transactions involving Bitcoins.
Bitcoin mining software is designed to allow all the currency users to collectively maintain the running log of all transactions--the buying and selling of goods and services with Bitcoins, as well as the trading of Bitcoins in special exchanges. It takes a lot of computing firepower to record all of the transactions (the entire log of transactions is known as the "blockchain"), and Bitcoin software is designed to do that.
With Bitcoin software users collectively maintaining the transaction log, every 10 minutes or so the system generates a new group of 25 Bitcoins and awards them to one of the "miners" or computers running the special log-maintenance and security-enabling software.
Because it's computationally intensive, Bitcoin generation is often performed by "mining pools" in which many computers are connected together in a network so they can join forces to collaborate in solving the cryptographic problems and generating Bitcoins which they share accordingly.
To get started with Bitcoin, people usually need a Bitcoin "wallet" which is special software designed to store the information that identifies individual coins by assigning them individual digital addresses. The wallet software is available at the Bitcoin website. Wallet software varies based on the operating system of your computer. One recommended option is Bitcoin-Qt for Windows, Mac and Linux, which was the original wallet software and remains popular. But because the software is open source, developers have created other versions.
There are basically three flavors of software wallets:
- Software wallets which are stored on your computer and require you to back up the information or risk losing your money.
- Web wallets which store your Bitcoin addresses for you online so that you aren't required to do your own backup.
- Mobile wallets which run on your mobile phone and allow you to use Bitcoin to buy things at participating stores by scanning a QR code or using NFC, near field communication.
Economy of Bitcoin Currency
A lot of people think Bitcoins will steadily increase in value since the virtual currency system is set up so there will be a finite number of Bitcoin units produced (21 million), and the production of Bitcoins through mining will steadily decrease. Every four years, the number of new Bitcoins generated annually falls by half. That makes the job of a Bitcoin miner progressively harder over time, since far fewer units will be awarded to miners every four years.
Installing and running Bitcoin miner software is not for computer dummies; it requires technical knowledge. A Windows-based program called <"http://guiminer.org/"> GUIMiner can help simplify things for folks lacking training in computer programming. GUIMiner offers a graphical, point-and-click user interface for mining that makes things easier.
Additional Mining Resources
- The Bitcoin wiki: Basic FAQs about the currency
- Bitcoin Stack Exchange: A network of question-and-answer sites about the currency and bitcoin mining
- Bitcoin Software - List of software for managing bitcoin transactions and mining
- Bitcoin Mining Software: Popular mining programs
- More Advice on Becoming a Bitcoin Miner