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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. 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.
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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.
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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. 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.
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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. Once you have a wallet, make sure to get your wallet address.
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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.
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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.
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Start mining Connect you miner to a power outlet and fire it up. 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.