What is bitcoin mining?

In that way, you could understand bitcoin mining as an activity, with the purpose of finding and producing bitcoins - just like gold diggers did with gold back in the old days, where gold was a building block of our economies.

However, bitcoin mining is a little different from gold digging. Instead of strong hands, bitcoin mining needs strong computers, amongst other things.

But to understand what a bitcoin miner actually does with all that computer power, you would first need to understand the concepts of hashing and proof of work.

Proof of work

Proof of work is the method bitcoin uses to validate new additions of data to the blockchain .

When you buy something with bitcoins, the transaction will consist of certain information. This is your name, the seller’s name, price of the product and so forth. 

All of this information is data, which can be encrypted with hashing. Bitcoin uses the hashing method SHA-256. More on hashing a bit later.

The information from the transaction is also anonymised. So you can’t see what data is actually in the transaction.

A larger collection of bitcoin transactions are gathered in a block, which in itself has a certain hash - this is needed to maintain the blockchain.

Here, the block’s hash is very important. Without a hash for the block, the block wouldn’t be able to be added to the blockchain, and the blockchain would stop working. If so, more bitcoins won’t be put into circulation, and new bitcoin transactions wouldn’t be able to be validated.

Hashing

But how does a bitcoin miner find the hash, which is a 1:1 match for the new block? They do so by “guessing” their way to the exact hash. And this is where computer-power enters the picture.

A bitcoin hash consists of 64 characters, where the characters can be the numbers 0-9 and letters A-F. An example of a hash could be:

F83AD003C461DE2B86A9F2F489F740B43883B96F4C454AF69FC98D6B003F1016

There aren’t any clues to lead you to the code. It’s completely arbitrary. So to find the exact hash, the bitcoin miner needs to make a lot of guesses. A very powerful computer - such as “The Titan supercomputer” - is able to write 140 million hashes per. second. That’s why it’s only a matter of time before the computer will find exactly the string of code (hash) that matches the new block in the blockchain. For bitcoin’s blockchain, around every 10 minutes the hash of a new block is being found.

Example of a transaction and hash

Let’s say Julie buys 500 bitcoins from Preben on June 16th, 2022. The transaction can be registered like this:

Transaction:

Buyer: Julie

Seller: Preben

Price: 500 bitcoins

Date: 16/06/2022

The transaction is compiled of an array of information, which we can encrypt using SHA-256.

It would look like this:

3BBBB64C239F2C37CCE322E090B01BD057CFE80527940E7BA73D2127F86376C4

If you copy-paste the information from the transaction into a SHA-256 generator, you would get the exact same hash. Try it yourself . Make sure that the information you type in is 100% identical with the example. Even the slightest difference will give you a completely different result.

But in reality, the information isn’t known. It’s encrypted. That’s why a bitcoin miner will have nothing concrete as a starting point when they’re trying to guess the next hash.

On the other hand, it’s pretty easy to validate whether or not a hash corresponds correctly to the encrypted information in a block. So, when a miner finally finds the correct hash, it would be easy for the rest of the bitcoin network to validate the hash.

When that happens, a new block is added to the blockchain, and the bitcoin miner is rewarded with a certain amount of bitcoins for their hard work.

Summary

Transactions: Every bitcoin transaction results in a certain hash.

A hash: Bitcoin uses the hashing method SHA-256.

Blocks: A block on a blockchain is a larger collection of the hashes from bitcoin transactions.

The block’s hash: A collection of transactions, a block, is a very long string of information. Therefore, the block can be encrypted with hashing in the same way as the single transactions can be.

New bitcoins: When a person/computer guesses the hash of a block, they’re rewarded with a certain amount of bitcoins as compensation for the hard work.

Alternatives to proof of work: Proof of stake

Looking for the correct hashes takes a large amount of computer power. The more computer power you have, the more hashes you can guess per second - increasing your chances of being rewarded with bitcoins.

This also means that people with a lot of money can invest in powerful computers to then increase their chances of finding the next hash. This creates imbalance, where the wealthier people in society are mining the most bitcoins - making them even more wealthy.

Besides that, mining with a super-computer also requires a lot of energy, which isn’t exactly climate-friendly.

To accommodate these problems - the rich getting richer, and the climate paying the price - other cryptocurrencies have begun developing other types of validation methods. Here, proof of stake is one, which cardano and solana   for example uses.

Cryptocurrencies can rise and fall

When you trade cryptocurrencies, you need to be aware that it carries a large risk. The value of your cryptocurrency can both rise and fall, and you can risk losing the entire amount you’ve invested in cryptocurrencies.

Cryptocurrency trading is done through Lunar Block. Lunar Block is not regulated by the Danish Financial Supervisory Authority (Finanstilsynet). That means you won’t have the same protection as when trading e.g. stocks or other regulated assets.

We do not counsel

We do not advise on currencies and do not make recommendations for either buying or selling. We can provide factual information about the different currencies, but past price developments are not an indication of future developments.

No information from Lunar Block should therefore be considered as recommendations and all decisions are up to you alone.