The discovery of gold nuggets in the Sacramento Valley in California sparked the Gold Rush. A total of $2 billion worth of precious metal was extracted, and the population of California spiked from a modest 1,000 to a bustling 100,000 people. These early gold miners couldn’t even begin to imagine the digital treasures that people would mine over 160 years later.
Once considered an unknown and unproven currency, the cryptocurrency bitcoin is accepted by major retailers, everywhere from Home Depot to Zappos and Dell. In fact, the value of a bitcoin surged past $1,000 this year, which is the first time it’s reached such heights since 2013.
One bitcoin miner, Eric, has been bitcoin mining since 2010. After early success, he made the bold decision to quit his well-paid job as a software engineer to devote all his time to extracting bitcoins. He accumulated 2,500 bitcoins, a quantity valued at about $2,875,000 today.
Eric’s story is an outlier, yet as bitcoins gain popularity, interest in mining this cryptocurrency is rising. But where should you start? Here’s a quick rundown to inspire your bitcoin mining efforts.
To understand bitcoin mining, you must understand the inner workings of this cryptocurrency. The bitcoin is not tied to any country or economy. Instead, it’s 100 percent decentralized and powered by math using complex algorithms that run on powerful computers.
A key element to the success of this currency is ensuring its accuracy and the methodical release of additional currency over time. Mining accomplishes both tasks as miners discover and obtain bitcoins by completing specific tasks.
People send bitcoins frequently over the bitcoin network. For example, Joe may purchase a DVD player from Bob for an agreed price, but there must be a way to record and validate the transaction. The network completes the tasks by collecting all transactional data created within a specific period and placing it on a list, which is also known as a “block.”
A miner’s job is to confirm the accuracy of transactions and write them into a general ledger, where there is a list of all blocks (also known as a “block chain”). As a result, there is a detailed list and confirmation of each transaction that takes place in the network. This data is constantly updated and provided to everyone who participates so they understand what is happening.
Key takeaway: Bitcoin miners are key to the success of this cryptocurrency because they verify transactions, ensuring the integrity of the network.
How to mine bitcoins you ask? When a “block” of transactions is created, bitcoin miners initiate a process that confirms its accuracy. They take this block and apply a mathematical formula, turning that initial sequence into something much shorter. The outcome is a more compact sequence and truncated patterns of letters and numbers that is also called a “hash.”
Each new block is produced using the hash of the block before it. This is one way the accuracy of the block is confirmed. This process creates a “wax seal,” which says this block and the one before it is accurate. Let’s say you decided to tamper with the block. If so, everyone would know instantly because of this process – and it would be spotted as a fake. Here is a quick breakdown of the mining process.
Miners are not trying to verify only a single transaction – they are working to verify many. All transactions are locked into boxes with a virtual lock. Miners are running software to locate the “key” that opens that lock. Once the computer finds it, the box is opened, the transaction is verified and the miner receives 12.5 bitcoins.
However, completing these tasks is not easy. It’s like finding a needle in a haystack. In fact, the estimated number of attempts to find the correct key is about 1.7 billion, and a bitcoin reward is given out about every 10 minutes. Key to success is having the right tools in place.
Key takeaway: During the mining process, people work to verify transactions and ensure their accuracy. This process is not easy and uses complex mathematical formulas. Once the miner completes the process, the bitcoin network gives him or her a nugget of gold of 12.5 bitcoins.
First, you need a bitcoin wallet. This wallet is basically an encrypted online bank account that holds what you earn during the mining process. In addition to the wallet, you also need the right tools – and those tools have changed significantly over the past few years. Here is a quick breakdown.
CPU/GPU bitcoin mining. During the early years, miners relied on simple CPUs to mine bitcoins. At the time, these basic desktops were powerful enough to complete the required tasks. But later on, cracking the codes became harder, and miners found a more robust alternative: GPUs on graphic cards.
GPUs were nearly 100 times faster than CPUs, and when it comes to bitcoin mining, faster translates to greater success. GPUs could also be used to mine a variety of cryptocurrencies, not just bitcoins. But as time progressed, faster and even more robust options emerged, and many miners do not use these options today.
FPGA bitcoin mining: A field-programmable gate array (FPGA) enables mining hardware manufacturers to purchase chips in volume and customize them for bitcoin mining prior to putting them into their equipment. Since this technology is customized specifically for the task of bitcoin mining, it usually performs much better than CPUs and GPUs.
