What is Bitcoin Mining?
Want to be a Bitcoin miner? Looking for more information on Bitcoin blocks? With Bitcoin price crossing $19,000 in December 2017, the largest cryptocurrency grabbed the headlines throughout the world. From being mostly an unknown digital currency until 2015 to being one of the most searched terms on Google in 2017 and offerings like Bitcoin debit card, the cryptocurrency has come a very long way. But when searching for news related to Bitcoin, people often come across the term ‘Bitcoin mining’.
Image Source: Genesis Mining
One of the many different ways through which people can profit from Bitcoin is by mining it. But what is mining? Is Bitcoin mining profitable? How is it done? Find answers to all of these questions and much more in this post.
Glossary of terms related to Bitcoin mining
While the glossary is generally written at the end, it is important to go through these terms now to better understand the things mentioned below.
- Bitcoin- A cryptocurrency which uses the Bitcoin ecosystem for its generation. Bitcoin price is very volatile and it is currently trading around $8,500.
- Blocks- Individual links in transaction verification chain. All the outstanding transactions are added to a block which is verified at regular intervals.
- Hash function- A computer algorithm which runs the input data through calculations and shifts the processes before any output, known as hash, is generated.
- Satoshi– This is the smallest unit of a Bitcoin which is equal to 0.00000001BTC. 1BTC=100,000,000 satoshis.
- Virgin Bitcoin- A Bitcoin that has never been obtained before.
What is Bitcoin mining?
If you are new to mining cryptocurrencies or still in the phase where you regularly search for what is Bitcoin, understanding the process might seem a little complicated. In simple words, it is just a process through which you can obtain Bitcoin. For most of the people, the only way to obtain Bitcoin is by buying it from an exchange. Through mining, you don’t buy Bitcoin to obtain it. Rather, you’d use your computer to run a software and you’ll be rewarded for your efforts in Bitcoin.
But is it that simple? Not really! To understand the mining process, you first need to know how Bitcoin is generated.
Generation of Bitcoin
If you’ve been following Bitcoin news for some time then you might already know that the total number of Bitcoin that can be generated is only 21 million. However, not all of these 21 million coins are available in the market. Mining is the process through which a new Bitcoin is generated. The reward that you receive for mining is a virgin Bitcoin which has never ever been available to anyone. It has not been purchased or sold by anyone and you are the first person to obtain it.
Image Source: Pinkjooz
When you run a Bitcoin mining software, you’ll basically crunch a lot of numbers and will be rewarded with Bitcoin in return. But as it is a digital currency, there needs to be a mechanism to ensure that people don’t just copy the coins and spend it again. Eliminating the problem of double spending is one of the many benefits of the blockchain technology.
The mechanism in place is known as ‘proof-of-work’ or POW function. The currency uses hashcash POW in its mining algorithm. When you’ll run your mining software, you’ll try to create a POW which will make your work unique to bring in the reward. But in terms of the electricity consumed and time spent, Bitcoin mining is very costly. But while generating a POW as per the pre-defined parameters is costly, verifying it is not as expensive or time-consuming.
So, if a single computer and mining software is consuming a lot of time to generate a POW, can’t we use multiple computers to run the software and generate the POW faster? Yes, this can be done! You can add more hardware to improve your mining power and generate POW faster. But this is where the mining difficulty comes in.
What is Bitcoin mining difficulty?
The Bitcoin network has a difficulty parameter which is adjusted every two weeks. This ensures that even if new people start mining the currency, the generation rate is still static. In short, the more the number of miners, the harder it is to generate new Bitcoins. The difficulty can be up to an extent where standard computers just cannot generate any coins at a profit. The money that you’ll spend on electricity will easily outweigh your generated Bitcoin’s value.
So, why are people still mining Bitcoin if it is not profitable? This is because rather than using a standard computer, they use high-end Bitcoin mining hardware. The modern mining hardware are way more powerful and faster than a normal CPU and consume lesser amount of power. But it is important to know that such hardware can be very expensive. For instance, the very popular AntMiner S9 is priced around $2,000.
Now that you have some idea about how the mining process works, don’t you want to know if you’d actually be able to profit by mining Bitcoin? Let us have a look.
Whether or not Bitcoin mining is profitable for you depends on how much money you are planning to invest. There are many different factors like the mining hardware you use and electricity cost where you live that determines whether or not Bitcoin mining can be profitable for you. While the Bitcoin mining app and software are free, these are the factors that you should focus open before deciding to mine Bitcoin.
Let us try to have a clearer idea with the help of the same AntMiner S9 mentioned above.
