Table of Contents
- 1 What is Bitcoin Mining?
- 2 What is Bitcoin Mining: How Does Bitcoin Mining Work?
- 3 What is Bitcoin Mining: How to Start Bitcoin Mining?
- 4 What is Bitcoin Mining: Is Mining Bitcoin for You?
- 5 What is Bitcoin Mining: Final Words
What is Bitcoin Mining?Bitcoin mining is the process of verifying, storing and securing Bitcoin transactions. Of course, there is much more to it than that. But before getting into more about what is Bitcoin mining and how it works, keep in mind these two important things about Bitcoin itself.
- When you make a payment using credit card, the credit card company verifies and records the transaction. Now, when you make a payment using bitcoin, there is no central/third party like the credit card company to verify the transaction. Instead, it is verified by Bitcoin miners.
- Unlike traditional money (USD, JPY, EUR etc.), which is printed by banks, Bitcoin cannot be printed by anyone. With traditional money, the bank can print as much money as they want because there is no maximum limit on it. Bitcoin, though, has a maximum limit of 21 million. This means there can only be 21 million Bitcoin ever created!
Bitcoin Mining ExplainedAs you now know, Bitcoin mining is the process of verifying Bitcoin transactions and creating new Bitcoin. The people who mine Bitcoin are known as Bitcoin miners. Well, I say “people”, but really they are computers that are operated by people. These computers (which we call “nodes”) have to be very powerful computers, as Bitcoin mining uses a lot of computer power. They run software that connects them to the Bitcoin blockchain and solves mathematical problems. When these mathematical problems are solved, new transactional data is verified and stored on the Bitcoin blockchain. So, the Bitcoin miners are verifying the transactions instead of banks and credit card companies. This means there is no third party to trust or rely on. Clever, right? The basic requirements for bitcoin mining are:
|Specialized computers||A strong internet connection||Electricity (a lot of it!)|
What is Bitcoin Mining: How Does Bitcoin Mining Work?ain, right? Well, that’s where we get the term ‘block’ from.
What Is a Block and the Blockchain Technology?Many Bitcoin transactions happen at the same time. The transactions that happen at the same time are put into groups; these groups are called ‘blocks’. It is these groups/blocks that Bitcoin miners must verify — they verify the transactions in groups instead of verifying them individually. Once a block is verified, it gets added to a chain of blocks that have already been verified. That’s why the technology behind Bitcoin is called the blockchain!
Note: you can read more about the blockchain in our Blockchain Explained guide.This will become easier to understand as I explain the step-by-step process of mining Bitcoins.
How Does Bitcoin Mining Work?
- Step 1: Imagine you want to pay using bitcoins to buy a bed. If the cost of the bed is $300, it will be around 0.046510 Bitcoin. While you buy the bed, other people around the world also buy things with Bitcoin.
- Step 2: The Bitcoin mining nodes (the computers) are told about these transactions that are happening.
- Step 3: Now, the Bitcoin miner must verify your transaction. You cannot take your bed home until the Bitcoin miner verifies your transaction.
- Bitcoin miners run Bitcoin mining software that solves mathematical problems — imagine a computer completing a really complicated puzzle/jigsaw! With each block of transactions, the problem/puzzle that they must solve is different.
- Lots of Bitcoin miners try to solve the problem at the same time, but the miner that solves it first is the one who is rewarded with the new Bitcoin. It’s just like a race!
- Bitcoin miners keep data of all the past transactions of Bitcoin that have ever happened. I’ll call this the ‘database of old transactions’.
- So what is Bitcoin mining transaction? When you send Bitcoin, the Bitcoin miners check the ‘database of old transactions’ before verifying it. This makes sure that you have not spent the same Bitcoin in any of the past transactions.
- They also check if you own enough Bitcoin. In the bad example, the transaction was 0.046510 Bitcoin. So, the Bitcoin miners will check if you have 0.046510 Bitcoin before they verify it. If you don’t have 0.046510 Bitcoin, your transaction will not be verified, and you can’t buy the bed — sorry, double spenders!
- Step 4: The first miner to solve the puzzle (let’s call this miner ‘John’), must tell the rest of the nodes that he has solved the puzzle. Other miners then check to see if John’s solution to the puzzle is correct.
