Bitcoin Mining has been a buzz word ever since the Bitcoin Prices flew high a couple of years ago. But what exactly is Bitcoin? Is it just another currency, or is there something else to it? What is meant by Bitcoin Mining? Is there a reason you should also try your luck at Bitcoin Mining in 2020? Let’s find out.
What is Bitcoin?
Bitcoin is a cryptocurrency, which is entirely in digital form. It exists in the form of records of transactions distributed by the of a technology called Blockchain. It was introduced to the world by an unknown person or a group of persons that go by the alias Satoshi Nakamoto.
Its ledger started on the 3rd of January, 2009, more than ten years ago. Although the Bitcoin whitepaper was published in October 2008, the first Bitcoin transaction was completed on 12th of January, 2009.
In 2008, Occupy Wall Street accused some big banks of ripping off their customers by misusing the borrower’s money. They also claimed that the banks were charging unnecessarily high transaction and interest fees and duping clients.
Bitcoin pioneers hence wanted to put the seller in charge and decentralize the system. They created a world-changing cryptocurrency whose transactions were transparent, corruption-free, and secure.
A cryptocurrency is a digital currency whose existence lies on a technology called Blockchain.
To put this concept in simple words, a blockchain is a system where transactions and records are spread across multiple machines on a peer to peer network.
It uses cryptographic blocks, each having an encrypted hash of the previous block on the chain. Thus, blockchain technology makes the cryptocurrencies completely decentralized. Hence, it is more secure than traditional central server-based transaction system.
Bitcoin transactions are pseudonymous. This means that the transactions are carried out using the receiver’s virtual addresses, which can’t always be tracked down to the real-world users.
The transactions done using the Bitcoin are irreversible. Once the transaction is complete, no one can trace it back or reverse it. The cryptography involves a private key for every transaction. It is long enough so that even the best computers in the world would take some million years to crack it, making it practically un-hackable.
Do we need permissions to store Bitcoin?
Cryptocurrency storage and mining are practically permission-less. Yes, you may be barred from exchanging cryptocurrencies like Bitcoin by paying real currencies in some countries. But storing Bitcoins, mining them is completely permission-less. You don’t need to pay anyone to keep them, like real-world bank accounts.
Bitcoin and other cryptocurrency transactions have become faster because of the rise in the number of blocks in the Blockchain. Transactions are now confirmed seamlessly in a couple of minutes, and they are entirely secure.
How to obtain Bitcoins?
You can buy Bitcoins (or portions of a Bitcoin called Satoshis) by spending real money, at any Bitcoin Exchange for a nominal transaction fee. However, not all countries and currencies are supported. As the Bitcoin Exchange rates keep on changing due to the buy/sell transactions that keep occurring, you can keep an eye on the prices to turn this investment into profit.
You can buy Bitcoins when they are cheaper and sell them when the prices of Bitcoin at the Bitcoin exchange spike up. Yes, there are risks involved in this approach. There is no guarantee that you will at least get your money back, but you will get some returns for sure– unlike mining.
You can also be a seller that accepts Bitcoins as a currency and get Bitcoins transferred to your wallet. From many multi-national companies to some private hospitals-there are a lot of stores that accept Bitcoins as a currency of exchange.
Your Business and Bitcoin
If you have your own business, you can start accept Bitcoins in exchange of providing products or services.
You can start services that involve users transacting in cryptocurrencies. Online casino is an example of such a service. You can put some transaction fee or other charges on the services you provide and make the users pay you with their cryptocurrencies like Bitcoin.
This does not require any special efforts towards Bitcoin Mining, neither it involves many risks. The APIs for Bitcoin are available, which you can use to develop the platform.
One of the most talked methods to get Bitcoins is to Mine them. Let’s explore what is meant by Bitcoin Mining and How it is done a little further.
Unlike real-world currencies that can just be printed when more is needed, Cryptocurrencies need to be Mined to come into existence. Bitcoin Mining requires powerful dedicated hardware and hence, electricity to run the equipment.
In general terms, Bitcoin Mining refers to confirming pending transactions by including them in the Blockchain.
It protects the neutrality of the network as there is no pre-established relationship between Bitcoin mining hardware that confirms the transaction and the parties involved in the transaction. It also allows multiple computers to agree on the state of the system, making it more secure. Mining also enforces a chronological order in the Bitcoin Blockchain.
For the transactions to be confirmed, transactions must be spread across Blocks in the Blockchain. Each block thus created for a new transaction should follow the strict cryptographic rules that will be verified by the Bitcoin Network.
