Wednesday, August 10, 2022

What Is Bitcoin Mining Actually Doing

Taxes On Bitcoin Mining

What is Bitcoin Mining and is it worth doing?

Its important to remember the impact that taxes can have on Bitcoin mining. The IRS has been looking to crack down on owners and traders of cryptocurrencies as the asset prices have ballooned in recent years. Here are the key tax considerations to keep in mind for Bitcoin mining.

  • Are you a business? If Bitcoin mining is your business, you may be able to deduct expenses you incur for tax purposes. Revenue would be the value of the bitcoin you earn. But if mining is a hobby for you, its not likely youll be able to deduct expenses.
  • Mined bitcoin is income. If youre successfully able to mine bitcoin or other cryptocurrencies, the fair market value of the currencies at the time of receipt will be taxed at ordinary income rates.
  • Capital gains. If you sell bitcoins at a price above where you received them, that qualifies as a capital gain, which would be taxed the same way it would for traditional assets such as stocks or bonds.

Check out Bankrates cryptocurrency taxes guide to learn about basic tax rules for Bitcoin, Ethereum and more.

Bitcoin Mining Farms Are Getting Inspected

While the format of the supposed document screenshot may seem off, it is, however, not impossible that the essence of the screenshot speaks to what is happening in Yunnan.

China Star Market, a business outlet under the state-owned Shanghai United Media Group, said in a news alert on Saturday that the Yunnan Energy Bureau confirmed to the outlet that it is requiring subordinate energy departments in the province to fully inspect bitcoin mining farms by the end of June.

In fact, the China Star Market’s news alert was also identical to the essence of the screenshot that was circulating on Friday but the media outlet didn’t specify whether the screenshot was authentic.

Below is an unrelated but authentic document from the Yunan Energy BureauBelow is the screenshot that was circulating last week

Neither China Star Market nor the circulating screenshot exactly mentioned that the Yunnan province was set to impose a blanket ban on bitcoin mining.

The media report said the Yunnan Energy Bureau is requiring subordinate departments to inspect and then either shut down or rectify bitcoin mining farms that are using unauthorized hydroelectricity. This includes power stations that are directly supplying energy to bitcoin mining farms without paying a profit cut to the government.

It remains to be seen what the next step is when the Energy Bureau completes its inspection of unauthorized energy use by bitcoin mining farms.

Cant Google Start Mining Bitcoin And Blow Out The Competition

Yes it canbut it wont do it much good. The reason is that Googles servers arent fit for solving the Bitcoin mining problem in the same way that ASICs are.

For reference, if Google harnesses all of its servers for the sole purpose of mining Bitcoin , it will account for a very small percent of the total mining power the Bitcoin network currently has.

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What Will Happen When All Bitcoins Are Mined

Some people are concerned about what will happen when all of 21 million Bitcoins are mined and no more mining reward will be available to incentivize mining. This is set to happen somewhere around 2140 and the answer to this question lies in Bitcoin mining fees.

Miners get paid in newly minted Bitcoins but also with mining fees that are attached to transactions. Once all Bitcoins are mined, it is presumed that mining fees will continue to incentivize the action of Bitcoin mining. As Bitcoin becomes more popular and the mining reward decreases, Bitcoin mining fees will become more lucrative.

Bitcoin Mining Is Like Giving Your Computer A Job

So, What Are Bitcoin Miners Actually Doing?

All the technical details can seem overwhelming at first, but in a nutshell, Bitcoin mining is like telling your computer to solve math problems for money, while helping to keep the entire network moving along so that people are able to send Bitcoin anywhere in the world in a matter of minutes. Pretty awesome if you ask me. To read about the best Bitcoin mining hardware of 2019 click here!

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Bitcoin: An Example In Crypto Mining Profitability

In 2009, the first widely successful cryptocurrency, Bitcoin, rewarded its first miner with 50 BTC, valued at $6,000. At the time, the computing resources and energy required to mine a single BTC were significantly less, allowing interested miners to pocket most of the reward.

As the Bitcoin protocol maintains a half-life of roughly four years, block rewards get cut in half, with the third and most recent reduction in May 2020 going from 12.5 BTC to 6.25 BTC. Though each block reward will continue to decrease, the rising value of BTC means dedicated miners can still be profitable. Pooling mining capabilities and earnings remain the dominant method for interested miners.

For reference, the value of 6.25 BTC as of November 2021 is approximately $360,000.

The Evolution Of Bitcoin Mining

In the early days of bitcoin mining, the central processing unit, or CPU, in an everyday desktop computer or laptop was powerful enough to uncover new blocks. Later, it was discovered that graphics processing units, or GPUs, used for gaming were more efficient at solving the hashing problem.

These days, bitcoin miners use specialized hardware called application-specific integrated circuits, or ASICs, designed just for mining. These devices can cost around $500 up to over $20,000. There are even mining pools run by third parties where groups of machines work to solve the same problem, then split the profit if they manage to mine a new block.