- Step 5: When 51% of the other miners agree that John has the correct solution, your 0.046510 Bitcoin is verified and sent.Note: The minimum time for verifying a transaction is 10 minutes. But with the increasing number of bitcoin transactions, it can sometimes be 35-40 minutes or more.
- Step 6: The Bitcoin miner finishes verifying the block/group that your transaction is in. The transaction is now complete! Yay — you can take your bed home!
What is Bitcoin Mining: How to Start Bitcoin Mining?Follow the steps below and you can become a bitcoin miner yourself. If you don’t want to, that’s fine too — learning how to mine Bitcoin still helps you to gain a better understanding of mining itself.
Get the Bitcoin Mining HardwareThe first step to start Bitcoin mining is to purchase the mining hardware. Selecting the right hardware is important for the success of mining. So what is Bitcoin mining best hardware? When Bitcoin mining started, back in 2009, you could mine using basic computers — like the ones we buy from retail stores! That computer’s CPU (central processing unit) had enough power to quickly solve the mathematical problem. As Bitcoin started to become more popular, the miners started to use more powerful computers. They used faster graphic processing units (GPU) that could solve the problems faster, meaning they would win the race and be rewarded with the new Bitcoin! Guess what happened when Bitcoin became even more popular? Miners got even faster. Instead of using CPUs and GPUs, they started using specialized Bitcoin mining hardware called ASICs (Application Specific Integrated Circuits). So, if you want to win the race and mine Bitcoin now, you’ll need an ASIC.
- The price
- The hash rate (this number tells you the power of the ASIC — the higher the hash rate, the quicker the ASIC is)
- The electricity requirement (the lower this number is, the less electricity it uses)
|ASIC model||Hash rate (TH/s)||Electricity (W)||Price (USD)|
Join a Bitcoin Mining PoolThere are two ways that you can start Bitcoin mining. One is to start by yourself, which is called solo mining. Another way is to join a group of other Bitcoin miners – these are called mining pools. So, what is Bitcoin mining pool? Think of Bitcoin mining pools as large Bitcoin farms. Lots of miners combine the power of their Bitcoin mining hardware. They also split the Bitcoin reward that they receive. Imagine this: you’re in a Bitcoin mining pool. Your computer power is 2% of the total power in the mining pool. If your mining pool wins the race to verify a block, you will get 2% of the new Bitcoin that the mining pool is rewarded with. If you are a beginner, Bitcoin farming (joining a mining pool) is recommended. There are many different pools for you to choose from. But, be careful and only choose well-known mining pools with a good reputation. Of course, they charge a fee, but it’s normally quite small (1-3%).
- Slushpool: fees of 2%
- Pool.BTC.com: fees of 2-3%
- Kanopool: fees of 0.9% (the cheapest of the three!)
Download Bitcoin Mining SoftwareYou could have the best mining hardware in the world, but without Bitcoin mining software, the hardware is useless. Mining software is needed to access the Bitcoin network and the ‘database of old transactions’. You also need it if you want to join a mining pool. There are different types of Bitcoin mining software available. There are different ones for different operating systems — like Mac OS, Windows and Linux. Some of the most popular software that supports mining with ASICs are:
- CG miner (Download here)
- Available for Windows, Linux and Mac
- Can be used with GPU/ASIC
- Free to download!
- BFG miner (Download here)
- Available for Windows, Linux and Mac OS X
- Can be used with ASIC but not GPU
- Free to download!
- BitMiner (Download here)
- Available for Windows, Linux and Mac
- Can be used with GPU/ASIC
- Free to download!
Note: I recommend that you check the Bitcoin mining regulations for your country. Regulators from different countries are trying to regulate the cryptocurrency market. This may affect your Bitcoin mining.
Open a Bitcoin WalletOnce you have set up your Bitcoin mining hardware, downloaded your software and joined a mining pool, you can start mining Bitcoins! But wait, you’re going to be rewarded in Bitcoins, right? So, have you thought about where will you store these Bitcoins? Unlike traditional money, Bitcoin cannot be stored in your bank account. Instead, you store them in a Bitcoin wallet! So, what is Bitcoin wallet? You must be very careful when choosing a wallet or you could lose your Bitcoin. Many people have lost a lot of money because their Bitcoin wallets got hacked. There are three types of Bitcoin wallets — web wallets, software wallets and hardware wallets.Exodus, Electrum and Copay.
