What Is Bitcoin Mining?
Bitcoin mining is the process that allows the Bitcoin cryptocurrency to exist and go into circulation. It also contributes to the security of the Bitcoin network by validating transactions. Since the network is decentralized, anyone can participate in Bitcoin mining.
To understand Bitcoin mining, it helps to understand the basic technology behind Bitcoin itself, and how blockchains work. Bitcoin is a cryptocurrency, or cryptographically secure digital currency, which users can exchange for goods or services, just like any traditional currency. Bitcoin transactions are stored publicly on a digital ledger known as a blockchain. Having a public record of every transaction means that anyone can see the transaction details, and there’s no third party such as a bank or payment processor involved. In general, transactions recorded in a blockchain cannot be altered after they have occurred.
A blockchain is made up of blocks, or transaction records, each of which links back to a previous block; this is where the term “blockchain” comes from. The blockchain database is managed automatically using Bitcoin’s peer to peer network, including miners. As discussed in the next section, transactions entered in the blockchain network are verified through the Bitcoin mining process. There are a variety of other blockchain-based platforms, all of which are inspired by the original Bitcoin design.
How Bitcoin Mining Works: The Proof of Work System
Bitcoin mining is the process of discovering new blocks. Essentially, miners are verifying Bitcoin transactions and getting rewarded for it. As soon as a transaction occurs, the verification process begins, ensuring that the bitcoins used in a transaction are valid. This verification process is essential to the security and functionality of the blockchain ledger.
Bitcoin miners’ software must complete a “proof of work” (POW) by solving a complex mathematical problem before a newly discovered block is accepted by the Bitcoin network. The POW system means that producing a new block has to be either expensive or time-consuming; its purpose is to limit the rate at which blocks can be generated (in Bitcoin’s case, to 10 minutes for each block). Completion of the POW also ensures that there is no double spending, where the same funds are spent more than once, an issue that may occur with other forms of digital payment. Once the block is discovered, it’s easy for other users to verify that the POW was completed.
Is Bitcoin Mining Worth It?
The main reason to mine Bitcoin is to make money. As mentioned above, Bitcoin miners are rewarded for discovering new blocks, at a rate which everyone in the network has agreed on. As of 2017, the reward for discovering a block has halved from 25 bitcoins to 12.5 (note that a single bitcoin has, at one time, been worth $3,018.54). The amount will halve again after four years. In addition to this reward, miners also receive transaction fees that are paid by the user who created the transaction.
Earnings for miners have decreased significantly over recent months, largely because reward amounts have dropped and because the rate at which blocks are discovered is continually decreasing. There is also competition from dedicated mining outfits, which are able to spend money upfront on equipment and other setup needs and have significantly more computing power than an individual miner.
As discussed in the next section, miners may need to purchase hardware to get started, which makes it trickier to start earning money. Users who do manage to make money mining must take into account other costs involved, such as the electricity needed to operate hardware and keep it from overheating.
While Bitcoin mining may no longer be profitable for individuals, some enthusiasts still participate because they see cryptocurrency as the future of payments and want to help Bitcoin succeed.
Bitcoin Hardware vs. Cloud Mining
Bitcoin mining requires certain hardware and software. When Bitcoin first became popular, users could mine it using their desktop computer’s CPU and GPU. This method is no longer cost effective due to the advent of ASICs (application-specific integrated circuits), specialized systems which vastly outperform other mining methods in both speed and efficiency. Therefore, miners need hardware specifically designed for mining. There are many Bitcoin-mining machines to choose from, also available on Amazon for cheaper, which range in price from around $150 to several thousands.
Users who are interested in Bitcoin mining but don’t want to purchase mining hardware may consider cloud mining on sites such as https://www.genesis-mining.com/, which allows members to use a remote datacenter to perform mining functions. This option can help save on electricity costs, since operating a mining machine requires a lot of computing power. Since Bitcoin mining machines can overheat if not cooled properly, and can be noisy, another advantage of cloud mining is that the physical setup is already in place.
While cloud mining does not require upfront spending on hardware, there are fees for the service which may diminish earnings over time. Another risk is illegitimate cloud mining services. Some operations have turned out to be fraudulent, such as Hashie.co, which allegedly failed to pay out nearly 1,500 bitcoins to users.
One way to help determine whether a cloud mining company is genuine is to see if they also manufacture hardware that can be purchased. There are also plenty of reviews online from users who have worked with various cloud mining services. Genesis Mining has gone a step further to prove its legitimacy, launching a live video feed inside its mining facility.
If you’re interested in getting started mining Bitcoin, or just learning more about the process, check out these sites.
- https://www.bitcoinmining.com/ – provides easy to understand information about Bitcoin mining, mostly in infographic form
- https://99bitcoins.com/best-bitcoin-miners-2016-hardware-reviews/ – compares various mining hardware options
- https://bitcoinworldwide.com/mining/calculator/ – a calculator to help you determine if mining will be profitable. Note that you’ll need a solid understanding of what your mining setup might look like to get the most accurate result
- https://www.bitcoin.com/guides/bitcoin-cloud-mining-is-it-worth-it-and-is-it-safe – summarizes pros and cons of cloud mining
- https://blockchain.info/ – lists recently discovered blocks, with a counter that shows Bitcoin transactions occurring in real-time