Bitcoin Mining

Bitcoin Mining bitcoin mining - Bitcoin Mining

                                                                                Bitcoin Mining

The concept of generating additional bitcoins until the supply cap of bitcoin mining revolves around the process
21 million coins have been reached. Because bitcoins are not generated out of thin air, nor issued by a bank or government, they are generated through solving complex mathematical equations.

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Without the bitcoin miners, no new coins would be brought into circulation. Though this might not be an immediate problem for most people, it would also mean that no further transactions could be confirmed on the network, which would be a much bigger worry.

Without blocks being solved on the network, transactions would remain unconfirmed and could not be spent by the recipient.

But bitcoin mining is not just about generating additional bitcoins.

Mining also adds transaction records to the public ledger, called the blockchain. Every bitcoin transaction needs to be recorded in a block of data, and that block of data needs to be discovered by bitcoin miners. Once a transaction is included in a bitcoin block, the transaction gains
one network confirmation.

Bitcoin mining has become a resource‐intensive and difficult process over the past few years. As more and more people compete to mine the next bitcoin block, the difficulty rating associated with these mathematical equations is increasing steadily.

By increasing the difficulty rating in this fashion, the flow of new blocks mined remains steady at about one block every ten minutes — which is why it is possible to calculate the year when the last block will be mined.

Electricity costs and investment costs to set up a proper bitcoin mining operation are quite substantial these days.

Mining at home has become next to impossible unless there is access to cheap or free electricity. This is the main reason why most bitcoin miners host hardware in China, where the bulk electricity rates are far cheaper than most places in the world.

Heading Down the Mine

No canary or gas lamp is necessary for bitcoin mining. Mining’s main purpose is to create a consensus ecosystem for
bitcoin nodes to determine whether or not a broadcasted transaction is valid. As mentioned elsewhere, a minimum of six network confirmations is required to “officially” deem a bitcoin transaction spendable.

The main reason why bitcoin mining has grown increasingly resource‐intensive and difficult over time is that the implemented SHA‐256 algorithm makes it very difficult to calculate a block’s hash. Every block hash needs to start with a certain number of zeros, meaning that quite a few attempts have to made to find the correct solution.

Additionally, the mining difficulty is recalculated by the network every 2,016 bitcoin blocks, and the difficulty hardly ever decreases.

The difficulty factor depends on the total amount of computational power used to solve the previous 2,016 blocks on the network within a two‐week period, and compensates for a rise or decline in the amount of mining power.

In the early days of bitcoin, every mined block rewarded users with the sum of 50 bitcoin. As more and more miners joined the fray, that block reward got split over miners of the pool that mined the next network block successfully.

At the time of writing, the current bitcoin block reward is 25 BTC, which will be halved to 12.5 BTC a few years from now.

Bitcoin transactions are subject to a transaction fee, paid out to the miners for including that transaction in the next mined block.

Although the majority of mining income is presently made up of the current block reward, those transaction fees will play a bigger role in future earnings.

Over the years, the bitcoin mining ecosystem has undergone some drastic changes. Mining now requires dedicated mining hardware to be even somewhat profitable. As mentioned, bitcoin mining is subject to high electricity fees, and the mining hardware used needs to be maintained at all times.

Addressing the variance in mining income had to take place sooner or later, which led to the creation of mining pools. Individual miners have all but disappeared from the bitcoin world since mining through a bitcoin pool is now far more preferable.

Uniting the computational power of multiple miners increases the chances of finding the next bitcoin block, and rewards are split according to the amount of computational power contributed by the individual miners.

Understanding How Bitcoin Mining Works

To recap: Unlike traditional fiat currencies, in which governments around the world can simply print more bills and mint more coins whenever they want, bitcoin has a limited supply of coins.

That limit is set at 21 million, and will not be reached until 2140. Until that time, bitcoin miners use dedicated computer hardware to mine new bitcoins on the network.

As soon as Bitcoin transactions are broadcasted to the network, they are picked up by miners and formed into a bitcoin block.

That bitcoin block needs to be verified by the miners, and once the block has been “solved,” all the included transactions are recorded in the blockchain. Every additional block discovered on the network after that stamps these transactions with one extra network confirmation.

Bitcoin miners play a key role in ensuring that the blockchain is accurate, as they take the information of a bitcoin block and verify its integrity. Afterward, a complicated mathematical formula is applied to this block of bitcoin data, which turns the block into something different.

The “different” block consists of shorter, seemingly random sequences of letters and numbers, known in the bitcoin world as a hash.

Hashes are easier to calculate for bitcoin miners than the full block of data, because new blocks have to be generated and mined roughly every ten minutes, and as we’ve said, these hashes are extremely computationally complex to solve and require expensive hardware.

