If you’re new to Bitcoin, chances are you might have heard about “miners” and “bitcoin mining.” With the U.S Dollars, the government prints more money when it wants to increase supply. For cryptocurrencies like Bitcoin, they are mined. What is bitcoin mining and how does it work exactly?
In this guide, we’ll look into what Bitcoin mining is and how you can get in on it.
What is Bitcoin Mining?
Bitcoin mining is the process involved in verifying Bitcoin transactions and adding them to the asset’s blockchain. It’s a form of auditing job that involves securing the network and minting new Bitcoins.
The people who conduct this activity are known as “miners,” and they’re required by code to solve sophisticated mathematical puzzles before a new block of transactions is added to the blockchain. Every time a miner adds a new block, they are rewarded with compensation called “block reward”, which is 6.25 Bitcoins.
The block reward is halved every 210,000 blocks (or roughly every 4 years). At the next halving event, this reward will be cut by half once more… and on and on.
How Bitcoin Mining Works
Bitcoin mining used to be quite easy back in the day, but with the Bitcoin network becoming more saturated and complex, mining has also grown in difficulty.
Primarily, Bitcoin miners work as auditors. They ensure that all transactions processed are legitimate and blocks are added to the blockchain in good time.
Currently, a block of transactions is worth about 1 MB. For a miner to receive mining rewards for a block of transactions, it has to be the first to solve the mathematical puzzle and then add the block to the blockchain.
So, PoW is more like guesswork. However, considering that we’re looking into 16-digit hexadecimal, the number of guesses you need to arrive at a precise number could run into the trillions. Evidently, no one has the time or capacity for that work.
This is where mining machines come into play. These machines lend their computing power to solving the math problem.
Is Bitcoin Mining Legal?
The legality of bitcoin mining depends on your location. Some governments have come to recognize the threat that Bitcoin poses to their financial and monetary sovereignty. This has led to several crackdowns on the sector, including mining.
Some examples of countries where mining is illegal include Pakistan, Ecuador, Egypt, Algeria, and Nepal. However, Bitcoin mining is legal in most countries or at most, unregulated.
Bitcoin Mining Requirements/Profitability
The first and most critical tool for mining is a specialized application-specific integrated circuit (ASIC) miner. A new ASIC can cost anything between $1,000 to $5,000, or more. But, that’s not the only consideration to run a mining operation. ASICs consume immense amounts of electricity – a cost that could easily exceed that of the device consuming power.
You will also need Bitcoin mining software to join the Bitcoin network. These aren’t as expensive as the hardware – in fact, some options are even free.
To determine whether Bitcoin is profitable, you will have to consider the following:
- Cost of hardware
- Possible software costs
- Electricity costs
- Current Bitcoin value
- Possible taxes
At first glance, you might think that Bitcoin mining is a profitable endeavor. Bitcoin is currently worth over $45,000, so mining a block and getting the reward will net you over $285,000. But, you’ll need an army of mining rigs to be profitable. Bitcoin mining’s electricity consumption can be pretty extensive. Data from the Congressional Research Service shows that a single ASIC can consume as much power as 500,000 PlayStation 3 consoles. To run a mining outfit from home, you’ll need to pay incredible sums.
In fact, the cost of electricity will most likely be the most significant determinant of mining’s profitability for you. This is why miners work with mining pools.
Understanding Mining Pools
Initially, Bitcoin mining was set up for individual efforts. People could use their home devices to mine Bitcoin.
However, with cryptocurrencies gaining more mainstream attention, mining became more competitive and less profitable to run from home. Looking to be first, several people got more advanced tools – Graphics Processing Units (GPUs). These tools, which were designed to run high-power games, can easily be retrofitted to work for mining instead.
Then came Application-Specific Integrated Circuits (ASICs), which are now the industry standard. These provided even greater power than GPUs, providing bitcoin miners with a higher degree of profitability. By delivering greater computing power at less energy consumption levels, these devices have phased out CPUs.
As their names suggest, mining pools concentrate the capacity of different miners together. These miners combine their processing power to mine Bitcoin, and they share the rewards based on how much power they contributed.
Mining pools can be incredibly profitable. However, the fact that they share the rewards means that you will be making less than you would if you went solo. It’s also important to note that you will most likely have to wait a long while to get your reward. Still, when you consider the money you save from not having to operate your mining rig, you’ll find that these pools aren’t such a bad idea.
How to Pick a Bitcoin Mining Pool
When choosing mining pools, keep the following in mind:
The first point of consideration will be the pool’s compatibility with your mining device. Some pools don’t allow CPUs, while others have specifications for miners running GPUs and ASICs.
Similarly, a pool might not support the software you’re used to. So, if you want to join them, you need to consider the mining software being used. You will need to contend with requirements for things like network connection speeds and identity verification in extreme cases. All of these are simple entry barriers that can make your selection more complicated.
Task Assignment Mechanism
Mining pools assign tasks to miners using different methods. Say pool A has stronger miners while those in pool B are comparatively weaker. A pooling algorithm running on the server should be able to distribute tasks across the available subgroups.
One simple way to do this will be to assign more challenging tasks to pool A and easier tasks to pool B. This way, the pool can achieve communication frequency uniformity to different miners with varying capabilities across the network.
Pool Transparency by Operator
Mining pool operators are also obligated to promote transparency and trust among pool members. Some of these transparency measures could be real-time dashboards that miners can view to ascertain their share of the pool’s resources.
When selecting a pool, look out for these systems and join pools that operate transparently.
If your hardware is on the low end of the computing power spectrum, then avoid pools with higher payout thresholds. Your contribution to the pool will be less, and you’ll get the lower portion of earnings. So, you will have to wait longer to hit the payout threshold and get your payment.
Pool Stability and Robustness
You should also assess the pool’s security infrastructure. Do they have an open or a secure connection? What are their vulnerabilities to DDoS attacks and other security threats? How do they deal with possible hacks? Consider questions like these to ascertain their safety.
Pool Fee Structure
While some pools charge a nominal fee for miners to use their services, others don’t charge at all.
However, you will need to be careful with pools’ payout formulae, which might come with some hidden charges. For instance, some zero-fee pools could only offer this free service for limited periods and charge later.
The Possible Risks of Bitcoin Mining
While it might seem like a risk-free endeavor, mining isn’t without its dangers.
For one, mining is a financial activity. You could purchase thousands of dollars worth of equipment and shell out even more due to electricity consumption and not mine a single block at the end of the day. Mining pools help to mitigate this risk, but you still run the risk of falling victim to a scam – or the pool getting hacked.
While bitcoin mining can be profitable and lucrative, it comes with several considerations and risks. The activity is now mainstream, and entrance is more challenging than it used to be.
However, with the right considerations and a sufficient capital base, you should be able to get it done.