As technology continues to advance at a rapid rate, so too has finance. Today, the world is looking for new ways to invest their money, and bitcoin has become a leading indicator of that desire.
Once considered an unknown and unproven currency, the cryptocurrency has become mainstream news. Now accepted by major retailers such as Home Depot, Zappos and Dell, more and more people are searching for answers about digital currency and how it came to be. The bitcoin price has surged past $10,000 this year and continues to break new records. Bitcoin’s greatest asset, “blockchain technology”, has been hailed as an innovative way to transact, and speaks to the future of moving money.
One bitcoin miner, Eric, has been bitcoin mining since 2010. After early success, he made the bold decision to quit his well-paid job as a software engineer to devote all his time to extracting bitcoins.
Eric’s story is an outlier, yet as bitcoins gain popularity, interest in mining this cryptocurrency is rising. But where should you start? Here’s a quick rundown to inspire your bitcoin mining efforts.
What Are Bitcoins?
To understand bitcoin mining, you must understand the inner workings of this cryptocurrency. The bitcoin is not tied to any country or economy. Instead, it’s 100 percent decentralized and powered by math using complex algorithms that run on powerful computers.
A key element to the success of bitcoin technology is ensuring its accuracy and the methodical release of additional currency over time. Mining accomplishes both tasks as miners discover and obtain bitcoins by completing specific tasks.
Why Bitcoin Needs Miners?
People send bitcoins frequently over the blockchain, which acts as the bitcoin network. For example, Joe may purchase a DVD player from Bob for an agreed price, but there must be a way to record and validate the transaction. The network completes the tasks by collecting all transactional data created within a specific period and placing it on a list, which is also known as a “block.”
A miner’s job is to confirm the accuracy of transactions and write them into a general ledger, where there is a list of all blocks (also known as a “blockchain”). As a result, there is a detailed list and confirmation of each transaction that takes place in the network. This data is constantly updated and provided to everyone who participates so they understand what is happening.
Key takeaway: Bitcoin miners are key to the success of this cryptocurrency because they verify transactions, ensuring the integrity of the blockchain network.
The Mining Process: A Quick Primer
How to mine bitcoins you ask? When a “block” of transactions is created, bitcoin miners initiate a process that confirms its accuracy. They take this block and apply a mathematical formula, turning that initial sequence into something much shorter. The outcome is a more compact sequence and truncated patterns of letters and numbers that is also called a “hash.”
Each new block is produced using the hash of the block before it. This is one way the accuracy of the block is confirmed. This process creates a “wax seal,” which says this block and the one before it is accurate. Let’s say you decided to tamper with the block. If so, everyone would know instantly because of this process – and it would be spotted as a fake. Here is a quick breakdown of the mining process.
• The transaction is bundled into a block.
• Miners verify whether the transaction is valid.
• They select the header of the most recent block and insert it into the new block as a “hash.”
• They solve the mathematical problem.
• When the solution is found, the new block is added to the block chain and then propagated throughout the network.
Miners are not trying to verify only a single transaction – they are working to verify many. All transactions are locked into boxes with a virtual lock. Miners are running software to locate the “key” that opens that lock. Once the computer finds it, the box is opened, the transaction is verified and the miner receives 12.5 bitcoins.
However, completing these tasks is not easy. It’s like finding a needle in a haystack. In fact, the estimated number of attempts to find the correct key is about 1.7 billion, and a bitcoin reward is given out about every 10 minutes. Key to success is having the right tools in place.
Key takeaway: During the mining process, people work to verify transactions and ensure their accuracy. This process is not easy and uses complex mathematical formulas. Once the miner completes the process, the bitcoin network gives him or her a nugget of gold of 12.5 bitcoins.
Bitcoin Mining: What You Need
First, you need a bitcoin wallet. Each wallet has its own unique bitcoin address. This wallet is basically an encrypted online bank account that holds your reward during the mining process. In addition to the wallet, you also need the right tools – and those tools have changed significantly over the past few years. Here is a quick breakdown.
CPU/GPU bitcoin mining: During the early years, miners relied on simple CPUs to mine bitcoins. At the time, these basic desktops were powerful enough to complete the required tasks. But later on, cracking the codes became harder, and miners found a more robust alternative: GPU mining on graphic cards.
