Bitcoin mining has been around since 2009. In the beginning, it was rather easy to discover Bitcoins and collect as many as you could. At this time, they were worth pennies on the dollar. You know how the story goes though. As of today, each Bitcoin is worth over $8,000. While this value fluctuates, Bitcoin exchange is the number one reason that people get into mining.
And why not? It’s about making money.
Getting Started with Bitcoin Mining
So, you want to start mining Bitcoins for yourself? To do that, beginners need to think about Bitcoin differently than a normal currency. Bitcoin mining uses energy from your computer to introduce new Bitcoins into system. If you think about the way that currencies are created by different governments, the law of supply and demand still governs the availability of Bitcoins.
However, Bitcoin’s supply is fixed and regulated by strict mathematic algorithms that can never be broken. It’s also not like banks that print new notes of currency. Instead, there is a lot of work that goes into acquiring each Bitcoin.
Where Do Bitcoins Come From?
Bitcoins are created using blockchain technology. It is crucial that beginners thoroughly understand blockchain technology before attempting to mine for Bitcoin.
A blockchain is a public digital ledger that records all of the transactions across a network of computers. The record is decentralized, distributed, and unchangeable. You can only alter a block without altering all of the other blocks on the network.
Blockchains are made up of blocks, which are files where data is stored pertaining to the network. It is a permanent record of all the new Bitcoin transactions that have not yet formed previous blocks. You can consider a block to be a page of a ledger.
If it sounds complicated, you are not alone. Blockchain technology was invented by Satoshi Nakamoto, also known as the father of Bitcoin.
In simple terms, mining for Bitcoin is much like mining for digital gold. However, it’s very rare to find huge nuggets of Bitcoin in the blockchain, unless you have a powerful mining machine.
How Does Bitcoin Mining Work?
Unlike printing a flat currency, digital currencies like Bitcoins are mined on the Internet. It is just like physical mining in that you need tools to be able to mine for Bitcoin as it is energy intensive. As Bitcoins are mined, new Bitcoins are added into the ecosystem.
New Bitcoins are found when miners discover a Bitcoin block that contains a number of Bitcoins. This process is also called a lottery as it is very rare to find these blocks and those who do are considered winners.
Unlike the lottery, however, Bitcoin mining is not based on random luck. There are nodes that you can seek out just by using highly educated guesses and doing a little bit of investigation into the network.
Typically, a Bitcoin block is found every 10 minutes. However, that miner probably spent months trying to find that one block. As the age of Bitcoin continues, it will take longer and longer, requiring more energy from your computer, to mine for these blocks.
As of now, a typical Bitcoin block contains about 12 Bitcoins. If you can imagine, at the start of Bitcoin, every block was easily found and contained about 50 Bitcoins. This reward has halved ever since 2009. It will reach total supply somewhere around 2120.
Successfully Mining a Block: How It’s Done
Before we get into how to successfully mine a block, there are some technical terms that you’ll need to know.
Bitcoin Hash Function
This is a mathematical function that takes any size of an input and creates a fixed length output, whenever it is computed. It uses SHA-256. This output is called Bitcoin Hash.
Merkel Tree and Merkel Root
Did you ever draw a family tree? The Merkel tree is no different. It is a tree of hashed groups, and it all trickles down to the Merkel root. This is a concept you should learn as part of cryptography and computer science. The Merkel tree is used to visual Bitcoin transactions. There are usually hundreds of hashed transactions in one Bitcoin block.
Target and Difficulty
When you talk about a target in Bitcoin, you are specifically referencing a 256-bit number, which is incredibly large. It can be found by hashing a previous block in such a way that all the Bitcoin clients share. Difficult refers to how complex it is to discover a hash below or equal to the target. This measured as the hash rate.
A nonce is a 32-bit or 4-byte field that you can find in the input area of the SHA-256 hash. The value of this nonce must be set in a path that the hashed output has all of the leading zeros. Miners follow the leading zeros that are equal or less than the target to get to the reward block.
Technically Speaking: How Do Miners Find Blocks?
When a miner successfully discovers a block, the miner needs to hash the block’s header in a specific way so that it is less than or equal to the target. Miners can create a block header by hashing all the transactions together in a block. This forms a full Merkel tree. The root puts together a hash of the latest block and a nonce. This raw data of a Merkel Root combines with Previous Hash and a Nonce with a Timestamp.
This is put into a SHA-256 function, which creates a hash output per the target.
The target must be a 246-bit alphanumeric string and starts with 17 zeros. If you look back at Bitcoin history, the goal is to obtain a target block hash with 8 zeros. However, the target changes as with difficulty every 2016 blocks.
