Bitcoin was the first cryptocurrency released in 2009. Bitcoin is the world’s largest distributed computer project involving people all over the planet contributing to the network in various ways. It has changed the world of finance with more and more traders and institutional investors climbing on board every day.
Bitcoin has been around for nearly 10 years and mining methods have changed quite a lot since the first block was mined by the creator, Satoshi Nakamoto, who has since vanished without a trace. Mining bitcoin has gotten a lot more difficult since that first block and it is definitely not easy to make money mining bitcoin.
In fact, it is the most difficult cryptocurrency of all to mine, for reasons outlined further in this article.
What is Bitcoin Mining?
The infrastructure that bitcoin runs on is the blockchain. Every time there is a transaction, a movement of bitcoin (BTC) from one wallet to another, it needs to be validated to ensure it is a valid transaction.
This is what bitcoin miners do. The term “miners” might be a little misleading. It would be more appropriate to call them “validators” or “record keepers.”
The term “miners” is most likely because mining bitcoin is a slow and steady process much like mining gold and other commodities from the ground. Bitcoin mining was actually designed to be difficult, so blocks were released steadily. Bitcoins are mined with processing power, which is essentially a mix of hardware, time, and energy.
First, bitcoin transactions are grouped into blocks. These blocks represent a computational puzzle with a specific answer.
The miners use their computers/mining rigs to solve these puzzles. The faster the computer can guess the answer the more likely they are to win the puzzle and find the solution. The winning solution is broadcast to all other miners on the network who then move on to the next block once they verify the solution.
While generating proof of work is very intensive, validating the proof is much easier. If the proof of work meets certain requirements, then it is valid.
These miners are very important, essentially running the bitcoin network. When people ask how bitcoins are found and mined, they are “found” when the miners verify transactions, as they are rewarded with new coins which enter the cryptocurrency ecosystem.
Without these miners, there would be no bitcoins. And the cost of mining runs on the pure variables of advancements in technology along with the cost of electricity, so it really is a utopia from the point of view of a free market ideologist, though it obviously has a number of risks like any system.
Every transaction that has ever been completed is recorded on the public ledger known as the blockchain, viewable online. The way that the bitcoin blockchain was developed was that every 10 minutes a new block was mined/validated by miners.
Technically, bitcoin transactions are instantaneous, but you have to wait for miners to verify the transaction which is what causes the delay. It is not due to a “slow” network; bitcoins need to get 6 verifications before the transaction is confirmed.
Every two weeks, this difficulty level is adjusted so that this 10 minute per block ratio is maintained. This ensures that a steady supply of bitcoin is released until the year 2140.
In a sense, the rate of inflation has been calculated into the bitcoin blockchain formula. Because there is a constant stream of bitcoin in the marketplace, the price is mainly driven by supply and demand and not due to interventionist policies, though technology and the price of electricity will have an effect. Bandwidth is not really a concern in terms of bitcoin mining.
Bitcoin Mining: What you Need
If you wish to mine bitcoin, you need an Application Specific Integrated Circuit (ASIC). These are machines (mining rigs) designed specifically for the purpose of mining bitcoin.
In the beginning, it was possible to mine bitcoin with CPUs and GPU’s, and for most cryptocurrencies, this will still be the case. But now it is far more difficult to mine bitcoin and an ASIC is a requirement. And just purchasing an ASIC is not enough to guarantee success on its own.
You need to use an online profitability calculator which calculates profit given variables such as the cost of electricity, the fee of the mining pool and the hashing power of your mining rig. This can only give you a current estimate of profitability based on the current price of electricity and the current USD/BTC exchange rate, both of which are extremely volatile.
Aside from your ASIC hardware, you will need a bitcoin wallet to store the bitcoins that you receive. There is no shortage of options for the storage of bitcoins.
For the ultimate protection, you can simply invest in a Trezor or a Ledger Nano. These are hardware USB wallets that are only switched on only when you enter the pin. Both hold all of the major cryptocurrencies, with a large number of cryptocurrencies held by the Ledger Nano.
If you lose the device, you will have to get a new one and enter your wallet seed words to recover, and they cost over $100. But these devices are essentially unhackable once you remember your wallet seed words.
