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The following post will give you an in-depth understanding of what Bitcoin mining is, how it works, and—most importantly—whether it’s still profitable today. I’ll do my best to keep it simple, as always. What is Bitcoin mining and how does it work? Why do we even need Bitcoin mining? Bitcoin is a decentralized alternative to the banking system. This means that the system can operate and transfer funds from one account to the other without any central authority. With a trusted central authority, transferring money is easy.
50 from your account and add it to someone else’s account. In this example, the bank has all the power because the bank is the only one that is allowed to update the ledger that holds the balances of everyone in the system. But how do you create a system that has a decentralized ledger? How do you give someone the ability to update the ledger without giving them too much power—in case they become corrupt or negligent in their work? Who Wants to Be a Banker?
How Bitcoin mining works In short, anyone who wants to participate in updating the ledger of Bitcoin transactions, known as the blockchain, can do so. All you need is to guess a random number that solves an equation generated by the system. Of course, this guessing is all done by your computer. The more powerful your computer is, the more guesses you can make in a second, increasing your chances of winning this game. Here’s a more detailed breakdown of the mining process: 1.
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Once your mining computer comes up with the right guess, your mining program determines which of the current pending transactions will be grouped together into the next block of transactions. The block you’ve created, along with your solution, is sent to the whole network so other computers can validate it. It’s a bit similar to a Rubik’s cube: The solution is very hard to achieve but very easy to validate. Each computer that validates your solution updates its copy of the Bitcoin transaction ledger with the transactions that you chose to include in the block. Additionally, you get paid any transaction fees that were attached to the transactions you inserted into the next block. All the transactions in the block you’ve just entered are now confirmed by the Bitcoin network and are virtually irreversible. Here’s a two-minute video showing the process of blocks and confirmations.
So that’s Bitcoin mining in a nutshell. But if you think about it, the mining part is just a by-product of the transaction confirmation process. So the name is a bit misleading, since the main goal of mining is to maintain the ledger in a decentralized manner. As you can imagine, since mining is based on a form of guessing, for each block, a different miner will guess the number and be granted the right to update the blockchain. Of course, the miners with more computing power will succeed more often, but due to the law of statistical probability, it’s highly unlikely that the same miner will succeed every time. Satoshi Nakamoto, who invented Bitcoin, crafted the rules for mining in a way that the more mining power the network has, the harder it is to guess the answer to the mining math problem. So the difficulty of the mining process is actually self-adjusting to the accumulated mining power the network possesses.
This is known as mining difficulty. Why on earth did Satoshi do this? Well, he wanted to create a steady flow of new bitcoins into the system. In a sense, this was done to keep inflation in check. Now, remember, this is on average.
We can have two blocks being added minute after minute and then wait an hour for the next block. In the long run, this will even out to ten minutes on average. The evolution of Bitcoin miners When Bitcoin first started out, there weren’t a lot of miners out there. Bitcoin back in 2009, since mining difficulty was low. As Bitcoin started to catch on, people looked for more powerful mining solutions. Gradually, people moved to GPU mining.
GPUs were originally intended to allow gamers to run computer games with intense graphics requirements. Because of their architecture, they became popular in the field of cryptography, and around 2011, people also started using them to mine bitcoins. For reference, the mining power of one GPU equals that of around 30 CPUs. Another evolution came later on with FPGA mining. FPGA is a piece of hardware that can be connected to a computer in order to run a set of calculations.
The downside is that they’re harder to configure, which is why they weren’t as commonly used in mining as GPUs. Finally, around 2013, a new breed of miner was introduced: the ASIC miner. ASIC stands for application specific integrated circuit, and these were pieces of hardware manufactured solely for the purpose of mining Bitcoin. Unlike GPUs, CPUs, and FPGAs, they couldn’t be used to do anything else. Their function was hardcoded into the machine. Today, ASIC miners are the current mining standard. Some early ASIC miners even appeared in the form of a USB, but they became obsolete rather quickly.
Even though they started out in 2013, the technology quickly evolved, and new, more powerful miners were coming out every six months. After about three years of this crazy technological race, we finally reached a technological barrier, and things started to cool down a bit. Since 2016, the pace at which new miners are released has slowed considerably. Bitcoin mining pools Assuming you’re just entering the Bitcoin mining game, you’re up against some heavy competition. Even if you buy the best possible miner out there, you’re still at a huge disadvantage compared to professional Bitcoin mining farms. That’s why mining pools came into existence. Once the pool manages to win the competition, the reward is spread out between the pool members depending on how much mining power each of them contributed.