The rules prevent previous blocks from being modified, and hence there is no issue of all subsequent blocks being invalidated. If that was to happen, that is, any past block was edited or changed, all the subsequent blocks will have invalid data and the transactions will be gone forever.
For each contribution to the transaction confirmation done by any miner, he or she gets issued with a part of Bitcoin as transaction fee as well as a subsidy of the newly created coins. This is how new Bitcoins are introduced in the Blockchain of Bitcoin.
The number of confirmations done on a transaction by different miners determine the security of the transaction. If the confirmations are 0, the transaction has not been confirmed yet. For small transactions that do not cross the $1000-mark, one confirmation is said to be enough.
For bigger transactions though, there needs to be three to six confirmations for the transaction to go through. If the transaction does not reach the requirement of confirmations, it is put on hold. Six or more confirmations are said to be very secure for a transaction.
How difficult is it to Mine a Bitcoin for Miners?
Mining a block of the Bitcoin Blockchain is difficult because of the different Cryptography rules each new block has to pass. The SHA-256 hash of the block’s header must be lower than or equal to the target for the introduced block to be accepted by the network. The target is the 256-bit number that all bitcoin clients share. Lower the target, more difficult it becomes to generate a new block.
To put it in simpler words, hash of each new block to be created must start with a certain number of zeroes (for it to have hash less than the target). The probability of finding a hash by calculation that starts with that many zeroes at the beginning is very low.
Hence it takes a lot of attempts to pass this simple verification of hash being less than the target. If the hash generated by your Bitcoin mining computer matches the criteria, you win and get paid with Bitcoins as stated before.
The reward for introducing a new legitimate block on the Bitcoin Blockchain is called the Block Reward.
The block reward is halved after every 210,000 rewards.
Mining Difficulty vs Rewards
The mining difficulty was 12.5 in 2018 and is expected to become 6.25 sometime in the year 2020. At this rate of halving, and due to the fact that the total number of Bitcoins in the world will saturate at 21 million, Bitcoins will become scarce.
After that, the prices of Bitcoins will increase due to scarcity, and for miners it will become very difficult to mine more Bitcoins as well.
The 21 Million Bitcoin limit has been set to control the inflation.
The Difficulty is frequently used when talking about cryptocurrency mining or the probability of finding a hash that matches the criteria. It is updated about two weeks to maintain the mining rates at a constant. Current Difficulty is around 9 trillion.
This means that the probability of successful block introduction is one in 9 trillion attempts to introduce a new block in the Bitcoin Blockchain.
The real Difficulty that the miners have to face is that not only they need to generate the hash less than the target. But they also need to be the first ones to do so. Hence competing with millions of miners around the world decreases the rewards even further.
Longest valid chain rule
To simplify this chain rule, let us consider an example where two miners from different parts of the world fight for the new block and their introduced block gets certified by the Bitcoin network at roughly the same time.
Now if both of them are kept, there would exist two different versions of Bitcoin at the same time!
The solution to this problem is sorted out by the longest chain rule. So whichever block gets appended faster and becomes a longer chain, that block is kept.
The shorter chain is discarded, and no rewards are paid to the contributors of the miners that contributed to the shorter chain. This increases the difficulties in Bitcoin or any other Blockchain based cryptocurrency mining even further.
Complete Guide to Bitcoin Mining
To join the Bitcoin Blockchain and get rewarded for mining Bitcoins, you need a powerful computer that can calculate hashes at a great speed. For the purpose mining Bitcoins or any other cryptocurrency, you can set up a mining rig- a powerful hash calculator that will be dedicated for this task.
You can also use cloud platforms to deploy virtual machines for Bitcoin mining. Alternatively, you can rent part of the hardware that has been dedicated to Bitcoin Mining.
We will see, in detail, each method that you can implement to mine Bitcoins.
Method 1 Using ASIC Machines for Bitcoin Mining
ASIC machines are specially designed computers for the sole purpose of calculating hashes at very high speeds, to mine the cryptocurrencies.
Originally, Bitcoin creators intended the Bitcoin mining to be done on CPUs. However, the miners discovered that it is more efficient to do the mining on graphics cards or GPUs. Graphic cards have now been surpassed by ASICs or Application Specific Integrated Circuits designed for mining Bitcoins.
All you need for mining Bitcoins using ASICs is a cheap electricity source and a thermally regulated data center. You can deploy several such ASICs at such data centers to make the mining profitable.
Using ASICs, if you feel that the hashing power that you have may not land you a reward, you can be a part of any global Bitcoin mining pool. That way, the probabilities of earning rewards will increase.
When a reward is earned, all the contributors in the mining pool get the reward distributed among themselves with respect to their contribution to the total hashing power of the mining pool.