Cheaper options that still do an excellent job are Exodus and Electrum, with Exodus being a multi-cryptocurrency wallet. These are desktop wallets that are not kept online, so they are much safer.
There are also a number of online wallets such as Blockchain Info which are still pretty safe, but not as safe as in your wallet with your cryptocurrencies stored on your computer. Even with the best intentions and the best security, there are online hackers who are very creative in their attempts to hack online wallets and exchanges using a variety of different methods.
Every online database is vulnerable to attacks, even official sites such as the NSA, are invulnerable. Ironically, the only way this vulnerability is removed is with a decentralized database such as the blockchain.
Some people still keep their cryptocurrencies on exchanges, which is an elementary mistake that could cost them dearly.
Every wallet has a receive address where the mined coins are sent to. Some wallets may not be compatible with certain software. If you are serious about mining and intend to store a lot of coins, then it is best to simply invest in a hardware wallet as it is more secure.
Once you have your mining rig and your bitcoin wallet, you will need software to connect to a mining pool to start mining. It is possible to mine on your own, it’s just that you would not receive any bitcoin for about 5 years or so
Bitcoin mining software is equally as important as the hardware. It connects you to a mining pool and also for solo mining it connects your bitcoin miner with the Blockchain.
The bitcoin software delivers the work of the hardware to the rest of the network. The software monitors a number of variables such as the hash rate, fan speed and temperature.
Many of the top mining rigs come with pre-installed software, but you can configure them to work with the software of your choice. Mining software is very user friendly, intuitive, and free.
For Windows, the most popular models are Bitcoin Miner, BTC Miner and CG Miner. CG Miner is the most famous and includes fan speed control, multi GPU support and remote interface options. BFG Miner is designed specifically for ASIC’s and aside from this, it is much like CG Miner.
You can even put a data visualization tool on these two pieces of software called Easy Miner which will streamline all the statistics. Easy Miner, CG Miner and BFG Miner are also available for Linux, and for Mac the best option is RPC Miner.
Bitcoin Mining Pools
Practically all miners join a pool. Mining pools have the added advantage of reducing variance, meaning you get paid more consistently with less risk.
Instead of having to wait 5 years for your coin, you can get paid a small amount every week or so in proportion to what you contributed to the project. Most mining pools charge a small fee between 1-3% and there are a variety of payment methods.
Essentially, you get paid in proportion to the hashing power you contributed to validating transactions. There is still luck involved in mining transactions, and it is possible that a mining rig that “guesses” the answer to the puzzles half as fast as your miner gets it right twice as much, simply by chance, however unlikely this is. Joining a mining pool reduces this variance to a large degree.
In order for transactions to be confirmed, they are included in a block along with a Proof of Work. These proofs are very difficult to generate, and to get it right the miners attempt billions of calculations per second.
The proof of work depends on the previous block and previous transactions cannot be reversed, preserving the integrity of the blockchain. There is simply no way that transaction can be fraudulent on the bitcoin blockchain.
It is technically possible for a conspiracy-like attack where a mining pool had 51% of the total hash power and decided to rewrite the blockchain. There are no mining pools near this number and it would set off alarms in the community if it did.
The mining pools are made up of individuals in different countries using their individual mining rigs, some with over 1,000 miners.
Bitcoin is known as an anti-fragile technology, getting more robust as time goes by. If new threats arise such as quantum computing, then there will be an upgrade to the protocol.
In order to make such changes there needs to be a majority consensus. It is very difficult to make changes to bitcoin due to this, and it is only done in response to major issues. And people are going to vote for these changes, as it is hard to imagine why people would want to compromise their own money.
There is no conflict of interest when all people have skin in the game, with a say proportional to their investment. Everyone would want the price to rise.
There have been criticisms that miners would prefer transaction fees to be high and processing times slow, but transaction fees and processing times are derivatives of network difficulty and computing power, set by the price of electricity which will cost the miners more.
And if costs stay high, then people will move from bitcoin, rendering all bitcoins worthless. Miners most certainly do not want this.