Quick Tip: Exodus is very simple and great for beginners!Hardware wallets are more secure because they are not connected to the internet. They are actual physical devices that you can store your Bitcoin on; you connect your hardware wallet to your computer via USB. Three of the most popular hardware wallets that I recommend are: TREZOR
- Price – $110
- Great security features, including a USB connection that cannot get viruses (+)
- Can be linked to a Dropbox account (+)
- Can’t store many cryptocurrencies other than Bitcoin (-)
- Price $116
- Easy to use (+)
- Can store 10+ different cryptocurrencies and ERC-20 tokens also (+)
- Price $129
- User-friendly (+)
- Great design (+)
- Very new, still has to prove itself (-)
- The highest price of the three (-)
Note: ERC-20 tokens are Ethereum-based tokens for the dApps (distributed applications) that run on Ethereum. You can read more about dApps and Ethereum in our Ethereum vs Bitcoin guide.
What is Bitcoin Mining: Is Mining Bitcoin for You?The answer to this question is different from person to person. It might be right for you, but it might not be right for someone else.
By answering the following questions, I can help you decide.
What Is Bitcoin Mining Reward?The current number of Bitcoins that miners are rewarded with per block is 12.5. That’s right, 12.5 Bitcoins are given to the first miner to solve the problem (verify the transaction) of each block. This number halves every 4 years, though. So, in 2020, the reward will go down to 6.25 Bitcoin per block. It’s 12.5 Bitcoins per block right now?! So, how long does it take to mine a Bitcoin?!
Well, one block takes 10 minutes to mine. That means one Bitcoin is mined every 48 seconds.
How Difficult is Bitcoin Mining?As more and more Bitcoin miners join the network, the mining difficulty level also increases. This simply means that the miners/mining pools with more powerful hardware will win. This also means that you would need to buy more expensive hardware.
How Much Does Bitcoin Mining Cost?Let’s go through what is Bitcoin mining cost? Two of the main costs involved with bitcoin mining are:
- Hardware/computer cost: Even for beginners, the cost of Bitcoin mining hardware would be $600-$1000 and it is much more expensive if you want to buy the best hardware available.
- Electricity cost: Bitcoin mining uses a lot of electricity! The cost of electricity at your location can make a huge difference to the cost of Bitcoin mining. If electricity in your area is too expensive, you might lose money by mining Bitcoins instead of making money.
How Much Profit Can You Make by Mining Bitcoin?CryptoCompare’s Mining Calculator. You’ll need to enter:
- Hashing power — the power of your hardware (which you can find out once you have chosen which hardware you are going to buy)
- Power consumption — how much electricity your hardware uses (again, you can find this out once you have chosen which hardware you are going to buy)
- Cost per KWh ($) — how much your electricity costs (if you don’t use USD, you can use Google’s Currency Converter)
- Pool fee — the fee for the mining pool you are joining
One More Important ThingDon’t forget about Bitcoin’s price! As we all know, Bitcoin’s price changes a lot every day. This is something that is completely out of your control but can change everything. For example, you calculate your profit when the Bitcoin price is $12,000. If the price falls to $6,000, then your profit may become a loss. We must always remember that this is possible. Just recently, we saw Bitcoin fall from $19,000 in December 2017 to below $7000 in early February 2018.
What is Bitcoin Mining: Final WordsSo, what is Bitcoin mining? Do you know now? If someone asked you “What is Bitcoin mining?”, would you feel confident answering?
I hope that you have a good understanding of what it is, how it works and how you can get started with your own Bitcoin mining. It’s clear that you can make a lot of money by mining Bitcoin, but it depends on a lot of things — most of which are out of your control (electricity costs, the price of Bitcoin etc.).
Starting to mine Bitcoin requires a lot of planning and money. It could give you a big profit, but it also may not give you a big profit. If your electricity costs are low, you’re probably very positive about mining Bitcoin. If they are high, you’re probably very negative about mining Bitcoin; well, either that or you’re thinking about moving countries!