The mining rig offers a mining rate of 14 TH/s. You can use a Bitcoin mining calculator to know how much profit your rig can generate as per the current mining difficulty. As per the calculator, you can earn around 0.03600399BTC in a month with AntMiner S9.
However, this profit does not include the cost of the mining rig, electricity cost, and the pool fee. What is pool fee? (Read below). If all of these fees, excluding the hardware cost, are included as per the current BTC/USD rate of around $8,500, you can earn around 0.022BTC. Use a Bitcoin converter and this becomes $180 in a month. This means, in a year you can earn around $2,100. But this still does not include the cost of the mining rig which in this case is around $2,000. So, after a year of mining with AntMiner S9, you might break even or lose some money.
The outcome can significantly vary as per the changes in mining difficulty, Bitcoin rate and the cost of electricity where you are mining.
So, if you are planning to buy a mining rig and start mining Bitcoin at home, things might not go as planned. You probably won’t make a lot of money unless the electricity costs are very low where you live or you invest in some heavy-duty mining rig.
Does that mean you cannot mine Bitcoin at all? No, there are a few other options that you can consider.
Cloud mining is a process through which you can rent a mining hardware or some portion of hashing power and have someone else mine Bitcoin on your behalf. For instance, if I am mining with 10 rigs, I’ll rent out the hashing power of one of my rigs. I’ll charge money to a person who wants to rent the hashing power and in return, the person will get the BTC that the rented hashing power generates.
In short, with cloud mining you can earn BTC on the rent you pay without really buying any mining rigs or running any software. Needless to say, the service provider will deduct the electricity costs and other fees before giving you a profit.
Steps to cloud mine Bitcoin
- Select a mining company
There are now several mining companies that offer cloud mining packages. Make sure that you check the reviews and ratings of the company before selecting as there have been several scams in the past. Only invest your money if you are 100% sure that the company is genuine and transparent.
- Select a mining package
After selecting a company, the next step is to select a package. Packages are divided on the basis of the hashing power. The higher the hashing power is, the more expensive is the package. Generally, more expensive packages offer better returns or at least deliver profits faster. However, this might not always be the case.
Most of the companies offer an assumption of how much a package would generate in a month. Use this as a reference point to make the decision. But note that such assumed calculations can change on the basis of the Bitcoin value in future.
- Select a mining pool
No matter if you are mining Bitcoin on your own or through cloud mining, it is highly recommended that you join a mining pool. While it is optional if you mine on your own, it is mostly compulsory with cloud mining companies.
Image Source: BitcoinMining
The mining pools are nothing but large groups of Bitcoin miners who work together to solve the blocks. The reward earned after solving is then shared with every member of the pool. If you do not join a mining pool and mine Bitcoin on your own, there is a possibility that you might end up mining for several months without earning any BTC.
There are several Bitcoin mining pools and some of them are more popular than others. Some popular options are BitMinter, Eligius, CK Pool and Slush Pool.
When you’ve selected a mining pool and paid for your package, the cloud mining would start within a few days and you might see some BTC coming to your account within a few weeks. Some of the mining companies also offer daily payouts. Once you have some considerable amount of BTC in your cloud mining account, you can then send it to your Bitcoin wallet.
Search on the web and you can find several wallets that let you save Bitcoin. Just like everything else in the process, make sure that you select a wallet very carefully. Some of the mining companies also allow you to reinvest your BTC for a higher hash power. Or you can just check the Bitcoin chart and sell your BTC on an exchange.
Pre-sale of mining contracts
A lot of new mining companies offer pre-sale of their mining contracts at a discounted price. As someone who is new to Bitcoin mining, it is advisable to avoid such contracts as you’ll be purchasing a contract which will not begin for several weeks or months.
No matter how good the profit is that they are promising, know that everything is in the air until the time the mining actually begins. There is no guarantee that the contracts will ever begin, when they’ll begin or whether they’d be profitable. There have been several such instances in the past where people lost a lot of money.
If you are interested in cloud mining, stick to reputed companies like Genesis Mining as they have been around for a long time and thousands of people use their services.
No one ever believed that a digital currency like Bitcoin would be worth thousands of dollars some day. Bitcoin price today is close to $8,500 and it might break its last year’s high of $19,000 in future. While it might be late to start mining Bitcoin now as the right time was at least 3 years ago, it is still not too late to begin.
Now that you know what Bitcoin mining is, whether or not it is profitable in 2018, and a lot of other important things that one should know about mining, you are now wise enough to make the right decision. Consider the pros and cons of all the options that you are considering and you can earn a handsome amount if not millions through Bitcoin mining.