How are Bitcoins Created?
How are Bitcoins created? It might seem like magic but its really rather simple…
HOW ARE BITCOINS CREATED INFOGRAPHIC
1. How are Bitcoins Created - ‘MINING’
Bitcoins are created by a competitive and decentralised process called “mining” and essentially this is how bitcoins are created.
Individuals ‘Mine Bitcoin’ using servers and powerful computers to work out complex equations which ultimately lead to the creation of new bitcoins.
Bitcoin miners process transactions secure the network using specialized hardware and they collect new bitcoins in exchange.
The Bitcoin algorithm is designed in such a way that new how bitcoins are created at a fixed rate that cannot be altered.
A very high level of energy is needed when servers are undertaking the complex equations needed to generate bitcoins.
Profitable
This makes Bitcoin mining a highly competitive and profitable business.
On the network, when more miners join it becomes increasingly difficult to make a profit Miners must seek efficiency to cut costs such as power and hardware.
No central authority or individual has any power to control or manipulate the system to increase profits unlike the current financial system.
How are bitcoins created - they are created at a decreasing, predictable rate.
The number of new bitcoins created each year is automatically halved over time until bitcoin issuance stops completely with a total of 21 million bitcoins.
We have reached this point already but Bitcoin miners are still supported by numerous small transaction fees.
2. How are Bitcoins Created - ‘SUPPLY’
The successful miner finding a new block is rewarded with newly created coins and transaction fees.
As of 9 July 2016 the reward was equal to 12.5 newly created bitcoins per block added to the unique blockchain.
To claim said reward a special transaction called a coinbase is included with all processed payments.
Every coin in existence has been created in such coinbase transactions leading many to ask how are bitcoins created in such volume effectively.
The bitcoin protocol dictates that reward for adding a block will be halved every 210,000 blocks every four years-ish.
Eventually reward will drop to zero and the max amount of 21 million bitcoins will be reached . Record keeping will then be rewarded by transaction fees alone.
Bitcoin’s creator Nakamoto set a monetary policy based on false scarcity at its creation that there would only ever be 21 million bitcoins in total.
3. How are Bitcoins Created- ‘SCALABILITY’
A commonly asked question would be how are bitcoins made to scale up in network size and volume.
The current Bitcoin network can potentially process a much higher number of transactions per second than it does today.
The network at this time is not ready to scale to the level of major credit card networks.
Said networks complete trillions of dollars worth of transactions every day.
Work is underway to lift current limitations and potential future requirements are well understood.
Since creation every aspect of the Bitcoin network has been in a process of optimisation and specialisation and it should be expected to remain that way for years to come.
4. How are Bitcoins Created - ‘LOST BITCOINS’
When a user loses his bitcoin wallet it has the effect of taking money out of circulation. Lost bitcoins still remain in the block chain just like any other bitcoins however.
It must be difficult to learn how bitcoins are created only to lose some!!
Lost coins are dormant forever because there is no way for anybody to find the private key - allowing them to be spent again.
This situation happened recently to a billionaire whose fortune in crytocurrency was lost forever when he died suddenly. Taking his passkey and fortune to the grave, his partner and children unable to benefit from their value.
Supply and demand - when fewer bitcoins are available the ones that are left will be in higher demand and increase in value to compensate.
We saw this in full force when Bitcoin reached $20,000 per coin in DEC 2017!
5. How are Bitcoins Created - ‘ANONYMITY’
Bitcoin by design allows its users to send and receive payments with an acceptable level of privacy. As well as any other form of money.
This is how bitcoins are made to maintain users annonimity.
Contrary to popular belief Bitcoin is not anonymous and cannot offer the same level of privacy as cash does.
The use of Bitcoin leaves extensive public records and an electronic paper trail.
Various systems exist to protect users’ privacy and yet more still are being developed.
There is still work to be done before such features are used correctly by most Bitcoin users.
Some fair reservations have been voiced that private transactions could be used for illegal transactions via the Bitcoin network.
Regulation
It is worth noting that Bitcoin will eventually be subjected to similar regulations that are already in place inside current financial systems.
Bitcoin can never be more anonymous than cash money and it is not likely to prevent criminal actions from being undertaken.
As a final note Bitcoin is somewhat designed to prevent a large range of financial crimes.
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