A Guide to Mining Bitcoin
So, you know all about the Bitcoin craze, have gone the traditional route of buying, selling, and trading, and you’re interested in a new challenge that also incorporates your favorite cryptocurrency? Maybe Bitcoin mining is your answer!
It’s a process that is vital to Bitcoin and the blockchain, and in return, each miner has a chance to earn rewards in the form of Bitcoin.
But it can be incredibly involved, and your success or failure relies on choices you make before you even start, so it is imperative that you take your time and do as much research as you can before entering into this rat race.
Whether you’re interested in the process of mining to better understand Bitcoin as a whole or because you are wondering if it’s right for you, this article aims to answer all of your burning questions.
Terms and Jargon to Remember
There are a lot of different terms that are used more widely in the context of Bitcoin mining than in the “front end,” or the typical buying, selling, trading context. If you want to break into Bitcoin mining, you should know exactly what these terms mean.
(Note: Not all of these terms are used on this page, but you will most certainly run into them at some point in your mining career.)
This is a scenario in which more than half (51% or more) of the computing power in a given network belongs to one individual miner or mining group. It is so named because an attack on the network is typically seen as a fraudulent practice.
Mining networks do not inherently have one person or group in charge, as the percentage of network controlled is spread out among all of the people and groups that operate within it.
So, in a 51% attack scenario, the group that is now in total control of the network can compromise the blockchain, recent transactions, and the mining process itself for personal gain.
With that power, they can halt all mining and block completion for the rest of the network in order to claim the block reward for themselves.
Altcoin is a term that refers to any coin or currency that is not Bitcoin. Bitcoin is known by many as the original cryptocurrency, though that is not exactly true. You’ll typically see altcoin used as an umbrella term, referring to any coin that isn’t Bitcoin.
ASIC (Application Specific Integrated Circuit) is a method that speeds up the mining process. It relies on a special chip that is designed to perform one task. The chips are designed with different coin mining processes in mind, so a chip that is designed to complete Bitcoin tasks won’t necessarily work for any other coins.
New coins that are just entering the market are making their mining process in such a way that ASIC mining is rendered impossible.
Bitcoins per Block
A term for the number of Bitcoins released into circulation every time a block is completed.
Any time a new operating system version is permanent and features substantial changes, it’s referred to as a fork.
This is the reduction of the mining reward after a certain number of blocks, as determined by the lead team. Bitcoin halves at every 210,000 blocks.
The hash rate refers to the speed that a block is discovered and the cryptography of the block is solved. Miners that use ASIC mining tools have an increased hash rate.
If a transaction needs more than one signature in order for it to be approved, it is known as a multisig or multisignature transaction.
This is shorthand for a computer that is connected to the Bitcoin network.
Proof of Work (PoW)
In the Bitcoin network, proof of work is known as a nonce, or number only used once. It is a security practice that makes the person proving the transaction solve a computation.
You can think of it as a kind of captcha method that’s used to stave off bots that you might see on secure websites.
Proof of Stake (PoS)
A proof of stake is an alternative to proof of work, where instead of making the prover complete a computation, they only need to show that they own a certain amount of stake (money).
If you join a mining pool, which you are likely to do at some point in your mining career, you are going to be subject to some pool fees that are used to maintain the daily operation. Your fee amount will differ based on the size of the pool you are a part of.
This is a method used to prove that a person has ownership over their wallet. Your personal and private key is known only to you and protects you from wallet infiltration.
How Mining Bitcoin Works
Mining is an alternative way to obtain Bitcoin where you don’t have to put down money in exchange for a given amount of it. But make no mistake, the decision to mine Bitcoin as your primary way of obtaining it can be extremely expensive.
Bitcoin mining is really an umbrella term for a few different things, the first being the practice of verifying Bitcoin transactions, known as blocks, and putting them together with a mathematical puzzle of which cryptography is the base.
