What is Mining
There are three primary ways of obtaining Bitcoins: buying them on an exchange, accepting them for goods and services and mining new ones. Mining is a process of adding transaction records to the Bitcoin’s public ledger called the Blockchain. It exists so that every transaction can be confirmed, and every single user of the network can access this ledger. It is also used to distinguish legitimate Bitcoin transactions from attempts of re-spending money that has already been spent somewhere else
Mining — a process of record-keeping, done through the use of computer processing power.
Blockchain — a public distributed ledger where records of every Bitcoin transaction are held.
The Blockchain is so called because it is literarily a chain of blocks, which are lists of transactions made during a set period of time. When a block of transactions is generated, miners put it through a process. They apply a complex mathematical formula to the information in the block, subsequently turning it into a far shorter, seemingly random sequence of letters and numbers called a ‘hash’.
Hash — a fixed-length unique sequence of random digits, which can be created from data of any size.
A hash doesn’t only consist of information from the block of transactions, some other pieces of data are used too. Most importantly, the hash of the previous block stored in the Blockchain is included.
While it’s relatively easy to produce a hash from a collection of data like a block of transactions, it’s practically impossible to know what data was used just by looking at the hash sequence. Moreover, each and every hash is unique, and changing just one character in a Bitcoin block completely changes the hash sequence.
As you can see in the example above, no matter how much data is used as input, the hash will always stay the same length.
Because of these attributes, hash works as a digital wax seal. If someone tampers with just one block of transactions its hash will immediately change, and so will all the following hash sequences in the Blockchain. Thus, every attempt at fraud within the Bitcoin network will be easily spotted by everyone using it.
Essentially, miners are serving the Bitcoin community by confirming every transaction and making sure that every single one of them is legitimate. They all compete with one another, using software written specifically to mine blocks. Every time a new block is ‘sealed off’, meaning that a miner has successfully created a correct hash sequence, he or she gets a reward.
As of October 2017, the bounty stands at 12.5 Bitcoins per block, and this value will decrease by half every 210,000 blocks. The overall number of Bitcoins is limited, so the more coins are mined, the more valuable each of them becomes. Thus, even though the amount of Bitcoins per block will inevitably decrease, the value of miners’ rewards will most likely stay the same or even rise.
Normally, it would be extremely easy to produce a hash from a collection of information, computers are really good at this. Hence why, to prevent users from hashing thousands of transaction blocks each second and mining all of the available Bitcoins within minutes, the Bitcoin network has to deliberately make the process more difficult.
This is done via a required ‘Proof of Work’. It is a system that requires some work from the service requester, usually meaning processing time by a computer. Producing a proof of work is a random process with low probability, so normally a lot of trial and error is required for a valid proof of work to be generated. When it comes to Bitcoins, hash is what serves as a proof of work.
Proof of Work — an economic measure used to ensure against fraudulent activities by requiring some work from the service requester, usually meaning processing time by a computer.
To complicate mining even further, something called the Bitcoin Difficulty is implemented in the process. It is a measure of how difficult it is to find a new block compared to the easiest it can ever be.
Bitcoin Difficulty — a measure of how difficult it is to generate a correct hash.
This measure is recalculated every 2016 blocks. It is designed so that mining one block will take approximately 10 minutes. As more miners join in, the rate of block generation inevitably goes up. Then, after the difficulty level is recalculated, it rises in order to compensate and bring the rate of block creating back down. Any block released by fraudulent miners that does not meet the required difficulty level will be rejected by everyone on the network, thus becoming worthless.
So, this process requires exertion and through it new currency slowly becomes available. The rate at which new coins appear resembles the rate at which commodities like gold are mined from the ground. Hence why the process is called ‘mining’.
Considering the complexity that is involved in mining Bitcoins, it’s very important to invest in the right kind of hardware. There are a few characteristics to consider when choosing the equipment that will best suit you, and one of them is hash rate.
Hash rate is the number of calculations that your hardware can perform every second. It is a very important parameter, as a higher hash rate will obviously increase your chances of solving the mathematical problem, sealing off the block and collecting your reward.
What miners are looking for is a specified output of the hash function. When it comes to hash functions, the same input will always produce the same output, but they are designed to be unpredictable. So, the best possible way to find a specific output is to try as many random inputs as possible. Moreover, mining is very competitive, so in order to collect a reward, the miner will need to be able to go through those random inputs as quickly as possible. Hence why choosing hardware with higher hash rate is extremely important for successful mining.
Hash rates are measured in megahashes per second (MH/sec), gigahashes per second (GH/sec) and terahashes per second (TH/sec). The hash rate of hardware that was specifically designed for mining Bitcoins can range from 336 MH/s to 14,000,000 MH/s.