Bitcoin Mining: Technical Details
When a mining rig is trying to solve the “puzzle,” what it is really doing is guessing a number. Bitcoin uses SHA (Secure Hash Algorithm) 256 encryption.
The miner runs a cryptographic function on the block of transactions. What this means is that the miner guesses a number to the puzzle. The result of this function/guess will be a hash.
Aside from the number (sometimes called a nonce), the mining input will also take a Merkle root (a data structure used in programming languages), a timestamp and the hash of the previous block.
A SHA256 Hash is a really long alphanumeric set consisting of letters and numbers. If this hash is below a difficulty target, then the block is validated and added to the blockchain. If the difficulty target is 1000000000000000000000000000000000000000000000000000000000000000, then the first number of the hash would have to be 0.
If the one in the difficulty hash above is moved to the right, then the Hash would have to start with 2 zeros to pass the difficulty target. The difficulty is adjusted every 2,016 blocks, which roughly equates to every 2 weeks. This is done algorithmically to ensure that blocks are completed every 10 minutes, so a steady stream of bitcoin is released.
Every block on the blockchain will have a magic number, a block size, a version, a Merkle root, a previous blockhash, a timestamp and a difficulty target. The block size is an important item in the above list and the cause of much controversy between developers.
It is set at 1MB and an increase of the block size would result in faster transaction speeds and lower fees. A proposal to increase the block size was rejected in favor of Segregated Witness (SegWit), which resulted in the creation of Bitcoin Cash and a fork in the blockchain with a new cryptocurrency.
The debate is over the scalability of bitcoin, which is a constant issue. When bitcoin was first created blocks could carry up to 36 MB of data, but this was reduced to 1MB to protect against attacks.
The transaction fees for bitcoin and the speeds are currently appallingly slow, though when Segwit gains widespread adoption, this issue will be mitigated.
But only for a while. Critics of the decision argue that this is only a stopgap measure that will only last until more users adopt bitcoin, and the problem will arise once more.
SegWit proponents say that there are other features such as Lightning Network (LN) which will help to scale bitcoin. However, LN will lead to centralized payment hubs, the whole purpose of bitcoin being to avoid centralization.
The Bitcoin Cash block size is 8 MB, meaning that there is no scalability issue in the near future, it is fast and practically free. But as a consequence, Bitcoin Cash is more difficult to mine and there is a higher cost to store data, and higher electricity costs. The debate goes on.
Bitcoin Mining Difficulty and Profitability
Many ask whether bitcoin mining is profitable or not. The simple answer to this question is no. If you are asking these types of questions, then chances are that you are not a technology specialist and you will need some time to understand how the blockchain works and get familiar with the technology.
Like anything, you need to have an edge to make money, and if it was easy, everyone would do it. And indeed, many did flock to bitcoin mining initially before the price of hardware shot up due to increased demand and the difficulty of the network was adjusted to ensure a steady flow of bitcoins.
The industry has been around for nearly a decade and the market is specialized, expensive to break into, and saturated. Though you are not really against other people, the rewards really go to those first on the market with the biggest and most efficient rigs.
If you think bitcoin is going to rise in future, then it would be much easier to simply purchase it outright, though you might lose 6-8% or so total when fees are considered. This figure beats expensive mining software and the time spent learning the network.
There are many other cryptocurrencies that could have more financial potential and it would be easier to focus on these, as less expensive software and expertise are necessary. Or you could join a pool that switches the coin based on which one is the most profitable, which is an intelligent trend at present.
Bitcoin is possibly the worst coin for a beginner to start mining, given how difficult it is and the cost of the hardware and electricity. It simply does not make sense, especially since there are so many other cryptocurrencies to choose from.
Few mining operators make much profit right now, though larger mining operations might benefit from economies of scale. Most miners are enthusiasts who do it as a hobby. If you are a solo miner, then you need free electricity or to choose a cryptocurrency you are sure will double in value in the near future.
Bitcoin Mining Summary
If you are dead set on bitcoin mining, then purchase a high-quality ASIC soon and start mining. If you do decide to mine bitcoin, work out your costs beforehand with an online profitability calculator to see if you can afford it.
If you think it is too much effort, bitcoin has never been easier to acquire and securely store than it is right now.