If it sounds complicated, that’s because it is. Bitcoin makes it complicated to find a block so that it takes more energy to mine a single block and avoid inflation.
The miners go to this particular hash or target by changing up a small part of the block’s headers. This is referred to as a nonce. Nonces always start with a zero and adds up every time that you receive a hash or target.
The chances of finding this specific target are very slim. It depends on the power of your computer and your knowledge of the Bitcoin network. You must have a machine that can handle a lot of computational power and hardware resources so that it can carry out mining and show “proof of work.”
How Difficult is to Mine Bitcoins Today
Over time, the difficulty to mine a Bitcoin block will grow even harder. This is because the SHA-256 hash of a block header has to be equal or lower than the target in order for the block to be found. Many attempts must be made first to find a hash that starts with the number of zeros that you need. As more attempts are made, the closer you get to the target.
You can use the Bitcoin network difficulty metric to understand how difficult it is to find a new block. The difficulty changes every 2016 blocks. It typically takes about two weeks for this to happen. This typically yields about a block every 10 minutes. However, as more miners join, the block creation rate will also inflate. The difficulty rises to compensate and push the rate of blocks back down.
The Block Reward
Everyone must agree upon the block reward. This is the number of coins that a block contains when it is discovered. Typically, it is about 12 bitcoins. However, this value halves with every 210,000 blocks found. You can use a bitcoin mining calculator to accurately give you the block reward for the current time.
The miner is also awarded fees paid by users who are making transactions at the time. The fees are a reason for miners to include the transaction in the block reward. However, as it becomes more difficult to mine Bitcoins, the number of new Bitcoin blocks being created will also go down. Fees will eventually become more important to mining income.
What is Proof of Work
Bitcoin uses a method to ensure that the information in the new block was properly mined based on time-consuming cost and energy. Proof of work comes down to the costs of processing power. This means that the bigger hardware, energy, and time you spend mining a block, the more likely you are to show “proof of work” and discover a block.
What’s Needed for Bitcoin Mining
The current formula for mining Bitcoins includes:
- ASIC setup
- Bitcoin pool software
- Bitcoin wallet
In the beginning, when there were no Bitcoin exchanges, anyone could use their personal computer to set up a node and start digging into your CPU for a valid block. It required little computational power, and you were able to discover blocks relatively quickly.
Mining for Bitcoins will continue to get more difficult as more minors continue to mine and generate coins to add to the Bitcoin ecosystem. Special GPUs and ASIG mining have changed the playing field a lot. With these high-energy machines, it raised the difficulty to a point that CPUs do not have the power to mine Bitcoins efficiently. It would take years to mine a single block using a CPU, which is probably not worth the effort.
However, mining has become a network nowadays. It still requires that you make large investments in special hardwares that need lots of electricity and cooling devices.
There are a couple different ways that you can “mine” for Bitcoins. Some are traditional, and other methods involve joining a Bitcoin network.
Bitcoin Mining Hardware
Your hardware is the most important part of mining for Bitcoins and showing proof of work. You have to have the computational power to set up a node and find the block. However, you won’t be able to do that with most setups that used to work in the past.
In the beginning, everyone could mine Bitcoins with a CPU. It was the only way to mine Bitcoins, and miners could do so using the Satoshi method. However, in the quest to earn more Bitcoins, larger computer networks and server farms were created to mine Bitcoins. Now if you tried to use a CPU, you could spend over 10 years trying to keep up with the computational power of other miners.
High end graphics cards were also used for Bitcoin mining. This started a year and a half after the beginning of Bitcoins and progressed mining challenges further. With a GPU, miners were able to increase their mining power by up to 100 times. While some GPU systems can still be used to mine Bitcoins, the AMD line is the most preferred and cost effective method for Bitcoin hardware.
Just like when miners upgraded to GPUs, after the GPU came FPGA or Field Programmable Gate Array. This was a Bitcoin mining hardware setup that gave way to new hardware that was completely dedicated to bitcoin mining.
FPGAs had more power efficiency and were out-of-the-box ready for mining bitcoins. While a typical graphics card with 600 MH/s can consume up to 400w of power, the FPGA mining device would create a hash rate of 826 MH/s with 100w of power.
This improvement started the first wave of bitcoin mining farms and were constructed to have a profit. FPGA is credited as starting the Bitcoin mining industry.
Nowadays, rigs are based on ASIC or Applicational Specific Integrated Circuit. The ASIC was a chip created specifically to mine Bitcoins and only mine Bitcoins. ASIC chips cannot be used for any other purpose either.