Once the hash is solved, it is stored on the bitcoin blockchain, along with the block it was derived from. That process validates all transactions recorded in this bitcoin block and labels them with one network confirmation.

Although the hashes are easier to solve for miners than full blocks, the increasing bitcoin mining difficulty counterbalances the scales and ensures blocks are not generated faster than ten minutes apart.

Using hashes is quite an interesting decision in its own right. This cryptographic solution is completely tamper‐proof and acts as a “seal of confirmation” for the previous network block. Every hash is based on the previous block’s hash and confirms the validity of the previous block, as well as every bitcoin block coming behind it.

Given the current dedicated mining hardware being used by individuals, companies, and even hardware manufacturers, it is nearly impossible to tell how many people are actively mining right now.

There is a lot of competition, as the 25 BTC reward per block is plenty of incentive to attract miners from all over the world.

Despite the increasing mining difficulty, more computational power is pointed at the bitcoin network at regular intervals.

Strengthening the network not only gives miners a better chance of finding the next block — and earning bitcoin based on their share of the hard work — but also makes the bitcoin network even more secure than it already was.

Cloud Mining

Sorry, but when it comes to mining bitcoin, as we’ve said, operating hardware at home is now all but impossible for most everyday customers, considering electricity costs, hardware maintenance, and the noise/heat generated by dedicated hardware that has to be run in data centers.

This is not possible for everyone, which is why there are companies dedicated to renting out their mining hardware for a service called bitcoin cloud mining.

As interesting as that terminology may sound to potential investors right now, there are both advantages and disadvantages to bitcoin cloud mining.

First of all, it is important to note that not all companies offering bitcoin cloud mining are legitimate, unfortunately.

Various scams have popped up, claiming to offer bitcoin cloud mining services, which turned out to be Ponzi schemes in the end.

That said, there are quite a few advantages to bitcoin cloud mining, assuming you can find one of the very few legitimate companies offering that service (such as Genesis Mining, discussed shortly).

Keep in mind that profitability of bitcoin cloud mining heavily depends on the current bitcoin price, and for most cloud mining services, a bitcoin price of $320 (at current mining costs) is required to yield somewhat decent profits.

Advantages of bitcoin cloud mining

They say it takes money to make money, and that holds true for bitcoin. Getting into the bitcoin mining game without committing to some form of upfront investment is simply not possible.

However, bitcoin cloud mining removes factors such as investing in bitcoin mining hardware, having it shipped to your door for a fee, and running the risk of paying VAT on top of all that.

As with any cloud service, when signing up for a bitcoin cloud mining service, you are effectively renting hardware from someone else, who purchased the machine and set up the accompanying software.

There are no shipping fees involved either because the machines are hosted by the cloud mining company itself. This cuts down tremendously on the upfront investment costs, depending on your location, of course.

But there is still an investment to make when signing up for bitcoin cloud mining services. Most companies will offer yearly or lifetime contracts to their customers, and these companies will mine bitcoin on your behalf for the agreed period of time. A price tag is attached to these contracts, which varies from provider to provider.

In exchange, you as a customer will be up and running with bitcoin cloud mining within a few minutes of completing your order.

There are no settings to worry about, as nearly every bitcoin cloud mining provider will automatically point your rented hardware to a bitcoin mining pool. Earnings will start trickling in slowly, and depending on which provider you sign up with, waiting for a return of income can be either brief or it can take a while.

With no shipping costs and VAT risk to take into account, bitcoin cloud mining seems to be a safe bet when it comes to entering the mining scene.

The wait for a return on investment, let alone profit, is a factor to take into account, as it depends on multiple factors — the bitcoin price, for one, but also the mining difficulty, which changes every 2,016 blocks, and the overall computational power aimed at the bitcoin network in general.

Disadvantages of bitcoin cloud mining

If there are advantages in using a certain service, you can be sure that there will also be disadvantages . . . and there are quite a few disadvantages to bitcoin cloud mining.

As a customer, with cloud mining, you’re never in full control of the hardware you rent, because you cannot physically or remotely access the miner itself. You rely on a centralized third‐party service provider, to be honest with you and not to pocket a share of earnings for itself.

This is where most of the issues surrounding bitcoin cloud mining start, as customers feel they are not being paid out correctly. There are several reasons for payments to seem short, and some of those reasons might even be legitimate.

Unexpected maintenance costs for hardware, a supplier upping their prices, electricity costs changing, and the ever‐changing bitcoin price are just a few potential causes.

Then again, there is no way to verify the truth of why the mining earnings might be reduced for a certain period.

Customers were forced to rely on a third‐party service provider is exactly what bitcoin set out to change by giving every individual user full control at any time.

