A Beginner's Guide to Bitcoin Mining

If you've heard of Bitcoin, you've undoubtedly heard about Bitcoin mining, which is the process of "producing" Bitcoins using your computer. The next post will provide you with an in-depth explanation of what Bitcoin mining is and how it works.

Mining is carried out by running very powerful computers known as ASICs in a race against other miners to guess a specific number. The first miner to correctly estimate the number gets to update the transaction ledger and earns a reward of newly created Bitcoins (currently the reward is 6.25 Bitcoins). To be lucrative with Bitcoin mining today, you must invest substantially in equipment, cooling, and storage. It is not feasible to mine Bitcoin profitably at home using a CPU or a GPU.

Bitcoin is a decentralized banking system alternative. This means that the system can function and transfer funds from one account to another without the intervention of a central authority. Transferring money is simple when you have a reliable central authority. Simply inform the bank that you wish to transfer $100 from your account to someone else's. In this scenario, the bank has complete authority since it is the only entity permitted to alter the ledger that records everyone's balances in the system. Bitcoin, on the other hand, establishes a decentralized ledger system. It allows independent miners to update the ledger without giving them excessive authority.

Anyone who want to contribute to the updating of the Bitcoin transaction log, known as the blockchain, is welcome to do so. All you have to do is pick a random integer that answers a system-generated equation. Sounds easy, doesn't it? Of course, your computer does all of the guesswork. The faster your computer, the more guesses you can make in a second, improving your chances of winning this game. If you guess correctly, you will receive bitcoins and will be able to write the “next page” of Bitcoin transactions on the blockchain. The answer to the problem is difficult to achieve but simple to validate. Consider a Rubik's cube as an example (extremely difficult to solve, yet simple to see you’ve solved it).

When your mining machine makes the correct estimate, it determines which pending transactions will be included in the next block of transactions on the blockchain. Compiling this block is your moment of triumph, as you've now become a temporary Bitcoin banker with the ability to edit the Bitcoin transaction ledger. The block of transactions you've produced, together with your solution, is forwarded to the whole network for validation by other computers. Each machine that validates your solution adds the transactions you selected to include in the block to its copy of the Bitcoin transaction ledger. The system creates a set number of Bitcoins (now 6.25), which it then awards to you as recompense for the time and effort you put into completing the math problem. In addition, any transaction fees associated with the transactions you placed into the following block are paid to you. The Bitcoin network has now verified all of the transactions in the block you've just entered, making them practically irreversible.

Now that you know what Bitcoin mining is, you may be thinking to yourself, "Cool! Money for nothing! “How do I sign up?” Now, don't get too excited... Satoshi Nakamoto, the creator of Bitcoin, designed the mining rules such that the more mining power the network has, the more difficult it is to predict the answer to the mining math problem. As a result, the complexity of the mining process self-adjusts to the network's collected mining power. If more miners join, it will be more difficult to address the problem; if more of them leave, it will be simpler. This is referred to as mining difficulties.

Difficulty is self-adjusting to ensure a consistent flow of new Bitcoins into the system. In some ways, this was done to keep inflation under control. The mining difficulty is adjusted so that a new block is added every 10 minutes on average. Keep in mind that this is an average. We may have two blocks added minute by minute, then wait an hour for the following block. In the long term, this will average out to 10 minutes. The difficulty is retrospectively adjusted every 2016 block (every 2 weeks on average). In other words, for each 2016 block, the algorithm looks back at previous 2016 blocks and estimates the average block time. If it is less than 10 minutes, the difficulty will rise, if it’s over 10 minutes it will lower it.

There weren't many miners around when Bitcoin initially started. In reality, Satoshi Nakamoto, the creator of Bitcoin, and his buddy Hal Finney were two of the only persons mining Bitcoin using their own computers at the time. Back in 2009, using your CPU was sufficient for mining Bitcoin because of the low mining difficulty. As the popularity of Bitcoin grew, individuals sought for more powerful mining methods. GPUs were initially designed to allow players to play computer games with high graphical demands. GPUs were prominent in the realm of cryptography because to their design, and around 2011, individuals began using them to mine Bitcoins. For comparison, the mining power of one GPU is about equivalent to that of around 30 CPUs. Around 2013, a new type of miner appeared: the ASIC miner. ASIC is an abbreviation for Application Specific Integrated Circuit. ASICs are bits of hardware designed specifically for Bitcoin mining. CPUs, unlike GPUs, could not be used for anything else. The machine was hardcoded with their function. ASIC miners are now the industry standard for mining. Some early ASIC miners even took the shape of a USB, but these rapidly became outdated. Even though they began in 2013, technology swiftly advanced, and new, more powerful miners were released every six months.

