If you want a basic overview of what bitcoin is, please see our article: What is Bitcoin
In conventional flat money systems, it is up to the governments to print the money as they require and see fit. In contrast to that, bitcoin is not printed but discovered. Computers around the globe connected in a network, ‘mine’ for coins in a competition with each other.
How to mine bitcoins: How does mining take place?
People are transacting bitcoins with each other all the time over the bitcoin network. It is important to keep a record for all these transaction otherwise no one would be able to keep track of who paid whom. The bitcoin network has implemented a scheme for dealing with this situation. It collects all of these transactions that are made during a set period of time into a digital list, called a block. The bitcoins miners work is to confirm those transaction and record them into a general ledger.
How to mine bitcoins: Making a hash of it
A ‘blockchain’ is a long list of blocks, which is a general ledger. The block chain can be utilized to find any transaction made between two bitcoin addresses, at any point on the network. Ever new transaction creates a record on the blockchain, creating an ever increasing lengthy list that keeps a record of all transaction made. An up to date copy of the official blockchain is given to everyone who is participating, so they know what is going on.
A general ledger has to be trusted and besides, everything is held digitally. So how can anyone be sure that the block has never been tampered with and is intact ? This is where miners come in.
Whenever a block of transactions is generated, miners work on it in a special way. The miners take the information present in the block and apply on it a unique mathematical formula, thus converting it into something else. That new something is a shorter, seemingly random sequence of letters and numbers know as a hash. The hash is added to the block, being stored at the end of blockchain at that point in time.
These Hashes have some exciting properties. The production of this hash from a collection of data (e.g. a bitcoin block) is quite easy, but reverse engineering the hash back into the bitcoin block data is nearly impossible by just looking at the hash. Although it is easy to produce a hash from large amount of data, each hash is still unique. Just changing a single character in a bitcoin block changes it completely.
The transaction in the bock is not the only piece of data used by miners in generating a hash. One of the other data includes information from the last hash as well.
As each new hash contains data from previous block’s hash and it contains data from the previous one as well and so on and on. So in a way, one can know if a block has been tampered with because it’s hash will display different data compared to hashes from other block and how it should be, alerting every one else.
How to mine bitcoins: Competing for coins
Now that you have learned how miners seal of a block, it is also to know that they all compete with each other to do this, using specific software made especially for mining blocks. On successful creation of a hash, the one who completes it gets a reward of 25 bitcoins. The block chain is updated in lieu of this new transaction and everyone on the networks gets to know about it. This is the incentive for mining and keeping the transactions going.
The problem with this type of system is that it is quite easy to produce hash from a collection of data, especially for powerful computers of today, which are really good at it. The bitcoin network has to make the mining difficult for this process to keep on going for a long time, otherwise we would have users hashing hundreds of transactions per second, and all of bitcoins would be mined in minutes. The protocol for bitcoin mining has been deliberately made more difficult with addition of something known as ‘proof of work’.
The bitcoin protocol just does not accept any generic old hash. Its new demand is that the block’s hash has to appear a certain way, with a certain number of zeroes at the start.
How to mine bitcoins: What hardware and software to use
There are many open source software that are available on the internet for you to use for mining. Using which software doesn’t set apart your mining capability as much as what hardware you are using. A typical CPU by itself does good hash calculation per second in mega range but that was good in early days of mining. Now a days there are dedicated Mining hardware like FPGAs, ASICs and even GPU that you use for gaming etc.
These hardware have ranges in mega to giga range. These days a lot of upfront money is paid to buy good mining hardware and it can cost also a lot in terms of power consumption. That is why these days people use pools of users, that is user combine together to mine a hash and then each get a portion of bitcoin award money.
All in all, if you want this to be profitable, try getting a dedicated hardware and join a mining pool. Also do some calculations with respect to you utility power cost for running mining hardware to bitcoin reward to see if this is profitable.