As soon as a miner solves the puzzle, they alert the rest of the group, usually known as a pool, so that it can be double-checked and approved by the other members.
After the pool verifies that the person sending the Bitcoin has the funds to do so, the block is added to the ledger, and they begin on the next set of transactions, repeating the process for each one.
Satoshi Nakamoto, the anonymous group that founded Bitcoin, also invented and implemented the first blockchain structure. This structure is widely regarded as one of the safest ways to store information, and it’s even being used for non-crypto projects like protecting hospital records.
Each “link” or block in the chain represents a set of transactions, and if a hacker were to attempt to tamper with a block to obtain information or steal coins, the entire chain would collapse as a security measure. This measure also means that every transaction made with Bitcoin or other cryptocurrencies is irreversible.
The finality of the transactions means that if a hacker was somehow able to obtain access to your online exchange account or wallet and transfer all of your coins to theirs, it would be nearly impossible to get them back.
If that same scenario occurred with your bank or credit card, the transaction would be easily tracked, reversed, and the perpetrator would likely face some sort of legal action.
The blockchain structure doesn’t mean that you are guaranteed safe from criminal activity, and it was actually designed to solve the problem of double-spending that occurs with digital currency.
The Double-Spending Problem
In the world of tangible currency, double-spending is not really possible. But it can be best illustrated with the cartoon scenario of a person tying a dollar to a string, putting that dollar in a vending machine, obtaining their treat, and pulling the dollar back out. It’s kind of a “having your cake and eating it too” type of thing.
Obviously, when you’re using cash, it’s impossible to hand someone a $5 bill to pay for something, take it back, and then pay for something else with that same $5 and walk out of the store with both items, but in the world of digital currency, it’s not impossible at all.
Mining and the blockchain structure together help to prevent double-spending, which is why cryptocurrency mining is a pretty valuable skill to possess.
The scenario looks something like this.
Jack has 1 BTC in his wallet. He really wants to branch out into owning some Ethereum and Litecoin, so he finds two different users to trade with. He makes a copy of his 1 BTC, so his wallet reflects that he has 2 BTC, though one is fake. He trades with both Jill and John, exchanging his BTC for an equal amount of altcoin.
This is where mining comes in for the save. Jack created a copy of his legitimate Bitcoin, so the copy has the exact same information as the original, which would not happen if both coins were real. It’s like having a $100 bill and a copy of that same $100 bill in your pocket. Though they are separate bills, they both have the same serial numbers, which is a dead giveaway that one of them is fake.
Both of Jack’s transactions are sent to a bay of sorts where they await verification from the miners and are added to the ledger. Two different miners are looking at the separate transactions. Jack’s trade with Jill is verified, as he had the funds to complete it.
His trade with John, which was made after his trade with Jill and would appear in chronological order, is now in the verification process.
The miners see that 1 BTC with the same hash information was used in another transaction earlier and cannot verify that Jack has the funds to back up the purchase, so it is not added to the blockchain, and the trade with John doesn’t go through.
Without the miners, this fraudulent practice would be running unchecked and would likely end up leaving a lot of genuine Bitcoin users at a loss for their honestly purchased or traded coins.
Release of More Bitcoin
The other major role miners play in the cryptocurrency world is the release of more Bitcoin or altcoin into public circulation. Without mining, Bitcoin wouldn’t have grown in the way that it has, and it probably would have stagnated.
In this instance, mining is almost like the practice of minting legal tender. They create the Bitcoin using cryptographic hashes, verify them within the existing lot, and release them into circulation for purchase.
Bitcoin in particular has a mining cap of 21 million, meaning that after the circulation reaches that cap, there won’t be any more released. Sites like CoinMarketCap display the real-time circulating supply information so that you can always stay up to date on how close it gets to the 21-million-coin cap.
Other coins don’t necessarily have a mining cap, but Bitcoin has an established number that was predetermined in the protocol.