Bitcoin mining hardware is an investment, and as such it has some associated costs. The more powerful your hardware is, the more electricity it is going to require. Before making a purchase, you need to consider your desired hardware’s electricity consumption in watts and work out how much more expensive your next electricity bill is going to be. You wouldn’t want to spend all your money on electricity to mine coins that won’t even be worth what you paid.
You can use hash rate and energy consumption numbers to work out how many hashes you will be getting for every watt of electricity used by your hardware. To do this, you need to simply divide the hash count by the number of watts. For example, if your hardware’s hash rate is 4,500 MH/s and it requires 32 watts of power, then you will be getting 140,625 MH/s per watt. You can use an online electricity price calculator or just check your power bill to figure out how much it is going to cost you in hard cash.
In some cases you will be using your computer to run the mining hardware. Obviously, your computer will have its own electricity draw on top of what mining hardware chews up, so you will need to factor that into your calculations.
Hardware for mining
In the early days of Bitcoin, many people were drawn to it, because to them it was a revolutionary and liberating idea. Indeed, a decentralized, self-governing network where ordinary users were in charge of ensuring that the transactions will go through was a breath of fresh air in a world dominated by banks, tax authorities and massive corporations keeping an eye on how people spend their own money. Back then, Bitcoin’s value was nowhere near what it is today. So, a lot of miners were motivated by the idea of Bitcoin and not just profit. They were able to generate hash sequences and confirm transaction using powerful enough computers and even laptops.
At some point, miners discovered that high-end graphics cards had the potential of significantly increasing Bitcoin mining power. Those graphics cards consumed far less power per unit of work, and the results were 50 to 100 times better than before. Subsequently, dedicated mining devices were introduced. They increased mining capabilities five-fold, which allowed for the fist mining farms to be constructed at an operational profit, and paved the way for the Bitcoin mining industry.
These days, Bitcoin mining has turned into a lucrative business. There are many people now who pay their bills by operating massive Bitcoin mining farms. These farms are assembled using various mining hardware, as well as graphics cards and coolers. Obviously, they require a lot of electricity in order to operate, so access to cheap power becomes paramount. It is the cheap electricity that made Chinese Bitcoin mining farms so profitable.
Those wishing to make some money on Bitcoin mining will need to compete against worldwide corporations with virtually unlimited resources to spend on mining farms, as well as hundreds of individual miners joining their forces and forming mining pools.
The least powerful category of Bitcoin mining hardware is your computer itself. CPU stands for Central Processing Unit, and implies your computer’s processor. It was the only way to mine Bitcoins back in the day, and it was extremely cost effective – all you needed was a computer with a powerful enough processor.
However, as miners tried to further secure the network and earn more Bitcoins, they innovated on many fronts. So, as of today, CPU mining is basically obsolete. You might mine for decades using your laptop without earning a fraction of a single coin.
GPU stands for Graphical Processing Unit, which is a feature of high-end graphics cards. These were designed specifically so that they can calculate all the complex polygons needed in high-end video games, which made them particularly great at hashing mathematics necessary to solve transaction blocks.
Despite costing several hundred dollars, GPUs gave miners a significant advantage over CPU hashing. For instance, a CPU will generally provide you with less than 10 MH/sec. On the other hand, an ATI 5970, one of the most popular graphics cards when it comes to mining, can give you over 800 MH/sec.
The widespread use of graphics cards led to the appearance of there first mining rigs, which were basically computers assembled with processing complex calculations in mind. Those rigs could either be solely dedicated to mining, or serve as a computer that fulfilled other needs, i.e. performed as a gaming system, and only used to mine on a part-time basis.
However, much like CPU mining, GPU mining is largely dead these days. With the introduction of hardware specifically designed for mining, the Bitcoin mining difficulty has increased so much that graphics cards just simply can’t compete. These days, even if you have access to free electricity, GPU rigs will most likely never even pay for themselves.
The next stage of Bitcoin mining development was the introduction of FPGA (Field Programmable Gate Array) mining. FPGA is an integrated circuit designed to be configured after being built. This enabled a mining hardware manufacturer to buy the chips in volume and customize them specifically for Bitcoin mining, before putting them into their own equipment.
The launch of the first few FPGA devices was a complete success and it changed the Bitcoin mining landscape. It was the first ever hardware manufactured specifically for mining cryptocurrency. They provided miners with the benefits of power efficiency and ease of use. While a typical 600 MH/sec graphics card could consume up to 400 watts of power, a standard FPGA mining device would provide a hash rate of 826 MH/sec at 80 watts of power. That improvement allowed for the first large Bitcoin mining farms to be constructed.
An Application-Specific Integrated Circuit (ASIC), is a microchip designed and manufactured for the sole purpose of mining Bitcoins at breakneck speed. It offers a 100x increase in hashing power, while reducing electricity consumption compared to all the previous technologies. Some experts consider ASIC to be the ‘end-of-the-line’ technology, as there is nothing to replace it in the immediate future.
