What is Bitcoin Mining?
One of the most common analogies that people use for Bitcoin is that it’s like mining gold. Just like the precious metal, there is only a limited amount (there will only ever be 21 million Bitcoins) and the more that you take out, the more difficult and resource intensive it is to find.
Apart from that, Bitcoin actually works quite differently and it’s actually quite genius once you can get your head around it.
Bitcoin mining serves to both add transactions to the blockchain and to release new Bitcoin. The mining process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle. The first participant who solves the puzzle gets to place the next block on the blockchain and claim the rewards.
The first participant who solves the puzzle gets to place the next block on the blockchain and claim the rewards. The rewards incentivize mining and include both the transaction fees (paid to the miner in the form of Bitcoin) as well as the newly released Bitcoin.
What is a Block Reward?
The amount of new Bitcoins released with each mined block is called the block reward. The block reward is halved every 210,000 blocks, or roughly every four years. The block reward started at 50 Bitcoins in 2009, and is now 25 bitcoin in 2014. This diminishing block reward will result in a total release of bitcoin that approaches 21 million.
As of today, block rewards provide the vast majority of the incentive for miners. At the time of writing, for the previous 24 hours, transaction fees represented 0.3% of mining revenue.
What is Mining Difficulty?
How hard is it to mine Bitcoins? Well, that depends on how much effort is being put into mining across the network. Following the protocol laid out in the software, the Bitcoin network automatically adjusts the difficulty of the mining every 2016 blocks, or roughly every two weeks.
It adjusts itself with the aim of keeping the rate of block discovery constant. Thus if more computational power is employed in mining, then the difficulty will adjust upwards to make mining harder. And if computational power is taken off of the network, the opposite happens. The difficulty adjusts downward to make mining easier.
The higher the difficulty level, the less profitable mining is for miners. Thus, the more people mining, the less profitable mining is for each participant. The total payout depends on the price of Bitcoin, the block reward, and the size of the transaction fees, but the more people mining, the smaller the slice of that pie each person gets.
Is it Profitable to Mine Bitcoin?
There are many calculators on the web that shows you exactly what the ROI is on any given hash rate when you take into account cost of electricity. Based on how much you spend on your computer hardware or cloud contract and what your electricity cost is, the payback for profitability might be 9-12 months out. So why do miners continue to mine?
Because the calculators only take into account what Bitcoins are worth today. At the time of writing, each Bitcoin is worth $4,000. But if Bitcoin’s value rises to $10,000 by next year, then the ROI on your mining significantly dropped to maybe a few months. And if Bitcoin’s value rises to $100,000 in 3 years, then your ROI would drop to mins. And whatever Bitcoins you’ve mined would be worth 25x more.
Remember Bitcoin has a finite number and as we approach the 21st million Bitcoin, the value will significantly rise.
What Do I Need to Mine Bitcoin?
Mining Bitcoins require you to have two things, mining hardware and software. In the early days, it was possible to mine Bitcoin with a standard computer. Then it shifted to power graphical cards. Today that’s no longer possible due to the rising difficulty.
Bitcoin ASIC chips packed into custom Miners offer performance up to 1000x-10000x the capability of mining from a computer. or graphics cards. As for software, there are many programs out there that can be used for Bitcoin mining.
What About Bitcoin Cloud Mining?
Rather than have Bitcoin miners running within your home, you can elect to go the cloud route and simply lease mining hash power and time. Cloud mining providers simply have a lot of ASIC miners within their datacenter but they have economies have scale on their side when it comes to space, power, and cooling.
The cost associated with cloud mining is very close if not better than the cost of buying Mining hardware. The downside is the lease time is usually 1-2 years and you do not own the hardware.
Mining Bitcoin with a cloud provider is a very good option for those starting out. This is especially so for people who do not want to clutter up their house or those who lack the technical ability to set up Bitcoin Miners. You simply enter your wallet address and watch mined Bitcoins flow into your wallet.
Here are some Bitcoin Cloud Mining providers:
Genesis Mining: Genesis Mining is the largest Bitcoin and Scrypt cloud mining provider. Genesis Mining offers three Bitcoin cloud mining plans that are reasonably priced. Ethereum, Dash, Litecoin, Zcash, Monero mining contracts are also available.
Hashflare: Another well known and long established cloud mining provider. Bitcoin, Scrypt, ETHASH and X11 mining available.
Minergate: Minergate offers Bitcoin clouding mining and offers both pool and auto-switching mining for Scrypt based coins.
Getting Started with Bitcoin Mining
Step 1 – Buy Bitcoin ASIC Miner(s)
In terms of mining Bitcoin, the higher the hash rate the better. So you will want to buy ASIC miners with the highest rate while consuming the lowest amount of electricity. The three miners listed are the best ASICs on the market. But due to short supply, they are selling above their original MSRP price since they are in great demand.
Antminer S9 v2
- Hash Rate: 14TH/s
- Power Consumption: 1372W
- Hash Rate: 13.5TH/s
- Power Consumption: 1323W
- Hash Rate: 7.3 TH/s
- Power Consumption: 1150W
- Hash Rate: 4.73 TH/s
- Power Consumption: 1293W
Step 2 – Download Bitcoin Mining Software
After getting your Bitcoin ASIC miner(s), next is to download Bitcoin mining software. The two most popular are CGminer and BFGminer which are command line programs.
If you prefer a GUI miner, try EasyMiner.
For information on how to configure CGminer or BFGminer, check out this guide provided by SlushPool.
Step 3 – Join a Bitcoin Mining Pool
Ok now that you have both the hardware and software in place, you are almost ready to mine Bitcoins! Although optional, huge recommendation (really a must) is to join a Bitcoin mining pool.
Mining rewards are paid to the miner who discovers a solution to the puzzle first, and the probability that a participant will be the one to discover the solution is equal to the portion of the total mining power on the network. Participants with a small percentage of the mining power (that would be you) stand a very small chance of discovering the next block on their own.
For instance, a single ASIC Antminer S9 would represent less than 0.001% of the network’s mining power. With such a small chance at finding the next block, it could be a long time before that miner finds a block, and the difficulty going up makes things even worse. The miner may never recoup their investment!
The answer to this problem is mining pools. By working together in a pool and sharing the payouts amongst participants, miners can get a steady flow of Bitcoins starting the day they activate their miner.
Below are the top 12 Bitcoin pools in the world according to hash power . A lot of them are out of China and not really for beginners. I suggest checking out SlushPool as a first pool to join.
Step 4 – Get A Bitcoin Wallet
The last step and the final thing you need to have ready is a Bitcoin wallet to store all of your Bitcoins.
Bitcoins are sent to your Bitcoin wallet by using a unique address that only belongs to you. The most important step in setting up your Bitcoin wallet is securing it from potential threats by enabling MFA/2FA with Hot wallets or keeping it on an offline such as a Cold wallet. Or the best of both worlds a Hardware wallet such as Ledger Nano S.
For help in choosing a Bitcoin wallet, check out the Wallet section.
With the proper hardware, software, pool, wallet, and knowledge, anyone can get started with Bitcoin Mining. The cloud option is always enticing because it does allow beginners to bypass the need to spend on hardware, configuration and eliminates the worry about space, electricity, cooling but it does come with its own drawbacks.
With cloud mining, you lose the ability to sell hardware when done and that you are obligated to the time included in your contract.
Outside of Bitcoin mining, Scrypt based mining is still very popular and can be done with common computer components. Scrypt mining allows you to mine coins such as Ethereum, Litecoin, and Zcash. Check out How To Build An Ethereum Mining Rig for more information.