Costs and Profits of Mining Bitcoin
Mining can be an incredibly expensive venture, and you may not even see a return of your investment depending on which coin or coins you decide to mine, which makes it a risk.
In the world of cryptocurrency, you can’t easily get around the risks involved, even if you’re not investing money directly into your chosen coin by buying it on an exchange or from another user.
The reason that mining isn’t seen as the primary method of obtaining Bitcoin is the potential immense cost, both one-time and recurring, that you have to be willing to take on. It’s also incredibly time-consuming, which most would consider a non-monetary cost of mining.
In order to get up and running, you will most definitely find yourself shelling out at least $1,000 on equipment. Graphic cards usually cost around $700, and if you are buying your own mining rig, you can add another $3,000 – $10,000 to that total.
In addition to the cost of the mining hardware that is typically only a one-time expense, you also have the recurring expense of energy.
It’s been said that the computational power that goes into mining each Bitcoin adds up to the same amount of electricity the average American household uses in two years.
The entire Bitcoin network consumes enough energy to power a medium-sized country, and the Ethereum network isn’t far behind.
Most people that want to try mining will first do it via a mining pool, which cuts down your personal energy costs, though there are still some fees involved.
Your potential profits will depend on which coin you are mining, the hash speed and quality of your equipment, and how much your initial spend was as well as any recurring payments. Additionally, it’s nearly impossible to predict the mining profitability long-term.
There are online calculators that can give you a ballpark of what you might expect to make, but they aren’t exact.
It’s important to understand that even after putting money into the mining process, you might not ever break even to your costs. It’s as much of a gamble as any other investment in Bitcoin. In order to make significant profits, you need to be the first miner to reach the correct answer to the numeric problem posed.
The hard part isn’t solving the problem, though, because discovering the answer is mostly guesswork. The most difficult part of the process is the race to get there first. That is why some miners are willing to spend tens of thousands of dollars on top-shelf mining rigs.
Tools Needed to Mine Bitcoin
The tools you’re going to need are dependent on which type of Bitcoin mining you decide to partake in. For a solo mining venture, you’ll obviously need more equipment than if you were to cloud-mine.
GPUs are a relatively old mining tool and have since been surpassed by ASIC rigs. GPU mining, especially for use in Bitcoin mining, is regarded as a technique that is not profitable anymore now that mining has increased in popularity. If you are planning on mining a smaller altcoin, you might still be able to get away with GPU mining.
Mining rigs vary in price and are the most commonly-used tool for a traditional mining setup. These are bigger than the GPUs and require more energy to power, but even the cheapest rigs have exponentially more hash power than a GPU.
ASIC rigs are the most popular for Bitcoin mining because they offer a lot of hash power and therefore give the user a better chance of finding a block.
The software that you use will be dependent on your mining rig setup, as some are designed with multiple rigs in mind, some are ASIC-specific, and some are GPU-specific. Mining software is typically free and just requires a download from the software site.
Here’s a list of 5 of our favorite software picks. We’ve listed the name, their rig compatibility, and if they use C language. Software that uses C programming language will be the most beginner-friendly, so if you consider yourself a beginner, you should start there.
- CGMiner – Good for GPUs – C language
- BFGMiner – Made for ASIC rigs – C language
- BitMinter – Made for ASIC rigs
- Diablo – GPU software
- RPC Miner – Good for expert miners
Use the internet to your advantage on your software search and read some experiences and reviews from past and present users!
Bitcoin Mining Pools
A mining pool is a group of cryptocurrency miners that have put their hardware and skills together to mine a certain coin.
Mining pools essentially spread the cost out among the members of the group, which makes it more manageable.
Miners will sometimes be a part of two or more different pools in order to mine more than one type of cryptocurrency. This is called multi-pool mining, and it is very attractive to some people because it gives the miner an opportunity to switch to coins that are highly profitable at that moment.
Keep in mind that Bitcoin has a mining cap of 21 million coins, of which 80% has already been mined, so the difficulty of mining is much greater than it was a few years ago. There are still a lot of Bitcoin mining pools in existence, however, because the odds of a reward are much greater when you’re in a mining pool.
