Bitcoin mining is quite an interesting process, let's find out why.
Often the first time you hear about bitcoin, one of the first questions you may have will be about bitcoin mining. It can seem quite mysterious at first; however, it's quite an interesting process and one that has grown to an impressive size and scale across the world. To find out why people mine bitcoin, how bitcoin blocks are mined, and other things related to bitcoin mining, read on.
What is Bitcoin Mining?
Bitcoin mining is a costly process that results in the production of newly available bitcoin. Miners use their mining equipment to perform complex computing tasks that reward them while helping the bitcoin blockchain function. When you mine bitcoin, you can earn cryptocurrency without directly buying it; however, unless you have access to free power, time, and equipment, a lot of work is still involved.
The simplest way to think about bitcoin mining is as a complex puzzle with multiple people trying to solve it, where each round lasts around 10 minutes. The winner of each round is then rewarded with brand new bitcoins as each new block is solved. The winners can then enjoy their bounty of new coins after blocks have been mined.
How is Bitcoin Mined?
While once CPU mining was practical and anyone with even an old laptop could effectively mine bitcoin themselves, both as bitcoin has grown, so has the mining power of the bitcoin network. As the computing power put to this widespread effort has grown, so has the bitcoin mining difficulty. While you still could technically mine bitcoin on a lower-powered or older device, the chance of you being rewarded much (if at all) is extremely low, even when participating in a larger group to share your rewards, otherwise known as a bitcoin mining pool.
After CPU mining became less practical and it became near impossible to solve blocks fast enough, GPU mining using consumer-grade graphics cards to mine bitcoin became common. Still, this phase was not to last either as ASICs rapidly proliferated in the bitcoin mining scene.
What is an ASIC Miner?
ASIC is an abbreviation for the term application-specific integrated circuit, and if you have looked a little into bitcoin mining in 2020, it is likely something you have seen mentioned. What makes ASIC miners so effective as mining hardware is that they are designed to perform a specific task but accomplish that task exceptionally well, which is, in this case, bitcoin mining. You can think of an ASIC miner for bitcoin as a form of specialized computer, but instead of being able to write a letter or send an email, what it does do is focus on mining bitcoin with the highest efficiency the device is capable, something that is a constant battle among the companies that produce ASIC miners.
As competition in the space of developing and releasing application-specific integrated circuit miners has increased, so has competition among bitcoin miners themselves. The more people that participate in mining on the bitcoin network, the more difficult it becomes by design. The stronger the hardware in use becomes, the higher the baseline for financially viable bitcoin mining becomes. Hence, to be profitable mining bitcoin in 2020, ASIC miners are an essential tool. At a larger scale, this can result in warehouses full of these specialized devices hashing away constantly.
ASIC miners are often aged out of mining in a few years or less as the hash rate per generation released can jump quite a lot. As bitcoin mining uses quite a lot of power, this results in requiring miners with a high hash rate that is at least comparable with the average of other bitcoin miners to be competitive enough to generate a profit after considering costs for power and other expenses.
What is the Purpose of Mining Bitcoin?
While the rewards for bitcoin mining may be quite apparent with the temptation of new coins as each block is solved on offer to miners across the world in the form of a block reward, how mining helps the bitcoin network can be less evident at first glance. Bitcoin miners are the backbone of what keeps the bitcoin network secure; those taking part in this segment of the bitcoin ecosystem could be considered auditors of the bitcoin network alongside the all-important node operators. As the mining hardware works hard to solve fundamentally complex math puzzles, they also verify transactions with each new block as a combined force.
Bitcoin miners defend against double-spend attacks or other attempts at nefarious bitcoin transactions, which could be detrimental to the bitcoin network and its users.
Does it Cost Money to Send Bitcoin?
Technically, no. However, to get your bitcoin sent in a reasonable time frame realistically, the answer is yes. The amount it will cost you to send bitcoin will depend mainly on how quickly you want your bitcoin transactions to be confirmed and how congested the bitcoin network is at any one time. Most bitcoin wallets will provide either a static fee which is calculated to ensure your transactions should confirm in a reasonable time frame, or give you the option to set a custom fee for the transfer.