All of this means that a single miner has little chance to successfully mine a block. Without specialized hardware, their chances are even lower. Thus, without the most up-to-date ASIC, one cannot hope to recoup the money they spend on their mining rig. Realistically, joining a mining pool with one of these machines gives you the best chance of success these days.

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What Is Bitcoin Mining Actually Doing

Bitcoin mining is the act of using specialized computer hardware to verify transactions on Bitcoins Blockchain network, an open and public ledger that cannot be altered, but what exactly does that mean? Whats actually happening behind the scenes when one is mining Bitcoin? If youre still new to the idea of cryptocurrencies like Bitcoin, the inner workings can seem a bit hard to grasp, but thats where we come in.

To be a little more accurate, Bitcoin mining is the act of solving complex proof of work algorithms to verify when someone sends Bitcoin to another person how much, to whom, and ensuring sure the portion of Bitcoin changing hands hasnt already been sent somewhere else. In exchange for lending their computing power to the network, Bitcoin miners are rewarded via transaction fees, and when new blocks of information are created. Well get a little more into that soon.

The Bitcoin Network Difficulty Metric

What Do Bitcoin Miners Actually Do? Bitcoin Mining Simplified â¿ How Bitcoin Mining Really Works?

The Bitcoin mining network difficulty is the measure of how difficult it is to find a new block compared to the easiest it can ever be. It is recalculated every 2016 blocks to a value such that the previous 2016 blocks would have been generated in exactly two weeks had everyone been mining at this difficulty. This will yield, on average, one block every ten minutes.

As more miners join, the rate of block creation will go up. As the rate of block generation goes up, the difficulty rises to compensate which will push the rate of block creation back down. Any blocks released by malicious miners that do not meet the required difficulty target will simply be rejected by everyone on the network and thus will be worthless.

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Who Updates The Blockchain

Because theres no centralized regulating authority to manage or control exchanges, it means that the computers that mine that specific type of cryptocurrency are all responsible for keeping the ledger current. And updates to the blockchain are frequent. For example, estimates that the Bitcoin blockchain gains a new block every 10 minutes through the mining process.

With a cryptocurrency blockchain, anyone can see and update the ledger because its public. You do this by using your computer to generate random guesses to try to solve an equation that the blockchain system presents. If successful, your transaction gets added to the next data block for approval. If not, you go fish and keep trying until either youre eventually successful. Or you decide to spend your time and resources elsewhere.

Now that you understand what cryptocurrency mining is and how it works, lets take a few moments to understand the attraction of cryptocurrencies and why someone would want to mine them.

China’s Bitcoin Mining Crackdown And Beyond

As Bitcoin mining has matured, the barrier to entry for individual miners has been raised. Now, most mining is carried out by pools of miners who combine their resources and attempt to use their cumulative computing power to earn Bitcoin rewards.

Up until mid-2021, the majority of mining pools were based in China. That changed in May 2021, when China’s State Council included Bitcoin mining in a list of financial risks that required monitoring. It marked the start of a sweeping crackdown on crypto mining across China, prompted by the country’s commitments to carbon neutrality and the imminent launch of its digital yuan, a central bank digital currency and Bitcoin rival.

A succession of mining bans imposed by provincial governments including Inner Mongolia, Xinjiang, Qinghai, Yunnan and Sichuan followed, causing a collapse in the Bitcoin mining hash rate. Since then, Chinese miners have relocated to countries including Kazakhstan, while miners in other countries have picked up the slack, with the result that by October 2021, the U.S. had overtaken China as the world’s largest market for Bitcoin mining.

Miners are heavily influenced by electricity prices, since proof of work mining uses large quantities of electricity many miners relocate their operations to make the most of cheap electricity.

Did you know?

The supply of Bitcoin is capped at 21 million. When all 21 million BTC are mined, in around 2140, miners will be rewarded with transaction fees.

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How To Buy Bitcoin

Most people buy Bitcoin via cryptocurrency exchanges. Exchanges allow you to buy, sell and hold cryptocurrency, and setting up an account is similar to opening a brokerage accountyoull need to verify your identity and provide some kind of funding source, such as a bank account or debit card.

Major exchanges include Coinbase, Kraken, and Gemini. You can also buy Bitcoin at an online broker like Robinhood.

Regardless of where you buy your Bitcoin, youll need a Bitcoin wallet in which to store it. This might be whats called a hot wallet or a cold wallet. A hot wallet is stored by an exchange or a provider in the cloud. Providers of online wallets include Exodus, Electrum and Mycelium. A cold wallet is an offline device used to store Bitcoin and is not connected to the Internet. Some mobile wallet options include Trezor and Ledger.

A few important notes about buying Bitcoin: While Bitcoin is expensive, you can buy fractional Bitcoin from some vendors. Youll also need to look out for fees, which are generally small percentages of your crypto transaction amount but can really add up on small-dollar purchases. Finally, be aware that Bitcoin purchases are not instantaneous like many other equity purchases seemingly are. Because Bitcoin transactions must be verified by miners, it may take you at least 10-20 minutes to see your Bitcoin purchase in your account.