Due to those chips being specifically designed and fabricated for one task only, they can be quite expensive as well as time-consuming to make, however the speeds are unparalleled. Top of the line chips like AntMiner S9 have an advertised speed of whopping 14,000,000 MH/sec, but such a device will cost you $1265. Of course, there are more affordable chips with a price tag of around $50, but their advertised speed is considerably lower.
Considering all the options that are out there, choosing the right hardware for mining can be quite overwhelming for newcomers. It’s expensive both in terms of the hardware itself, and the power that it requires to run. Hence why, before purchasing all the necessary parts and assembling your rig, it is very important to calculate the mining profitability.
There are several dedicated calculators in existence, such as the calculator from The Genesis Block or the BTC Mining Profit Calculator. You can input parameters such as the cost of equipment, hash rate, and electricity consumption, as well as the current Bitcoin price, in order to figure out how long it will take your investment to pay off.
Depending on the kind of equipment you choose, you will probably need to install mining software. Using GPUs and FPGAs requires you to have a host computer running a standard Bitcoin client and mining software. The Bitcoin client is necessary to relay information between your miner and the Bitcoin network, while the mining software is what instructs the hardware to do its work, going through transaction blocks for it to solve.
Some modern ASIC miners are being shipped with everything pre-configured, including a BTC address. So, in most cases, plugging it into an outlet is all you’ll need to do. However, some older ASIC miners will still require you to run mining software.
Easy to use interface, power saving mode, mining pool support, fast share submission, profit reports.
Fan speed control, remote interface capabilities, self-detection of new blocks with a mini database, multi GPU support, CPU mining support
Windows, MacOS, Linux
Similar to CGMiner, but designed specifically for ASICs.
Windows, MacOS, Linux
Supports various mining protocols, can be used for both solo and pool mining, performance graphs.
Integration with MacOs APIs and systems.
What is a mining pool?
These days, everyone entering the world of mining cryptocurrencies will have to compete with big companies and their mining farms. So, naturally, one of the first decisions that every aspiring miner has to make is whether to go solo or join a ‘pool’.
Pooled mining is a mining approach where multiple users contribute their computing power to the generation of the block. A pool has a much bigger chance of solving a block and getting a reward, although that reward will be split between the members according to the contributed processing power. So, joining a pool might create a steady stream of income, even though each payment will be quite modest compared to a full block reward.
Joining a pool works just like signing up to to any other web service. All you need to do is create an account on the pool’s website. Once you have an account, you’ll need to create a ‘worker’. There is a possibility of creating multiple workers, assigning them to each individual piece of hardware that you use. Another important thing to consider is the amount of deductions from your mining payments that the pool will require. Normally, the value ranges between one percent and 10 percent, while some pools won’t charge you at all.
Is Bitcoin mining profitable?
Bitcoin mining has transformed from a handful of early enthusiasts confirming transactions using their CPUs, into a full-blown specialized industrial-level venture. The easy money was scooped out a long time ago, and what remains is basically buried under the cryptographic equivalent of tons of hard rock. Furthermore, BTC’s ever-growing conversion rate makes it more and more appealing to both large corporations and the general public, which attracts a lot of new miners, tightening the competition.
In theory, mining is still possible for anyone, but only those with specialized high-powered machinery are able to make any kind of profit by mining the cryptocurrency. Most individual miners and smaller pools will spend more money on electricity bills than is generated through mining. So, unless you’re able to invest in big and expensive mining farms, and have access to cheap electricity, profitable Bitcoin mining is simply impossible.
Moreover, the average home miner can be very susceptible to trivial problems like hardware failures, power outages, network disconnections and price crashes. They will most likely struggle to be profitable or even recoup the costs of the mining hardware and electricity. Thus, given the present circumstances, Bitcoin mining profitability for home miners is highly unlikely.
However, the situation might improve in the future. ASIC mining software is still developing and reaching new highs, while new cheap and sustainable power solutions are also coming into play. Those things combined may not only make Bitcoin mining profitable for small individual miners again, they could also greatly improve the decentralization of the network, further protecting it against legislative risks.
What is cloud mining?
If you want to invest in Bitcoin mining without purchasing and managing your own hardware, cloud mining could be a viable option for you. This is done through purchasing mining contracts, which enable miners to use shared processing power run from remote data centers. In a lot of ways, it makes mining easier. You don’t have to deal with hardware, software, added electricity costs, bandwidth and other offline issues. All you need is a computer for communications and an optional local Bitcoin wallet.
However, there are certain risks associated with cloud mining that investors need to be wary of before paying for contracts. There’s been a tremendous amount of Bitcoin cloud mining scams. Moreover, you won’t be able to control the actual physical hardware.
After all, when opting for cloud mining, you’re handing over the control to the operators. This means that mining operations may cease if the operators deem Bitcoin’s value to be too unstable at any given moment. Finally, you will be getting a lot less profit as the operators will charge you commission to cover their costs.