When selecting your own fee, try and make sure that the rate is in line with the average at the time to ensure you aren't waiting long periods until eventually your transactions make it into a block and are confirmed. Providing a fee that is at least on average with the rest of the transactions making their way into the most recent blocks will help ensure that you can get your transaction confirmed relatively quickly.
What is a Double Spend Attack?
While not only a type of attack that could be targeted at bitcoin and many other types of cryptocurrencies, the double-spend attack, if successfully performed, would result in a loss of trust as coins could be "spent" twice. Every bitcoin on the bitcoin blockchain is kept track of on a public ledger called a blockchain; a bitcoin should only ever be in one place at any one time. However, in a successful double-spend attack, the same amount of bitcoin could be used to pay for goods or services in two different places, which is against how bitcoin is supposed to function. To successfully perform a double-spend attack, you would need to control more than 51% of the bitcoin network, sometimes referred to as a majority attack or 51% attack. If you control more than 51% of the bitcoin hash rate (a measure of the amount of work being performed by miners at any one time), you could try to trick the network for a short time.
Currently, the viability of a double-spend attack on bitcoin is very low, as the industry behind bitcoin mining has grown to a massive scale with a vast amount of computing power pushing it forward, and with the proliferation of ASICs would be a hugely cost-prohibitive endeavor even to attempt. While other forms of potential attacks have been discovered or theorized, most of these rely on the person receiving the bitcoin to not wait for adequate confirmations (verification) of a bitcoin transaction. An example of some attacks that work this way is the Finney Attack or a Race Attack.
What is a Mining Pool?
Bitcoin mining pools are something that almost all bitcoin miners will be involved with to help increase their chances of getting rewarded for their work supporting the network by hashing away at blocks and verifying bitcoin transactions. Mining pools in cryptocurrency are formed when a group of miners combines their computing power to increase the odds of finding the solution to a block and getting the block reward. As multiple miners are participating in bitcoin mining when using a mining pool, when a reward is found, it is then be spread between participants broken down into pieces that match the mining power contributed to the effort by each participant.
While you can mine bitcoin on your own, it makes sense to join a mining pool in most cases to reduce the risk of not solving a block yourself. While this reduces the block reward you would receive, it can be extremely difficult to solve a block on your own, even if you own several miners. Mining pools are how individual bitcoin miners can compete on such a colossal scale with the larger mining community. However, if you did manage to solve even one block on your own, the entire block reward would go to you, which in the year 2021 is 6.25 BTC per block after being reduced recently from 12.5 during the recent bitcoin halving.
What is Proof of Work?
Proof of work, commonly abbreviated as PoW, is the consensus algorithm that helps keep the bitcoin network secure. For bitcoin miners, proof of work is why you mine bitcoin in the hope of gaining a block reward. Proof of work can be thought of as a difficult, costly, and time-consuming task, which is on purpose as this is where the work aspect comes into play.
The Proof of work consensus mechanism is used to confirm transactions (such as the specific number of bitcoins sent somewhere) and as a way to add new verified blocks to the bitcoin blockchain. Thus, PoW helps maintain an accurate public ledger as it grows and moves forward.
How Does Difficulty Change?
As mentioned earlier, the more hashing power and miners putting their resources and energy into bitcoin mining, the harder it gets. Production of new bitcoin is regulated, ensuring only a set amount is produced on average over time, never to exceed the planned total of 21 million bitcoin. Bitcoin mining difficulty measures how hard it is to find a new block compared to the easiest possible circumstances with no competition.
Every 2016 blocks (or roughly every two weeks), the difficulty is adjusted so the number of bitcoins produced on average over any particular period will be around the same. This difficulty adjustment every two weeks helps ensure that one block is produced with a suitable amount of work to ensure that the network remains stable. Ideally, reasonable incentives are there for miners and help ensure that the number of bitcoin produced remains at the desired rate through time, not to exceed the end goal of 21 million coins or at a faster rate than planned.
What Happens to Bitcoin Mining When there is 21 Million Bitcoin?