People Seek Greater Privacy And Control Of Their Finances

Bitcoin Mining and the things you need to do it at home

Not everyone is as trusting of the existing systems. And some would prefer to have greater control and privacy when it comes to their finances. The idea here is that Uncle Sam doesnt need to know when you purchase underwear or how much you spent on that new surround-sound audio system.

To avoid being a part of the traditional centralized banking system, some people keep money under their mattresses or rolled up in old coffee cans in their pantries. But theres another way that people can keep their money out of the traditional centralized banking system: by mining for and using cryptocurrencies.

Cryptocurrencies such as Bitcoin, Dash, Ethereum and Monero offer a certain level of anonymity to users. Why? Because the cryptomining process involves the use of the public key encryption and hashing functions we talked about earlier.

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The Bottom Line On Bitcoin Mining

Bitcoin mining is essential to the functionality of Bitcoin. Miners do the vital work of verifying transactions, tracking Bitcoin asset ownership, and ensuring the Bitcoin network remains secure. Anyone can participate using a computer capable of Bitcoin mining. Even if you dont plan on mining, its good for Bitcoin users to understand the basics behind how Bitcoin mining works.

But How Can Solving A Puzzle Prove That A Transaction Is Valid

In order to answer this, we need to refer back to the PoW algorithm we mentioned earlier and we need to explain what a hash is.

Simply put, a hash is a string of characters. This string of characters is the output of a special function called a hashing function. Hash functions are special because they can take any series of digital data as input and transform it into a single string of characters. What makes this function even more special , is that if you change even one character in the input , the output string, or hash, will be completely different with no link whatsoever to the previous output.

At this point it might still seem unclear how SHA256 works and how it helps miners reach consensus on the state of the blockchain. To understand this, it is important to recall what information is included in Bitcoin blocks, or most importantly, how transactions are included in Bitcoin blocks. Most information contained in a Bitcoin block on the blockchain is represented by a hash and every block itself is tied to a unique hash. Lets list some of the essential elements which are combined to generate a Bitcoin block hash:

  • Transactions hash
  • The hash of the list of all transaction hashes included in the block. A transaction hash is created by combining the following elements into a single hash: the senders hash, the receivers hash and the amount sent .

    2. Previous blocks hash

    Computed in a similar way. Only the very first block does not use the previous blocks hash.

    3. Nonce

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    Mining Is Used To Issue New Bitcoins

    Traditional currencies–like the dollar or euro–are issued by central banks. The central bank can issue new units of money ay anytime based on what they think will improve the economy.

    Bitcoin is different.

    With Bitcoin, miners are rewarded new bitcoins every 10 minutes.

    The issuance rate is set in the code, so miners cannot cheat the system or create bitcoins out of thin air. They have to use their computing power to generate the new bitcoins.

    What Is Proof Of Work

    What Bitcoin Miners Actually Do

    A proof of work is a piece of data which was difficult to produce so as to satisfy certain requirements. It must be trivial to check whether data satisfies said requirements.

    Producing a proof of work can be a random process with low probability, so that a lot of trial and error is required on average before a valid proof of work is generated. Bitcoin uses the Hashcash proof of work.

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    How Does Bitcoin Mining Work And Why Is It Expensive

    Bitcoin mining seems pointless, but it’s vital in keeping the Bitcoin network up and running.

    The cryptocurrency industry isn’t just lucrative for traders and investors. Crypto miners can also make a healthy profit while contributing to the market, blockchain security, and network integrity, especially those that mine Bitcoin. But what exactly does the Bitcoin mining process consist of, and why is it so expensive to be a Bitcoin miner?

    What Is A Good Hashrate For Bitcoin Mining

    A mining computers total hashrate, or calculations per second, denotes the mathematical processing power of a computer or group of computers mining Bitcoin. Higher hashrates rates are better. As mining difficulty increases, your mining rig needs a higher hashrate to compete with other miners. High-end mining hardware for Bitcoin has a hashrate of around 100 hashes per second.

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    How Bitcoin Mining Really Works

    As Bitcoin approaches mainstream adoption and recognition, its fundamental security model, characterized as mining, is being put under the spotlight and scrutinized more and more everyday.

    People are increasingly concerned about and interested in the environmental impact of Bitcoin mining, the security and degree of decentralization of the underlying model, and even the potential impact of a quantum computing breakthrough on the future of Bitcoin and other cryptocurrencies.

    Often times, proof-of-work is described as a cryptographic puzzle, but what is that puzzle, really?

    In order to truly understand these questions , you need to have a fundamental understanding Bitcoin mining itself and its evolution.

    This article will explore all the technical components and moving parts of proof-of-work, and how they seamlessly synchronize with one another to allow Bitcoin to be the decentralized platform it is today.

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