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Today there are over a dozen large pools that compete for the chance to mine Bitcoin and update the ledger. Hash rate: A Hash is the mathematical problem the miner’s computer needs to solve. Bitcoin reward per block: The number of Bitcoins generated when a miner finds the solution. The current number of bitcoins awarded per block is 12. The last block-halving occurred in July 2016, and the next one will be in 2020. Mining difficulty: A number that represents how hard it is to mine bitcoins at any given moment considering the amount of mining power currently active in the system. Electricity cost: How many dollars are you paying per kilowatt?
You’ll need to find out your electricity rate in order to calculate profitability. This can usually be found on your monthly electricity bill. Power consumption: Each miner consumes a different amount of energy. You’ll need to find out the exact power consumption of your miner before calculating profitability.
This can be found easily with a quick search online or through this list. Power consumption is measured in watts. Bitcoin’s price: Since no one knows what Bitcoin’s price will be in the future, it’s hard to predict whether Bitcoin mining will be profitable. If you are planning to convert your mined bitcoins to any other currency in the future, this variable will have a significant impact on profitability. Difficulty increase per year: This is probably the most important and elusive variable of them all. The idea is that since no one can actually predict the rate of miners joining the network, neither can anyone predict how difficult it will be to mine in six weeks, six months, or six years from now.
In fact, in all the time Bitcoin has existed, its profitability has dropped only a handful of times—even at times when the price was relatively low. Bitcoins you will earn each month. If you can’t get a positive result on the calculator, it probably means you don’t have the right conditions for mining to be profitable. How to mine Bitcoins at home: A step-by-step guide Now you know all you need to know about Bitcoin mining!
Wanna know how to actually mine? Find out if mining is profitable Before even starting out with Bitcoin mining, you need to do your due diligence. The best way to do this, as we’ve discussed, is through the use of a Bitcoin mining calculator. Bear in mind that mining costs money!
If you don’t have a few thousand dollars to spare on the right miner, and if don’t have access to cheap electricity, mining Bitcoin might not be for you. Get your miner Once you’re done with your calculations, it’s time to get your miner! Make sure to go over our Bitcoin mining hardware reviews to understand which miner is best for you, if you haven’t done it already in step 1. Get a Bitcoin wallet You’ll need a Bitcoin wallet in which to keep your mined Bitcoins.
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Once you have a wallet, make sure to get your wallet address. It will be a long sequence of letters and numbers. Each wallet has a different way to get the public Bitcoin address, but most wallets are pretty straightforward about it. For a complete tutorial on Bitcoin wallets, watch this video. Find a mining pool When you join a mining pool, you’ll be given smaller and easier problems to solve. All of your combined work will make the pool more likely to solve the original problem and earn the bitcoin reward and transaction fees.
The profits will be spread out throughout the pool based on contribution. Basically, you’ll make a more consistent amount of Bitcoins and will be more likely to receive a return on your investment. What fee does the pool charge for mining and the withdrawal of funds? How easy is it to withdraw funds? What kind of stats does the pool provide? Once you are signed up with a pool, you’ll get a username and password for that specific pool, which you will use later on.
Controlling and monitoring your mining rig requires dedicated software. Depending on what mining rig you have, you’ll need to find the right software. Many mining pools have their own software, but some don’t. In case you’re not sure which mining software you need, you can find a list of Bitcoin mining software here. Start mining Connect you miner to a power outlet and fire it up.
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The first thing you’ll need to do is to enter your mining pool’s address, username, and password. Once this is configured, you will start collections shares, which represent your part of the work in finding the next block. According to the pool you’ve chosen, you’ll be paid for your share of coins—just make sure that you enter your address in the required fields when signing up to the pool. Cloud mining means that you do not buy a physical mining rig but rather rent computing power from a mining company and get paid according to how much mining power you own. However, when you do the math it seems that none of these cloud mining sites are profitable. Ponzi schemes that will end up running away with your money.
As a general rule of thumb, I’d suggest avoiding cloud mining altogether. If you still want to pursue this path, make sure to make the right calculations before handing over any funds. Mining on a mobile phone Some mobile apps claim to mine Bitcoin on your phone. While in theory, this is possible, due to the low processing power phones have compared to ASIC miners, you’ll probably end up draining your phone’s battery much faster and make a very small fraction of bitcoin in return. The apps that allow this act as mining pools for mobile phones and distribute earnings according to how much work was done by each phone. Remember, mining is possible with any old computer—it’s just not worth the electricity wasted on it because the slower the computer, the smaller the chances are of actually getting some kind of reward. For reference, mining was demonstrated in theory on a 55-year-old computer some time ago by IBM—and the result was of course, that it’s not worth it.
Somewhere around 2017, the concept of web mining came to life. CPUs and use them to mine Bitcoin. CPUs in order to gain profits. However, since mining Bitcoins isn’t really profitable with a CPU, most of the sites that utilize web mining mine Monero instead. The concept of web mining is very controversial. From the site’s visitor perspective, someone is using their computer without consent to mine Bitcoins.