The chip is able to increase hashing power by 100 times while also reducing the consumption of power compared to FPGA, GPUs, and CPUs.
If you plan to mine today, ASIC is the best way to do so. However, you may not be able to compete on the server farm level. If your device is power efficient enough, you may be able to mine a block in two years. However, you also have to make sure that the electricity cost doesn’t exceed the output. The exchange rate of Bitcoins also changes how profitable it is to use ASIC.
Bitcoin Mining Software
There are a lot of Bitcoin mining software scams out there, so you should make sure that you pick a Bitcoin cloud mining contract that has been reviewed and recommended by other miners. Almost all miners are now mining in pools because it allows you to combine your computational power and reduce the amount of time to uncover a block through “proof of work.”
Joining a Mining Pool
You can find Bitcoin mining pools online. Once you join, you’ll set your miners to connect to that pool. The profit from each block that a member finds will be distributed among the members of the pool. The payout depends on the amount of hashes that your miners contributed to the overall output.
The key thing to pay attention to is the fee for joining the pool. You want to always join a zero fee pool.
Bandwidth Used in Bitcoin Mining
You will need to be connected to the Internet and have a decent bandwidth limit to be able to mine Bitcoins. Currently, you need about 10MB/day to mine Bitcoins with a pool. However, you need to make sure that you are constantly connected so that you can get updates as soon as they become available for your miners. You want to be one of the top contributors of hashes in order to get a high payout from the pool.
Solo Mining vs Pool Mining
While solo mining will require expensive hardware and will take time to get a payout, you will get larger payouts that are few and fare between. While pooled mining gives you small, frequent payouts, you have to be a top contributor to get the payouts that you want.
What About Bitcoin Cloud Mining?
With the advancement of Bitcoin mining, investors can earn Bitcoins now without having any hardware, electricity, bandwidth, software, or other offline problems that prevent you from just getting the payout. Cloud mining contracts can be scams, so it’s important to investigate any contract before purchasing.
There are a few things to look for when purchasing a cloud mining contract.
- Buy SHA-256 mining contracts or SHA-256 coins
- Purchase at least 10GH/s
- Reasonably pricing mining plans
- Proper hardware to mine as fast as possible – look for ASIC chips, BitFury, and largescale server farms
There are some risks with cloud mining contracts that you should be aware of.
Most cloud mining services are scams. These are fraudulent investments that follow the Ponzi scheme method. It allows you to pay old investors with the funds given by the new investors. Typically, the service providers run out of money and can’t support the server farm in order to support the cloud mining pool. You typically won’t be able to recover your investment if you invest in these contracts.
You can spot cloud mining scammers with the following:
- No video/image of a real mining facility.
- The facility hasn’t been open for more than a year.
- The mining plans are exorbitant and have tons of fees.
- There should be 24/7 customer support.
- Do not pay with cryptocurrency as you can’t recover your investment.
2. Mining Difficulty Increases – Choose Short-Term Contracts
As with the progression to GPUs, FPGAs, and ASIC computational power, cloud mining is the next step to making it more difficult to mine Bitcoins. While cloud mining contracts provide you with computational power that is constant, the difficulty of mining will likely increase as well. This also means that the number of cons you can mine will also go down over time. You can always pick up a short-term contract over long-term contracts.
3. Volatile Cryptocurrency Problems
While Bitcoins have steadily increased in value, from $25 to over $8,000, they have also been known to drop drastically from week to week and then make astronomical gains. This means that coins can decrease drastically in just a number of hours. You should always diversify your assets so that you are not putting all of your investment in one bucket.
4. Read the Terms of the Contract
You have to read the terms of cloud mining contracts before purchasing a plan. These contracts should define the cryptocurrency that is being mined. You should also pick a contract that has a short lifetime so that you can avoid problems with volatile cryptocurrencies. The contract should also detail the costs of electricity and management if separate from the plan.
If you plan to mine Bitcoin, you should be prepared to make hefty investments in ASIC, electrical costs, and time. You may want to join a Bitcoin mining pool or purchase a cloud mining contract. However, with each avenue, you will have to make concessions on what matters more. If you want to make a lot of money in the short-term, then you may want to opt for a Bitcoin mining pool for a constant stream of payouts. If you find a reliable cloud mining contract company for a reasonable price, then you can avoid hardware and electrical costs.
Investing in Bitcoin mining is a bit risky. However, if you have the investment funds to set up your Bitcoin mining hardware and software, then you can get back a lot of your investment over time from discovering Bitcoin blocks.
You should also look into Bitcoin exchanges and market trading for cryptocurrencies to maximize your payouts.