Another disadvantage of bitcoin cloud mining is the maintenance and electricity fees. Even though you don’t host the hardware at your place, where you would pay these costs, the bitcoin cloud‐ mining operator does have to pay them, and those charges are passed along to you. These dedicated machines are not really floating in the clouds, of course.

They’re physically hosted in a real location and need to constantly be fed electricity to operate.

In some parts of the world, such as China, electricity is relatively cheap, which makes these fees less substantial.

The biggest misconception most people have about bitcoin cloud mining is the fact they will buy a certain amount of computational power and earn the full reward of that power. This is never the case, as electricity and maintenance costs will be calculated based upon how much computational power you are “renting” from the service provider.

Bitcoin cloud mining can still be profitable for smart investors, assuming they have done their research and calculations themselves. Never rely on the project earnings given to you by a cloud mining service operator, as there are too many variables to influence that outcome.

Plus, there are quite a few mining profit calculators out there who will project a completely different — and
lower — earnings number, but at least they are far more realistic in their calculations.

Risks associated with bitcoin cloud mining

Perhaps the biggest risk associated with bitcoin cloud mining is coming across a service provider that looks legitimate but is not. Most bitcoin cloud mining companies will offer to show you pictures of their mining farms, which, of course, may or may not be real.

Added to that, whenever a bitcoin cloud mining company gets hacked — and that does happen quite frequently — customer earnings are affected as well. User funds tend to go missing, and the service provider is forced to reduce mining earnings for an extended period of time to recoup losses.

One confirmed legitimate bitcoin cloud mining company is Genesis Mining (www.genesis‐mining.com). This Hong Kong company has been active in the bitcoin cloud mining business since 2013, and it offers lifetime mining contracts at affordable prices.

Unlike most other companies, there are no extra or hidden fees associated with purchasing a bitcoin cloud‐mining contract from Genesis Mining, making it the preferred service provider for miners.

If you purchase a cloud‐mining contract at some point, keep in mind that the next best offer might just be around the corner. The bitcoin cloud‐mining scene is constantly evolving, adjusting, and becoming more competitive. Always do your own research, check out the various offerings, and make a well‐educated decision.

Don’t get swayed by offers that seem too good to be true, as they usually are.

Securing Bitcoin with Mining

The bitcoin network is only as strong and secure as the people supporting it either by running a bitcoin node or by dedicating computational power to the mining process.

As discussed in Bitcoin sercurity, one of the things posing a threat to the bitcoin network is the so‐called 51 percent attack.

More computational power pointed to the mining process reduces the chances of malicious individuals managing to obtain 51 percent of the network power and doing harm to bitcoin.

From a miner’s perspective, of course, the monetary gain is the most obvious incentive to dedicate powerful mining hardware to this process. However, there are also miners who do this “job” for the benefit of making the bitcoin network more secure and see the monetary gain as an added bonus for doing so.

Regardless of which side of the fence they are on, mining secures the bitcoin network by confirming transactions and moving the blockchain along.

But there is more to it than that. Mining also protects the neutrality of the network by preventing one individual or mining pool from gaining the power to block other transactions.

As Bitcoin Security explains, anyone who gains that much computational power can only confirm their own network blocks, and leave other transactions unconfirmed by an undetermined amount of time.

Bitcoin mining makes it increasingly difficult for any individual or mining pool to reverse a previous transaction because all blocks following this transaction will need to be rewritten.

Every network block gains additional confirmation as more time progresses, which is why it is pivotal to keep the blockchain going and generate new blocks roughly every ten minutes.

Bitcoin mining is designed to be very resource‐intensive and to become even more so as time progresses. Every individual block found on the network requires a certain proof‐of‐work to be deemed valid, which is then further verified by all the bitcoin nodes on the network.

Once these nodes receive a tamper‐proof consensus, new coins will be disseminated in a decentralized manner, motivating miners to keep pointing resources to the bitcoin network.

More resources mean a higher level of security, and this cycle continues to repeat itself.

Starting Your Own Mine

Getting involved in the bitcoin mining game is now more difficult than it used to be. Mining hardware has evolved at an accelerated rate in recent years, as the mining difficulty ramped up and demanded more intensive computational hardware to solve blocks.

But there are still ample opportunities to get involved with bitcoin mining, assuming you have substantial resources and carefully do some calculations beforehand.

Getting the right hardware

When bitcoin was released in 2009, the mining process was quite simple. All a user had to do was install the bitcoin software client, let it synchronize with the bitcoin network, and make sure the checkbox on the Mining tab was checked.

Any type of CPU inside a computer — even laptops — could be used to mine bitcoins, because there was next to no competition on the network.