In extreme cases, this can even harm the CPU due to overheating. From the site owner’s perspective, web mining has become a new way to monetize websites without the need for the placement of annoying ads. Also, the site owner can control how much of the visitor’s CPU he wants to control in order to make sure he’s not abusing his hardware. For more information about web mining, you can read this post. Three questions I get asked a lot: Isn’t mining a waste of electricity? There’s been a lot of criticism regarding the energy consumption that Bitcoin mining employs worldwide. Can’t Google start mining Bitcoin and blow out the competition?
Yes it can—but it won’t do it much good. Isn’t Bitcoin mining centralized by the hands of a few Chinese companies? China to take more of the market share. And finally, should I mine Bitcoin? Now that you’ve finished this extensive read, you should be able to answer this question yourself. Keep in mind that sometimes there might be better alternatives to Bitcoin mining in order to produce a higher return on your investment.
For example, depending on Bitcoin’s price, it might be more profitable to just buy Bitcoins instead of mining them. If you still have any questions, feel free to leave them in the comment section below. Is Bitcoin mining profitable after the mining difficulty increased dramatically in the past 2 years. Bitcoin, first released as open-source software in 2009, is generally considered the first decentralized cryptocurrency.
The system does not require a central authority, distributed achieve consensus on its state . The system keeps an overview of cryptocurrency units and their ownership. The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units. Ownership of cryptocurrency units can be proved exclusively cryptographically. The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them. In March 2018, the word “cryptocurrency” was added to the Merriam-Webster Dictionary. The term altcoin has various similar definitions. Stephanie Yang of The Wall Street Journal defined altcoins as “alternative digital currencies,” while Paul Vigna, also of The Wall Street Journal, described altcoins as alternative versions of bitcoin. Decentralized cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly known. As of May 2018, over 1,800 cryptocurrency specifications existed. Most cryptocurrencies are designed to gradually decrease production of that currency, placing a cap on the total amount of that currency that will ever be in circulation.
The validity of each cryptocurrency’s coins is provided by a blockchain. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain. The block time is the average time it takes for the network to generate one extra block in the blockchain. Some blockchains create a new block as frequently as every five seconds.
By the time of block completion, the included data becomes verifiable. Cryptocurrencies use various timestamping schemes to avoid the need for a trusted third party to timestamp transactions added to the blockchain ledger. The first timestamping scheme invented was the proof-of-work scheme. The most widely used proof-of-work schemes are based on SHA-256 and scrypt. The latter now dominates over the world of cryptocurrencies, with at least 480 confirmed implementations. The proof-of-stake is a method of securing a cryptocurrency network and achieving distributed consensus through requesting users to show ownership of a certain amount of currency. In cryptocurrency networks, mining is a validation of transactions.
For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases transaction fees by creating a complementary incentive to contribute to the processing power of the network. Some miners pool resources, sharing their processing power over a network to split the reward equally, according to the amount of work they contributed to the probability of finding a block. One company is operating data centers for mining operations at Canadian oil and gas field sites, due to low gas prices. Given the economic and environmental concerns associated with mining, various “minerless” cryptocurrencies are undergoing active development. As of February 2018, the Chinese Government halted trading of virtual currency, banned initial coin offerings and shut down mining.
Some Chinese miners have since relocated to Canada. In March 2018, a town in Upstate New York put an 18 month moratorium on all cryptocurrency mining in an effort to preserve natural resources and the “character and direction” of the city. An example paper printable bitcoin wallet consisting of one bitcoin address for receiving and the corresponding private key for spending. In India as of July 3,2018 The reserve bank of india released a statement directing all regulated entities, including banks to stop dealing with individuals and businesses dabbling in virtual currencies.
This amounts to a ban on bank in dealing with companies or individuals that trade in cryptocurrencies. A cryptocurrency wallet stores the public and private “keys” or “addresses” which can be used to receive or spend the cryptocurrency. With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet. Thereby, bitcoin owners are not identifiable, but all transactions are publicly available in the blockchain. Additions such as Zerocoin have been suggested, which would allow for true anonymity.
Most cryptocurrency tokens are fungible and interchangeable. However, unique non-fungible tokens also exist. Cryptocurrencies are used primarily outside existing banking and governmental institutions and are exchanged over the Internet. Transaction fees for cryptocurrency depend mainly on the supply of network capacity at the time, versus the demand from the currency holder for a faster transaction. The currency holder can choose a specific transaction fee, while network entities process transactions in order of highest offered fee to lowest. For ether, transaction fees differ by computational complexity, bandwidth use and storage needs, while bitcoin transactions compete equally with each other.