How to earn, spend and mine bitcoins

To prevent this, Bitcoin uses a transaction validation system based on “blocks”. A block consists of a set of transactions, plus a “proof of work” – a number that, when combined with those transactions and fed twice though an SHA-256 hashing algorithm, produces a value that meets certain strict mathematical criteria.

How to earn, spend and mine bitcoins

Such values aren’t easy to find. In fact, the only known way to find one is to test billions of numbers until you happen to find one that produces a valid hash.

Bitcoin achieves this by drawing on a huge network of volunteers who devote computing power to the task – a process called “mining”. With so many people looking for hashes, it can be predicted that a valid block will be produced roughly every ten minutes. (In fact, as more people join the mining network, the hash criteria are automatically tightened up to maintain this average.)

When a miner generates a valid block, they’re credited with a reward (currently 25 bitcoins), and the block is immediately distributed across the whole network.

Transaction fees

As more and more people start mining transaction blocks, the process becomes progressively more expensive in terms of computing power and energy costs. At the same time, the rewards are shrinking: from 2017, miners (or mining pools) will receive 12.5 BTC per block, falling to 6.25 BTC in 2021.

To counter this, Bitcoin supports a system of voluntary transaction fees, whereby senders can offer a small payment to whichever miner includes their transaction in a block. By default, current Bitcoin clients automatically add small payments to particularly complex transactions – such as sending dozens of smaller amounts to someone from multiple Bitcoin addresses – and mining clients will naturally prioritise transactions with higher fees over those with lower fees, or none.

The default fees are calculated as a simple function of the size of the transaction in bytes. At present the fee is 0.0005 BTC (around 5¢) per thousand bytes, so from the sender’s point of view it’s negligible. To a miner, however, the potential cumulative income from hundreds or thousands of transaction fees isn’t to be sniffed at.

Clients can verify for themselves that the proof of work does indeed produce the desired hash, and the record of transactions contained within the block is thereafter considered authoritative.

This approach ensures that you can’t sneakily spend a single bitcoin in two simultaneous transactions: the block chain in effect establishes a canonical, atomic sequence of events.

It also provides strong protection against fraud, since anyone wanting to get a fake transaction accepted by the network would need to distribute it within a counterfeit block containing a valid proof of work – something likely to take years to generate on a single PC.

Since all miners are constantly trying to generate valid blocks, it will sometimes happen that more than one valid block ends up circulating around the network, creating a fork in the chain.

This is handled by a simple rule: the fork representing the larger quantity of work is accepted, and the other is discarded. This makes fraud all but impossible: even if an incredibly lucky hacker somehow managed to generate a counterfeit block in only one hour, by then a longer chain of legitimate blocks would have been generated by the network, and the fake block would be rejected.

In other words, to create and distribute a fraudulent block quickly enough for it to be accepted into the block chain, your computer would need to outpace the combined efforts of every Bitcoin miner in the world.

What is a bitcoin worth?

Traditional units of currency are almost invariably more valuable than the mere physical materials from which they’re made: the metal in a pound coin, for example, is actually worth around four pence.

In the case of bitcoins, which exist only in the virtual domain, the currency units have no intrinsic worth at all. However, since people are willing to exchange them for goods and services – a partial list of companies accepting bitcoins is maintained here – they nevertheless have value.

How much value is still very much in flux. When bitcoins were introduced in 2009, the first unofficial exchange rate proposed (by a site called New Liberty Standard) was approximately 1,300 bitcoins to the US dollar.

In May 2010 one early adopter famously paid 10,000 bitcoins for a pizza.
Since then, bitcoins have rocketed in value. At the start of this year, traders were selling them for around $6.50 each, and by mid-April a bitcoin boom had seen the price surge to more than $230.

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