In fact, during the first few weeks, there were only a handful of miners.

It didn’t take long for a bitcoin enthusiast to figure out the code to let his graphics card do all the computational work, as graphics cards are designed to do exactly that. Even when playing video games, a graphics card is doing nothing more than processing computational data over and over again, at a rapid pace.

The difference in mining speed between CPU mining and GPU mining is simply astonishing. Productivity increases exponentially, and the first GPU miners started strengthening the bitcoin network tenfold. Despite all that extra mining power, new blocks were still ten minutes apart, thanks to the change in mining difficulty.

A few years ago, CPU and GPU mining became completely obsolete when FPGAs came around. An FPGA is a Field Programmable Gate Array, which can produce computational power similar to most GPUs around 2013 while being far more energy‐efficient than graphics cards.

Needless to say, quite a few miners switched from CPU mining to GPU mining and then to FPGA mining within a few years.

But the mining hardware business keeps evolving even now, and FPGAs were only used for a short amount of time. Bitcoin ASICs were introduced to the scene in 2013, and these Application‐Specific Integrated Circuits cut down electricity requirements even further, while outperforming GPU and FPGA mining by quite a margin.

That said, there are some downsides associated with bitcoin ASIC mining. Although the energy consumption is far lower than graphics cards, the noise production goes up exponentially, as these machines are far from quiet.

Additionally, ASIC bitcoin miners produce a ton of heat and are all air‐cooled, with temperatures exceeding 150 degrees F.

Buying a Bitcoin ASIC miner also involves some hefty shipping fees — these machines are quite heavy. Plus, you are guaranteed to pay import duty on a bitcoin ASIC shipment as well, due to the size and weight.

All in all, ASICs today are a very costly investment with absolutely no guarantee of the customer ever breaking even, let alone making a profit.

Last but not least, bitcoin ASICs can only produce so much computational power until they hit an invisible wall.

Most devices are not capable of producing more than 1.5 TH/s (terrahash) of computational power, forcing customers to buy these machines in bulk if they want to start a somewhat serious bitcoin mining business.

It should come as no surprise to find out that most people have moved away from bitcoin mining hardware themselves and switched over to cloud mining (even though there are a lot of risks associated with bitcoin cloud mining companies, as most of them are far from legitimate)

And the low bitcoin price is not helping matters either. See the earlier section on cloud mining to find out about the measures you can take to protect yourself.

Calculating your costs

Regardless of whether you want to buy hardware or sign up for a bitcoin cloud-mining contract, you need to do some homework to determine costs, earnings, and the expected time until you receive your investment back to start making a profit.

Bitcoin mining costs go far beyond the original investment in the hardware, logistics costs, and import duty fees. One of the main factors to keep in consideration is power usage, as electricity costs fluctuate greatly from country to country.

In most countries, the price per kilowatt-hour (kWh) makes bitcoin mining unprofitable. Make sure to check a recent electricity bill and determine the price per kWh and then calculate how much kWh your bitcoin mining hardware will use on a daily basis.

For example, a bitcoin miner drawing 600 watts from the wall will consume 12.4 kWh per day. Calculations for this are simple:
600W × 24 hours in a day = 12,400W or 12.4 kWh.

If you pay $0.10 per kWh, your daily electricity bill will be $1.24.

This cost has to be weighed against the daily income you can earn from bitcoin mining. These daily earnings will heavily depend on the current bitcoin price, which is fairly low at the time of writing.

A higher bitcoin price would drastically improve earnings, while electricity costs remain the same (unless your supplier decides to make a price change).

Electricity is not the only cost. Owning bitcoin mining hardware means maintaining it at all times and repairing it if something breaks down. Some bitcoin ASIC miners don’t come with a power supply, which you have to purchase as well.

The biggest and most important cost is investing time and effort to optimize mining earnings. Most bitcoin mining hardware will perform at its highest rate out of the box, but there are always tweaks that can be made.

Most manufacturers release new firmware for the mining hardware at regular intervals to fix any bugs and squeeze out that extra bit of computational power.

Using a profitability calculator

Luckily, calculating your costs and potential earnings doesn’t require a math degree, or even a pen and paper.

Several websites specialize in providing accurate mining profitability calculations. You simply enter various hardware information and electricity costs.

Keep an eye on these mining‐profitability calculation websites. They will not only give you an estimate for mining today, but also for the foreseeable future.

The bitcoin mining difficulty adjusts every 2,016 blocks, which affects your mining earnings as well. If the difficulty increases, your earnings will go down slightly, whereas earnings increase if the mining difficulty decreases.

To find bitcoin mining profitability calculators, simply search online for “bitcoin mining profitability calculator.”

 

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