While currently, bitcoin miners are incentivized by block rewards, eventually, this won't be the case. Every four years, the reward produced by each block is reduced and ultimately will go to zero. However, as fees are generally also paid to send bitcoin, it's expected that one day this will be the sole reward for miners and, with enough growth and bitcoin adoption over time, will be sufficient.
What is Hash Rate?
When deciding on purchasing bitcoin miners, it is essential to consider the hash rate that the device can produce. The hash rate is a measurement of the number of calculations that can be performed per second. You may see a measure of hash rate associated with the amount of mining occurring on the bitcoin network itself, keeping track of things at a mining pool, or in the case of mining hardware, showing how competitive the device would be to use. As competition is fierce in bitcoin mining, hash rates are significant to keep track of if you are a bitcoin miner or looking to buy a bitcoin miner yourself.
There are many online tools, such as hash rate calculators that can assist you in determining the profitability of your mining hardware. Just beware that over time the potential hashing power of your mining rigs or ASIC miners will reduce, and sometimes this drop can be more drastic suddenly if a dramatically more powerful ASIC miner or graphics card hits the market with greater efficiency or hashing power. Additionally, you’ll often find many second-hand bitcoin miners available for sale or a large number of used graphics cards on the market; however, these are usually not ideal as the profitability of these devices is likely low or non-existent by the time they on sale.
How Much Electricity Does Bitcoin Mining Use?
The amount of power used to mine bitcoin is constantly changing. As miners come and go and machines are added and removed, the energy used by the network fluctuates. The University of Cambridge has a fantastic bitcoin electricity consumption index that can help give some good insight into the specific stats.
While people are sometimes skeptical regarding the use of electricity used to power miners, it has increased interest in greener energy sources. These can end up being cheaper than more traditional sources of power. Miners are continually looking at resources like solar power and excess power generation as potential sources for energy that could also help keep their costs low and mining profits high.
Finding the cheapest power for cryptocurrency mining helps keep profits high and enables you to be competitive even as your hardware begins to age. Often after the hashing power of your equipment, the second most significant factor in determining your bitcoin mining profitability will be the cost of energy available to you.
Thanks to the uptake in things like solar power, cryptocurrency mining is becoming more accessible in this regard, especially for those cryptocurrency miners that operate mining rigs from home on a smaller scale as they can often supplement their energy costs well and power some of their mining rigs and other equipment with energy provided by rooftop solar. However, for those larger-scale cryptocurrency miners that operate larger mining farms, you'll often see these somewhat pooling in regions where power is less expensive for obvious reasons. There are other factors to consider, though, such as local regulations for cryptocurrency.
What is a Bitcoin Mining Farm?
As bitcoin has grown in recent years, so have the industries involved in it. While there has been an enormous surge in the various aspects of the fintech industry and many things involving bitcoin and other cryptocurrencies, many have looked to mining on a larger scale as a business model. As a result, Bitcoin mining farms have grown to be quite massive in some cases, and while they vary in size, this term is increasing in use as more businesses and independent miners opt to start farms to mine bitcoin on various larger scales.
Often mining farms will be more prolific in areas with access to well-priced power and tend to be more prevalent in areas where the government is supportive or at least tolerant of the cryptocurrency space. Attainable and reasonable regulations and cheap power are the perfect places to set up bitcoin mining. However, due to bitcoin becoming more widespread, you can see mining farms for cryptocurrency or purely bitcoin popping up worldwide. In addition, many businesses operate entirely around the mining of bitcoin and other types of cryptocurrency, which is unlikely to go away even with the ebbs and flows that are regularly seen in the space, no matter how dramatic they can be at times.
Thanks to the proof of work algorithm, profitable mining operations are always likely as those that turn off their miners, making it more profitable for those that remain thanks to the difficulty adjustment built into most proof of work cryptocurrencies like bitcoin. The changing difficulty is why you still see mining happening even with a dramatic decline in the price of a cryptocurrency. However, operating a mining farm is a competitive business that relies on planning and constant attention to detail to ensure your profit margins are enough to sustain the business. While it may seem like an easy thing to do initially, large-scale bitcoin mining can be quite a lot of work.
How Does Cloud Mining Work?