ASIC bitcoin mining: Application-specific integrated circuits (ASICs) are the newest thing in bitcoin mining. They’re designed to mine bitcoins at crushing speeds and use very little electricity – which is a bonus for miners with high electricity bills slowly eating away profits.
These chips, however, must be designed for the specific task, which does make them time consuming and expensive to produce. Yet many bitcoin miners find the investment is worth the speed. In fact, ASIC devices can run up to 2 terahashes/sec.
Key takeaway: Much of the hardware used in the early days is no longer relevant for bitcoin mining; it’s simply too slow. However, newer options have a large price tag. There is a third option that reduces cost while increasing speed (more on that in a minute).
Depending on what type of equipment is selected, you also need software to make it work. If using GPUs and FPGAs, a host computer is needed that runs a standard bitcoin client and the mining software. Here’s a breakdown of each and their roles.
Standard bitcoin client: This type of software allows you to interact with the bitcoin clients. Basically, it relays data between the miner and the bitcoin network.
Bitcoin mining software: The bitcoin mining software is at the heart of successful cryptocurrency mining because it tells the hardware to do the hard work, passing along transaction blocks to solve. Most of the time, you’ll need software for the ASIC miner as well, but manufacturers of some new models say they don’t require it.
All this equipment and software can make the cost of mining bitcoin add up. In the previous example, Eric, who earned $191,000 through bitcoin mining, estimates that he spent $50,000 in graphic cards, CPUs, circuit boards and memory. He also deployed water-cooling technology to run his mining operation at optimal efficiency. These costs do not include electricity, which can add up quickly.
Collectively, miners are estimated to use about 3,176 megawatt hours of electricity per day. With mining becoming increasingly difficult and expensive, many miners are joining pools to ease the expense and workload.
Key takeaway: Bitcoin software helps the hardware do what is required to mine bitcoins, making it a crucial piece of the mining setup.
Remember when we talked about the expense and cost of bitcoin mining, and another option that lowers that cost? Mining pools provide one such solution. These pools formed when mining became more difficult and it could take years for slow miners to generate a single block. They needed a method that would help pick up speed, without too much expense.
Miners decided that if they pooled resources and joined forces, they could generate blocks faster and receive block rewards on a more consistent basis, rather than every few years. However, all mining pools are not created equal, and they use a variety of operational methods. Here are a couple of examples:
Pay-per-share: This method offers instant payout for each share that is solved by a miner. Payment is made from the pool’s balance and a miner can withdraw his or her money immediately. This method offers low risk for miners and transfers a large amount of the risk to the pool’s operator.
Proportional: This method allows miners to earn shares until the pool finds a block (which is basically the end of the mining round). After that, each user gets a set number of shares within the round, based on a specific formula.
Bitcoin pooled mining: This is known as a “slush system” because older shares from the beginning of a block are given less weight than more recent shares. This method minimizes the risk of cheating the mining pool system by switching pools during a round for maximized profit.
This isn’t a complete list of methods, but it shows that before joining a pool, it’s important to do a little research on the payout method used. Ask a few questions, such as how do they calculate payments? What is the method they use? And how long has the pool been in existence? Getting answers to these questions will help you better understand the best option for your situation.
Key takeaway: More people are mining for bitcoins, and the mining is getting more difficult. It’s harder today than several years ago to uncover the “gold.” Mining pools make the task easier by allowing miners to pool their resources for greater efficiency.
Now that you understand the various ways to engage in bitcoin mining, it’s important to answer one single question: Is this activity profitable and what is the price of bitcoin?
A variety of factors contribute to the profitability of bitcoin mining. For example, the cost of bitcoins, bitcoin mining hardware and electricity all play a role. The bitcoin mining community is also growing quickly. New miners have a learning curve when getting started, especially with a mathematical algorithm designed to make it more difficult as more miners try to harvest the “gold.”
A block of coins is awarded about every 10 minutes, so the difficulty depends on how many miners are working. The more miners working during that period, the less chance of reward. In addition, the reward decreases each year. So when Eric started mining, the payout was 50 bitcoins per block, and now it’s 12.5.
But while the jackpot has decreased for those mining today, opportunity still exists. Having the right tools in place, however, can increase your success and overall profits.
Genesis Mining offers you a smart and easy way to invest your money. Our solution is suitable for those who are new to the world of cryptocurrencies, as well as for cryptocurrency experts and large-scale investors. Genesis Mining is the world’s first large-scale multi-algorithm cloud mining service, offering an alternative to those who would like to engage in bitcoin and altcoin mining. Be part of the bitcoin community today.