Unlike regular currency, Bitcoin isn’t backed by a government, and it isn’t issued by a central bank. Instead, Bitcoin is created by a process called mining, which puts a limit on how much Bitcoin can be created. As the word “mining” suggests, this is a little like staking a claim during the gold rush: not everyone will strike it rich, but the process does regularly turn up something of value.
How Mining Works
In order for an something to have value, it must have scarcity―that is, it must exist in limited quantities. For example, if you could create gold out of thin air, nobody would ever buy it from you―after all, they could simply create their own gold. Bitcoin operates under the same logic, which is why there are hard-coded rules on how much Bitcoin can be created.
It is possible to create Bitcoin within the limits of Bitcoin mining, but this is a very demanding process. In order to generate new Bitcoin, you must dedicate computational power to the task. Your computer will attempt to solve complex mathematical puzzles. If it succeeds, new Bitcoin will be generated, and you will earn Bitcoin as a reward. However, success is largely down to chance.
Miners can improve their odds of solving a Bitcoin mining puzzle by dedicating more power to the task. To do this, miners use special devices called ASICs, which can mine Bitcoin very efficiently. Unfortunately, the abundance of ASICs has made Bitcoin mining very competitive. Electricity costs and current Bitcoin market prices also mean that most people cannot profit from Bitcoin mining.
The Future of Mining
Eventually, there will be no more Bitcoin left to mine. Only 21 million Bitcoin will ever exist, and 84% of the supply has already been mined. Right now, Bitcoin mining is being dominated by big corporations like Bitmain, which operate large data centers that mine Bitcoin with extreme efficiency. Meanwhile, most individual miners have joined mining pools in order to get more reliable rewards.
As time goes on, mining will become less profitable for a number of other reasons. Bitcoin mining rewards are scheduled to split in half at certain points, and the next reward halving is expected to take place in May 2020. Mining will become even more difficult than it already is, and mining will slow down overall. This means that the last coins in the Bitcoin supply will not be mined for over 100 years.
However, these mining trends are a good thing, even if they do not offer much profit. They ensure that Bitcoin is not generated too quickly, and that Bitcoin remains somewhat scarce. This, in turn, encourages investors and coin holders to spend Bitcoin that is already in circulation. In other words, mining doesn’t just create new Bitcoin―it is also what gives Bitcoin its value in the first place.
Disclaimer: information contained herein is provided without considering your personal circumstances, therefore should not be construed as financial advice, investment recommendation or an offer of, or solicitation for, any transactions in cryptocurrencies.