When people ask, "what is cloud mining?" it can often result in strong opinions by those who have been in the crypto community for a while. Cloud mining results from businesses looking to take their bitcoin mining in a different direction. Perhaps by setting up a mining farm and renting out the miners to other people. Purchasing mining contracts allows users to share in the hashing power of a mining farm while not having to own any mining hardware themselves. The problem with bitcoin cloud mining is that sometimes these companies may claim to have mining hardware they don't, and the profit line can be pretty slim as well, which could result in you even losing money if the deal isn't a good one.
While some companies focus more on hosting bitcoin miners for clients, often cloud mining is not looked upon fondly by many in the bitcoin community, but that is not always the case. If you consider cloud mining bitcoin, ensure you do your research and make an informed decision, don't ever jump into something, especially if it sounds too good to be true.
Unfortunately, even for bitcoin miner hosting companies operating above board, there has been a significant issue with scams in the cloud mining space that trust can be a problem. In cryptocurrency, it's always better to verify than to blindly trust.
What are Bitcoin Nodes?
One of the lesser-known parts of the bitcoin network is the bitcoin node. For beginners to bitcoin mining or bitcoin, in general, it can be easily assumed that this is some form of a cryptocurrency miner; however, this is not the case. Instead, a node on the bitcoin network has three primary functions: sharing information, keeping a record of confirmed transactions, and following the rules.
Bitcoin nodes are a vital part of the bitcoin network and help ensure that once transactions are mined, there were done so correctly, and all transactions that are performed in a way the bitcoin network accepts are passed on to the rest of the network. If you were trying to send more bitcoin than you currently have available, if the bitcoin node received your transaction, it would not be passed onto other nodes as it would not be valid. Think of nodes in bitcoin as the safety inspector at many workplaces; they ensure that everyone is following the rules and help people transact safely.
While having a full node of your own is ideal when dealing with important transactions or operating a large bitcoin business of your own, a web wallet will suffice for many people and bridge the gap between you and the rest of the network. Once a transaction has reached a node, it propagates outward to the rest of the network if it is valid; this helps each part of the network stay on the same page and agree about how much bitcoin is where and where it may be going at any point. As a bitcoin node is used to keep track of things in this way, this is why running a full bitcoin node yourself is sometimes preferred as it is the best way to ensure your transactions are performed correctly and you are receiving honest information from the broader network without relying on an intermediary, like a bitcoin web wallet or another service provider.
Running your own full node is a great project and can help you learn a lot about bitcoin while contributing to the security and the infrastructure that supports it. Bitcoin nodes are run by people worldwide on remote servers, laptops, desktop computers, and even tiny computing devices like a Raspberry Pi. Some node operators even go as far as to take advantage of satellites to sync their bitcoin node, allowing them to avoid even relying on the traditional internet infrastructure that would typically be required. In addition, using services like these bitcoin satellites helps increase redundancy further and provide access to bitcoin nodes to people worldwide that may otherwise not have had access due to network restrictions or other roadblocks.
How to Start Bitcoin Mining?
If you are interested in bitcoin mining, the most important thing you can do is research things thoroughly, including working out your various expenses and what hardware is available. If you find that bitcoin mining may be a little difficult for you, many people choose to mine altcoins instead, such as ethereum. However, mining ethereum and many other cryptocurrencies can often be performed quite well when using consumer-grade GPUs, which can be purchased from any suitable computer hardware supplier, making getting started far easier.
If you choose to look at GPU mining for altcoins, you can typically even decide to sell what you mine for bitcoin if that is what your end goal is to help you stack and accumulate some without mining it directly. That's not to say you can't buy your own bitcoin ASIC or a few to mine yourself at home; just beware that it is far more competitive and lacks the flexibility of GPU mining altcoins. If you do mine altcoins with a GPU, you can change between various coins that are the most profitable to make the most of your hardware for a longer time to come, giving you a better chance of not just reaching your ROI but getting some profit as well.
Bitcoin mining is an interesting activity that can not just be a fun hobby, side project, or large-scale business. How you get involved in bitcoin mining or the cryptocurrency community at large is solely up to you.