Innovative solutions in Fintech are expanding at a rapid rate. Unlike our traditional brick and mortar bank structures, these solutions are neither constrained by geography nor time. Yes, we are talking about the godfather of cryptocurrencies, namely, Bitcoin.
The mainstream adoption of Bitcoin is rising. It is accepted as a mode of payment at major retailers such as Dell, Starbucks, and even Microsoft. It has even remained one of the most searched terms on Google year after year. Moreover, the technology, blockchain, behind this masterpiece, has found its application in nearly every sector.
The popularity of Bitcoin is rising. More and more people are exploring different ways to get their hands on the currency. However, when one Bitcoin is worth more than a few thousand dollars, not everyone can afford a bulk chunk of Bitcoin investment. But, the protocol of Bitcoin is such that it allows alternative methods to invest in it.
We are talking about Bitcoin mining.
In this comprehensive Bitcoin mining guide, we are going to explore what is Bitcoin mining, why is it needed and how to mine Bitcoins.
What is Bitcoin Mining?
Before the advent of Bitcoin, many attempts at digital currencies were made. However, they faced a fundamental issue of double-spending. Anything digital can be easily duplicated. In the case of digital currencies, the same token can be created twice and used again.
Until Bitcoin!
How Does Bitcoin Mining Work?
The underlying protocol of Bitcoin is decentralized. There is no central body, like a bank, that processes and verifies transactions. Then, you might be wondering, how does the network validate transactions and ensure that the same Bitcoin is not being used again?
Each second, a number of transactions are made within the Bitcoin network. Miners pick up these transactions and begin the process of verifying each one of them. This is done through a process known as ‘Proof of Work’, wherein miners solve computational mathematical problems. This means that in order to solve the computational problem issued by the Bitcoin network, miners have to verify transactions. One lucky miner that is first in solving this problem, receives a block of reward as Bitcoins. As mentioned before, this whole process of solving the puzzle and receiving Bitcoin as rewards is known as proof of work.
Bitcoin mining ensures that the decentralized network remains honest and subsequently, the miners are incentivized to successfully carry out the process.
The Bitcoin network processes about 7 to 10 transactions per second. Miners pick these transactions and begin the process of solving the problem. Every 10 minutes, one miner is awarded the block containing Bitcoins.
Even as it sounds, Bitcoin mining does not require excavation equipment to dig deep in search of Bitcoins. Instead, it is carried out by hardware equipment like CPUs and GPUs. Miners are the people behind the hardware equipment that verifies transactions and attempts to solve mathematical problems through its processing power.
Bitcoin Mining Rewards
Bitcoin mining has gained remarkable popularity over the last decade. Large corporations have built huge mining farms to specially carry out mining activities for Bitcoin. Furthermore, special mining equipment pieces, with massive computing power, are also available on the market now.
Why has Bitcoin mining become so desirable?
Well, primarily because the supply of Bitcoin is limited to 21 million. After which, no new Bitcoins can ever be produced. This makes Bitcoin all the more valuable. Bitcoin mining is a way to earn huge rewards for the cryptocurrency in one-go.
We understood that when a miner solves a computational problem, a reward of Bitcoin block is awarded. This block of reward has changed over time. In 2008, when Bitcoin was first invented, a block contained 50 Bitcoins. The Bitcoin network is such that this reward gets halved every 4 years or 210,000 blocks. This means that in 2012, the reward of a block is reduced to 25 Bitcoins. In 2016, this reward was further halved to 12.5 Bitcoins. Now, in 2020, the Bitcoin halving will yield a reward of 6.25 Bitcoins per block.
The last Bitcoin block that will mark the 21 million Bitcoin will be in the year 2140.
How to Mine Bitcoins?
Now, that we have understood what makes Bitcoin mining a favorable option among investors, let’s further explore how to mine Bitcoins and what are the options available in the market.
Essentially, arriving at the correct solution of the computational problem is much like guesswork. The more the competition, the less are the chances of winning a Bitcoin block. Moreover, the faster your processing power is, the more chances there are of you winning the reward.
Over the years, Bitcoin mining has grown increasingly competitive. While it is possible to indulge in Bitcoin mining by setting up hardware equipment right in the four walls of your home, it is not profitable. Hence, investors now prefer either joining a mining pool wherein resources (hardware and software) and rewards are shared among the group. Alternatively, methods of cloud mining have also emerged, wherein you basically invest in a large mining company with renting your hardware equipment.
Whichever route you basically decide to go, the basic steps in Bitcoin mining remain the same.
Step 1: Create a Bitcoin Wallet
The first step is to get a digital wallet where you can safely and securely store your Bitcoins. A Bitcoin wallet allows you to send and receive Bitcoins to and from your wallet address.
A wallet is accompanied by a public and private key that allows you to access the Bitcoins stored inside. Your public key is a string of letters and numbers representing the address to your Bitcoin wallet. Similar to a bank account number, you hand out your public key whenever you want to receive Bitcoins. A private key is essentially your Bitcoins. You lose your private key or if it gets in the hands of someone shady, they are as good as gone.