Method 2 Use your own personal computer for Bitcoin mining (Don’t)
In the world where the ASICs have high hash rates or the number of hashes it can perform per second, the personal computers have practically no use as a mining machine. They are way more inefficient than ASICs.
This is true especially if your PC was not built like mine. Why you ask? Find out here!
Just considering the electricity costs, the miner using personal computers as mining machines will lose a lot of money on costs. You need to understand the current Difficulty and the number of miners using ASICs all around the world.
Even after spending thousands of dollars on the electricity bill, you will earn only a few pennies worth of Bitcoins. We are not even considering the cost of a stable and fast internet connection required here. Hence, we feel that using your personal computers for mining purposes is not a good idea at all.
Method 3 Rent virtual hardware to mine Bitcoins
This is definitely the only option today that looks somewhat promising to turn Bitcoin Mining into actual profit. Sure, using your own ASICs to mine Bitcoins can earn you up to 10-30 dollars a day, but there is some upfront investment in the form of ASIC machine itself as well as electricity and internet connection costs.
In the case of cloud services providing their computing power to be utilized for mining Bitcoins, this issue becomes insignificant. There is a registration fee sometimes, and a lot of packages to choose from.
Depending upon how much you can afford to spend, you will most probably find some package or the other that meets your needs.
To mine Bitcoins using this method, you need to follow these simple four steps:
Step 1 Pick a Bitcoin mining company
Although there are many companies that allow their users to be a part of their mining group and rent the hardware, there are some companies like Genesis Mining that are very popular. It completely depends on your choice to choose the company, but you need to make sure that you are allowed to do so as well.
Step 2 Choose a Bitcoin mining package
The companies allow various kinds of packages for their user to be a part of their Bitcoin Mining process. The cost of rent depends on the current Bitcoin Exchange Rate, the Difficulty, and the hashing power (in hashes per second) you wish to rent.
You must note that the Bitcoin Rates, as well as the Difficulty, keep changing all the time. More investment does not always mean turning into profit quicker.
Step 3 Pick up a Bitcoin mining pool
Once the package has been selected, there are many pools of miners you can be a part of. All the miners in a mining pool are spread across the world, and creating a pool of miners is a way to insure rewards. Once Block Rewards are obtained by a pool, the rewards are distributed among the contributors of the pool.
The distribution is done with respect to the hashing power that you have calculated towards the mining pool that you were a part of. For example, if your pool gets rewarded with 12.5 Bitcoins and you contributed 1% of the total hashing power of the pool, you get 0.125 Bitcoins as the reward.
Choosing a mining pool can be a little tricky; you don’t want to divide your rewards among too many people. At the same time, mining pools with a lesser number of miners have lower probabilities of earning any rewards as well.
There are various positives and negatives about every mining pool, but any of the established and trusted mining pools with low entry fees should be your best bet.
Step 4 Select a wallet to store your Bitcoins in
Once you have earned some Bitcoins or fractions of Bitcoins, you need to store them securely in Bitcoin wallets. You can use any of the trusted and renowned Bitcoin Wallet providers, or use hardware wallets that store your data offline at a secure place. Storing the data offline ensures security from online hackers.
You need to protect the wallets with a strong password that will be difficult to guess for hackers. But there still exists a threat of keyloggers hence securing your hard-earned Bitcoins is a very important task.
This concludes the methods that you can opt for if you decide to mine Bitcoins out of enthusiasm or as a means to earn some money.
Bitcoin mining used to be solely done on personal computers in the early days of the Bitcoins. They were easy to mine as well, due to low difficulty and a lesser number of miners that used to compete against each other for Block rewards.
This has changed a lot over the past decade since the Bitcoin was launched. Bitcoin mining is no more a child’s play, and you require a highly capable mining computer to earn a little portion of Bitcoin. Even if you find highly efficient hardware to do so, electricity prices as well as the cost for high speed stable internet come into the picture and spoil the deal.
Even after considering all this, you decide to put some investment into Bitcoin Mining, you will be competing against well-equipped Miners from China with cheap electricity at their disposal. Needless to say, Bitcoin Mining on own hardware is a lost cause today.
It does not mean that Bitcoin investment is not possible today. There are many other ways you can own Bitcoins and profit from them. You can just buy Bitcoins at a Bitcoin Exchange and wait for the next hike in prices to turn that investment into profit. You can accept Bitcoins in exchange for delivering products or services to customers. You can develop websites like online casinos and let the users gamble with their cryptocurrencies, and charge them some fee while doing so.
To conclude, we feel that Bitcoin mining is not for everyone today, even more so for those who look to mine it using their own hardware. It is definitely a fascinating technology though- no doubt!