Miners that enter into mining pools will often receive their payouts in a relatively scheduled manner, unlike solo mining, where you may not ever see a reward.
Pools will charge fees before a block reward is distributed in order to cover energy costs and any other fees that a solo miner would have to pay for on their own. This fee is usually a percentage that is applied to the block reward or your share payout.
Be sure to check the pool’s site for their fee information, as it’s essential to know how much the fee might impact your total profit.
If a miner in your pool discovers a block, the entire pool splits the reward. There are a few different structures that pools use to reward the miners. If you are thinking of joining a mining pool, take the reward structure into account when you make your decision.
- Each of the miners receives a reward that is proportionate to the shares they have found in that mining round.
- PPLNS (Pay Per Last N Shares)
- It’s a similar setup to proportional, but instead of the miner being paid for the shares in that round, they are rewarded based on the last “N” shares, where N is a number chosen by the pool. This number of shares does not take into account mining rounds and looks at the bigger picture.
- PPS (Pay Per Share)
- A structure where each share a miner submits is worth a fixed amount of Bitcoin. If a block is found, the reward is split based on the current difficulty.
- FPPS (Full Pay Per Share)
- A relatively uncommon structure where the full block reward will be given to the miners.
If you are a beginner or have no interest in or ability to own your own rig, you might want to consider cloud mining. It uses a remote datacenter to mine, as opposed to the miner using his or her own rig. That means that you don’t need to shell out the money for a rig or GPU and can utilize larger rig setups.
Miners have to purchase a contract after registering with their chosen cloud mine, and that contract could be anywhere from 6 months to 2 years. As a Bitcoin cloud miner, you will typically see the contract lasting from a year to 18 months.
Your contract also stipulates your hash power, so for more money, you can get more hash power and therefore a better chance to maximize your overall profit.
Because you are paying up front, any Bitcoin that you mine is your payout, so it is less regular and structured than mining pools.
Cloud mining is a definite risk for a number of reasons, but the most pressing is the vulnerability to scams. Scam cloud mining sites will have you pay for your contract, collect the money you put down, and shut down before you have the chance to make anything back.
Is It Worth It to Mine Bitcoin?
Unfortunately, there isn’t a cut-and-dry answer to this question. Because Bitcoin is nearing its mining cap of 21 million coins, some may say that it isn’t smart to jump in now because it is a potentially large investment that you might never see a profit from.
Each type of mining comes with its pros and cons, so it is important that you pay close attention to your own needs and expectations when making your decision.
Traditional solo mining is expensive to start up, expensive to maintain, and the likelihood of discovering a block on your own in the current Bitcoin mining difficulty state is slim, but the potential block reward and promise of a challenge might be enough to make you want to try.
Remember that this is the most expensive route by far, and you may never see a profit.
Mining pools mean that you have to share rewards, might not end up in a pool with a reward structure that is favorable to you, and still have to pay some fees set by the pool in order to maintain it.
But mining pools offer a relatively regular payment schedule, and it drastically cuts the cost of energy for the miner, so seeing a profit is more likely.
Cloud mining is the most beginner-friendly, as no actual hardware is needed, but the user does have to purchase a contract that covers the cost of using the mining rigs that belong to that cloud, meaning that you may never see a profit depending on how much your contract costs and any other fees that you may run into.
Cloud mining is a solid choice for beginners that are unsure about whether or not Bitcoin mining is right for them or don’t know how committed they will be in the future.
It doesn’t require the purchase of hardware, and any shares or blocks discovered or mined are the miner’s own to put back into the cost of their contract.
Whether or not mining is worth it can only be answered by you, based on your financial ability to fund the hobby, your daily schedule, energy costs in your area, and your chosen mining setup, to name a few.
But remember that this is a hobby and should be treated as such, so as they say, don’t quit your day job.