There are a variety of wallet options currently available in the market for you to store your Bitcoins. Hardware wallets, like Trezor or Ledger, allow you securely store your Bitcoins in an offline manner. Alternatively, if you want easy accessibility, you can consider storing your Bitcoins in a software wallet, such as Exodus.
Step 2: Choose a Graphics Card or Join a Mining Pool
Bitcoin mining at the beginning of its invention was done using domestic computers in the sanctuary of one’s home. But, today, you will not acquire any Bitcoins through these methods and low processing power.
In order to have higher computational power, GPU (graphics processing unit) cards have become popular. Commonly used for video games, these graphic cards provide better functionality and higher speed for Bitcoin mining as compared to CPUs (central processing units).
Nowadays, Bitcoin mining is conducted through specialized hardware equipment known as Application Specific Integrated Circuit (ASIC) chips. These functional chips are built specifically for mining Bitcoins. They carry huge processing power and are much faster than normal CPUs. Additionally, they are also expensive piece of hardware to invest in.
Furthermore, you also need to take electricity costs into account. An efficient Power Supply Unit (PSU) will effectively reduce electricity costs.
Bitcoin Mining Requirements
The below mentioned are the common list of the necessary equipment that you will require for Bitcoin mining:
- GPU graphic cards or ASIC mining chips
- Motherboard
- Constant electrical power supply
- Internet connection
- Temperature monitoring equipment
- Coolants or air conditioner, if mining is carried out in hot weather.
Join a Mining Pool
The competition in Bitcoin mining has scaled up after cryptocurrencies gained attention. Mining, even with the best ASIC equipment, will still not yield higher profits since a single machine cannot compete with large mining rigs built with multiple ASIC chips. Hence, a new method has evolved – Mining pools with a combination of miners.
In a mining pool, individual miners contribute their computing power to the group. According to the computing power resourced, the miner receives subsequent awards. The rewards are typically low but consistent. Hence, nowadays, instead of buying and setting up a mining rig, people prefer investing in a mining pool. Note that miners have to pay a fee ranging from 0% to 2% to the operator of the pool.
A large percentage of the Bitcoin mined is done by the mining pools. At some points in the history of Bitcoin, almost 80 to 90% of the computing power has been on the account of mining pools. Some of the famous options available of a mining pool available in the market include Slush Pool and Bit Miner.
Cloud Mining
This mechanism involves mining of Bitcoin without having to spend money on hardware equipment, finding a suitable location or setting up the mining farm.
Basically, you invest in Bitcoin mining by investing a chunk of your money in a company. These corporations allow you to participate in the process of Bitcoin mining by opening an account and paying the money upfront. This gives better accessibility to Bitcoin mining processes without putting a restraint on geographical locations.
The amount of ‘hashing power’ you receive depends upon the money you invested. The profits or your share would be equivalent to the allotted hashing power.
This is a favorable option for those who want to acquire Bitcoins through mining without having to set up mining rigs. Some common cloud mining providers in the markets include Hashflare and Genesis Mining.
Step 3: Install Mining Software
After you have your wallet, hardware equipment and the chosen mining pool in place, the next step involves installing software that basically connects you to the Bitcoin network. This software program runs on your computer.
The software program establishes a connection to the network, thereby delivering work to the miners, collecting results, and adding up the information on the Bitcoin blockchain. Additionally, the software further enables monitoring of miner activities, hash rate speed, processing power, temperature, etc.
Depending upon your OS, you would need to download and install a software client that establishes a successful connection to the Bitcoin network. Once the download is complete, you are basically a node, among thousands of nodes, in the Bitcoin ecosystem.
One of the available Bitcoin software clients in the market includes Easy Miner. It is simple to set up and is compatible with Windows and Linux.
Finally, you need to test your connection and mining capacity by further establishing a private connection.
Step 4: Start Mining Bitcoins
With all the systems in place, you can effectively begin mining your own Bitcoins. If you have joined a mining pool, fill in your information about the wallet address and you can start earning steady rewards of Bitcoins.
Concluding Remarks
In this guide on Bitcoin mining, we have explored the basics of Bitcoin mining, its role in the network, how to mine Bitcoins, and the options currently available.
Aside from a miner’s perspective to acquire Bitcoins through this process, Bitcoin mining also ensures that the network remains honest. The more the miners, the more the security of the Bitcoin network.
Day by day, the widespread adoption of Bitcoin as a currency is growing. Over time, it has gained value; in terms of price as well as in its underlying protocol. Further, the limited supply of Bitcoin makes it all the more valuable in the future. For a common man, it is difficult to invest in Bitcoin due to its high price as well as its volatility. Bitcoin mining does provide an easy and secure option to invest in this cryptocurrency. Additionally, the growing choices available in the market has further made it relatively easier to invest in Bitcoin mining.