GPUs were nearly 100 times faster than CPUs, and when it comes to bitcoin mining, faster translates to greater success. GPUs could also be used to mine a variety of cryptocurrencies, not just bitcoins. But as time progressed, faster and even more robust options emerged, and many miners do not use these options today.
FPGA bitcoin mining: A field-programmable gate array (FPGA) enables mining hardware manufacturers to purchase chips in volume and customize them for bitcoin mining prior to putting them into their equipment. Since this technology is customized specifically for the task of bitcoin mining, it usually performs much better than CPUs and GPUs.
ASIC bitcoin mining: Application-specific integrated circuits (ASICs) are the newest thing in bitcoin mining. They’re designed to provide mining power at crushing speeds and use very little electricity – which is a bonus for miners with high electricity bills slowly eating away profits.
These chips, however, must be designed for the specific task, which does make them time consuming and expensive to produce. Yet many bitcoin miners find the investment is worth the speed. In fact, ASIC devices can run up to 2 terahashes/sec.
Key takeaway: Much of the hardware used in the early days is no longer relevant for bitcoin mining; it’s simply too slow. However, newer options have a large price tag. There is a third option that reduces cost while increasing speed (more on that in a minute).
Bitcoin Software
Depending on what type of equipment is selected, you also need software to make it work. If using GPUs and FPGAs, a host computer is needed that runs a standard bitcoin client and the mining software. Here’s a breakdown of each and their roles.
Standard bitcoin client: This type of software allows you to interact with the bitcoin clients. Basically, it relays data between the miner and the bitcoin network.
Bitcoin mining software: The bitcoin mining software is at the heart of successful cryptocurrency mining because it tells the hardware to do the hard work, passing along transaction blocks to solve. Most of the time, you’ll need software for the ASIC miner as well, but manufacturers of some new models say they don’t require it.
All this equipment and software can make the cost of mining bitcoin add up. In the previous example, Eric, who earned $191,000 through bitcoin mining, estimates that he spent $50,000 in graphic cards, CPUs, circuit boards and memory. He also deployed water-cooling technology to run his mining operation at optimal efficiency. These costs do not include electricity, which can add up quickly.
Collectively, miners are estimated to use about 3,176 megawatt hours of electricity per day. With mining becoming increasingly difficult and expensive, many miners are joining pools to ease the expense and workload.
Key takeaway: Bitcoin software helps the hardware do what is required to mine bitcoins, making it a crucial piece of the mining setup.
Bitcoin Mining Pools
Remember when we talked about the expense and cost of bitcoin mining, and another option that lowers that cost? Mining pools provide one such solution. These pools formed when mining became more difficult and it could take years for slow miners to generate a single block. They needed a method that would help pick up speed, without too much expense.
Miners decided that if they pooled resources and joined forces, they could generate blocks faster and receive block rewards on a more consistent basis, rather than every few years. However, all mining pools are not created equal, and they use a variety of operational methods. Here are a couple of examples:
Pay-per-share: This method offers instant mining output for each share that is solved by a miner. Payment is made from the pool’s balance and a miner can withdraw his or her money immediately. This method offers low risk for miners and transfers a large amount of the risk to the pool’s operator.
Proportional: This method allows miners to earn shares until the pool finds a block (which is basically the end of the mining round). After that, each user gets a set number of shares within the round, based on a specific formula.
Bitcoin pooled mining: This is known as a “slush system” because older shares from the beginning of a block are given less weight than more recent shares. This method minimizes the risk of cheating the mining pool system by switching pools during a round for maximized profit.
This isn’t a complete list of methods, but it shows that before joining a pool, it’s important to do a little research on the mining output method used. Ask a few questions, such as how do they calculate payments? What is the method they use? And how long has the pool been in existence? Getting answers to these questions will help you better understand the best option for your situation.
Key takeaway: More people are mining for bitcoins, and the mining is getting more difficult. It’s harder today than several years ago to uncover the “gold” because as more people get involved the bitcoin difficulty rises. Mining pools make the task easier by allowing miners to pool their resources for greater efficiency.
The easiest way you can get in to bitcoin mining is by participating in cloud bitcoin mining. Cloud bitcoin mining allows for an individual to pay for the use of hardware and software needed for bitcoin mining without expending the cost of overhead associated with a personal mining rig. Companies such as Genesis Mining, Hashing24, Hashflare, MyCoinCloud, etc have data centres all over the world that house this hardware, which means they absorb the electrical and heating cost that comes with cryptocurrency mining.