Mining is a highly competitive sport. Even if you buy the finest miner available, you will be at a significant disadvantage when compared to professional Bitcoin mining farms. That is why mining pools were created. The concept is straightforward: miners get together to establish a "pool" in order to pool their mining power and compete more effectively. When the pool wins the tournament, the reward is divided among the pool members based on how much mining power each of them provided. As a result, even inexperienced miners may participate in the mining game and have a chance to win Bitcoin (though they get only a part of the reward). Today, over a dozen major pools fight for the opportunity to mine Bitcoin and update the ledger. According to some statistics, China accounts for 65 percent of all Bitcoin mining activity globally, owing to low power prices, manufacturing costs, and meteorological conditions.

Is Bitcoin Mining Lucrative? The quick answer is "probably not," but the right answer is "it depends on a number of things." There are several factors to consider when estimating Bitcoin mining profitability. Let us dissect them. Hashrate (the power of your miner); A hash is a mathematical puzzle that the miner's computer must solve. The hashrate relates to the performance of your miner (i.e., how many guesses your computer can make per second). Hashrate can be measured in MH/s (mega hash), GH/s (giga hash), TH/s (terra hash), and even PH/s (peta hash).

Bitcoin Reward; the quantity of Bitcoins created when a miner solves a problem (or "solves a block"). This figure began at 50 bitcoins in 2009 and is half every 210,000 blocks (about four years). The current reward each block is 6.25 Bitcoins. The latest block-halving took place in May 2020, and the next one will take place in 2024. The payout will be reduced to 3.125 Bitcoin after the halving happens.

Mining difficulty is a statistic that reflects how difficult it is to mine bitcoins at any particular time, taking into account the amount of mining power that is currently operating in the system.

Electricity cost; often known as "how much do you pay per kilowatt hour to acquire electricity?" In order to assess profitability, you must first determine your electricity tariff. This is often seen on your monthly power bill. This is significant since miners use electricity, whether to run the miner or to cool it down (these machines can get really hot and noisy).

Consumption of energy; Each miner consumes a different quantity of energy. Before you can calculate profitability, you must first determine your miner's actual power usage. This is easily available online with a short search. Watts are units of measurement for power usage.

Pool costs; If you mine through a mining pool, the pool will take a percentage of your profits in exchange for their services. In general, this figure would be approximately 2%.

Bitcoin's pricing; Because no one knows what Bitcoin's price will be in the future, predicting whether Bitcoin mining will be successful is difficult. This variable will have a big influence on profitability if you want to convert your mined bitcoins to any other currency in the future.

Difficulty increases every year; this is most likely the most significant and elusive variable of all. The notion is that because no one can anticipate the rate at which miners join the network, no one can foresee how tough it will be to mine in six weeks, six months, or six years. In reality, during the course of Bitcoin's existence, its profitability has decreased just a few times, even when the price was relatively low.

Cloud mining is another form of mining in which you do not own a physical mining rig but rather rent computing power from a mining firm and get paid based on how much mining power you possess. At first glance, this appears to be a great idea since you save the trouble of purchasing pricey equipment, storing it, cooling it, and monitoring it. However, when the numbers are crunched, it appears that none of these cloud mining sites are lucrative. Those that appear to be successful are generally frauds that do not even own any mining equipment; they are simply complex Ponzi schemes that will end up stealing your money. As a general rule, I would advise against using cloud mining. If you still want to go down this road, make sure you do your homework before giving out any money.

Is Bitcoin Mining Profitable? You should be able to answer this question now that you've finished this lengthy read. Keep in mind that there may be other options to Bitcoin mining that can provide a larger return on your investment. For example, depending on the price of Bitcoin, it may be more advantageous to just buy Bitcoins rather than mine them. Another alternative is to mine cryptocurrencies such as Ethereum, which can still be mined with GPUs.