What is Bitcoin Mining?
Bitcoins come into existence through a process called Bitcoin mining; it is essentially the backbone of Bitcoin and other cryptocurrencies. Since Bitcoin is decentralized, there is no centralized authority to control the supply and demand of the currency. The supply and demand of Bitcoin is dependent on the activity of its miners. Miners utilize special software to solve difficult math problems that take considerable electricity in exchange for Bitcoin; these miners also get rewarded via fees for validating transactions.
The reward that Bitcoin miners get for mining new Bitcoin decreases every 210,000 blocks (or about every 4 years) and is referred to as the “reward halving” or “halvening”. This reduction in reward coincides with the reduction in supply of Bitcoin that is built into the code of Bitcoin. Sometime around the year 2140, when the full supply of 21 million Bitcoin has been mined, the only way miners will be able to earn Bitcoin is through validating transactions.
Currently there are two methods of cryptocurrency mining: personal mining, which involves buying your own mining hardware; and cloud mining, which lets you essentially rent the hardware and have someone else does the technical dirty work for you. Today we will mostly focus on personal mining—as it is the more tends to be the most practical of the two options.
The History of Bitcoin Mining
In the early days of Bitcoin, mining did not require specialized hardware. Any garden-variety PC that you could pick up on the clearance rack was most likely sufficient. Back then, desktop computer’s CPU and GPU were up to the task and you could mine blocks of Bitcoin with a regular old PC and people used the same run-of-the-mill CPUs that their mother used to play solitaire or to do the family budget. Of course, it was not initially apparent that this was a profitable activity. With the huge increase in value of Bitcoin in recent years, this luxury afforded to early adopters lasted a bit longer.
Since then, the mining difficulty has been greatly increased since that time. Nowadays, Bitcoin mining is quite expensive pastime, due to the vast amount of resources required — particularly electricity — both for the cost of the hardware itself and also the electricity driving the CPU and the cooling required to keep them at a reasonable temperature to avoid overheating. This makes personal mining much less practical than it was in the past; with some people even questioning it is even worth doing anymore.
After a while, miners began to experiment with GPUs (graphical processing units). These are processors that were designed for graphics cards. Since these processors were made to specifically designed to handle the heavy mathematical calculations that manipulating and displaying high-resolution graphics requires, they performed much better than standard CPUs in performing the difficult math problems required for mining Bitcoin.
After GPUs, processors specifically designed for the calculations inherent to mining were developed. These processors, called ASICs — short for Application Specific Integrated Circuit — are the standard today for Bitcoin mining processors. Due to the fact that all other miners are using this hardware to compete for processing Bitcoin block rewards, attempting to mine with any less will probably lose you money.
Methods of Mining
If you have never used Bitcoin before, the first step will be getting a Bitcoin wallet. This will enable you to securely store your Bitcoin, whether mining, purchasing or earning it.
Great, now you have a wallet; however it is never too early to start thinking about how you are going to secure it. Enabling two-factor authentication will go a long way toward making your wallet more secure and its starting to become an industry standard; however, of course it is not foolproof. Keeping your wallet stored offline as much as possible is advisable as well. A wallet that is online at all times, such as a software wallet for example, is a much easier target than one that is online only when needed. This fact explains the popularity of hardware wallets and even paper wallets.
It is standard to join a mining pool, whether you are cloud mining or buying your own hardware. Just as the name suggests, mining pools group their processing resources together to improve their rate of success for mining a Bitcoin block and share in the rewards (however small they might be). This allows smaller miners an opportunity to compete as part of a larger operation who can simply dwarf them in processing power should they choose to mine alone.
The methods of mining are as follows:
What Is Cloud Mining?
Cloud mining is essentially renting the computing power necessary to mine Bitcoin from a third party because you may not want to deal with the headaches of owning physical equipment—buying it, keeping it cool, and making sure it continues to run properly. However, If you do this, then make sure to really do your research prior to signing up for an expensive mining contract.
Cloud mining has been awash with scams and bad pre-sale contracts that also take your money through unexplained fees. For example, pre-sale means that you pay up front before the hardware arrives and is available for use. (1) it’s hard to pin down exactly when the new hardware will be available (2) you have no way of knowing that the contract will be profitable in the future.
Due to the high cost of the specialized equipment required, personal mining as common as it once was. You can no longer use your Grandma’s CPU and GPU for mining, so ASICS will be setting your wallet back a pretty penny.
One upside for personal mining is that there is a greater potential for reward, while a disadvantage is the large upfront investment necessary and the risk of not yielding a profit to make up that investment.
Whatever you decide to mine with (be it ASICS or the dusty graphics card you tripped on in your parents garage) your first step will be the purchase of mining hardware. Some of the factors that will come into play when considering mining hardware include the following:
1. Hashing Power
Assuming you actually want to be competitive in receiving Bitcoin block rewards, an ASIC miner is required and will set you back a few thousand dollars. Every ASIC miner has an associated hash rate, which reflects the miner’s overall performance. These rates are often measured in TH/s (Terra hash per second) and sometimes PH/s (peta hash per second).
In the past, mega hash per second (MH/s) and giga hash per second (GH/s) were the industry standards, but today’s technology has left those standards in a galaxy far far away (Yes, that was a shameless Star Wars Plug). You can buy used equipment, however, mining tends to be a punishing process for computer hardware (you know, from the heat and being ran non-stop at max computing power).
Just like every cell phone or laptop you have ever bought, the evolution of technology continues to accelerate at an exponential rate while the funds in your wallet do not. Bitcoin mining difficulty continues to accelerate and it is likely that a new rig may be developed that essentially leaves your current rig in the dust.
If you have only ever used a computer of regular person reasons that don’t include massive amounts of computing, may not think much about how efficient your computer is or isn’t. Once you start mining Bitcoin, with its intense rig cooling requirements, the cost may make you take notice.
Today’s hardware is constantly being improved to be more efficient; ASICs are being the subject of such innovation that makes the circuit processing more efficient (from a processing and a cooling perspective). Another argument against buying used equipment is the fact that older hardware will inevitably be less efficient.
That finally bring us to cost; the main prohibitive factor as to why most refrain from entering the Bitcoin mining arena. Not only must you purchase an ASIC mining rig, you must also purchase a power supply, cooling fans, replacement hardware, etc. On top of those non-recurring expenses you have monthly recurring costs such electrical, cooling, internet and other stuff.
Another decision that will need to be made is whether to join a mining pool. Joining a pool enables you to get more rewards, but also requires you to pay fees to the pool. Mining on your own will give you greater rewards, but it can take longer to see a return on your investment (much longer if it is a huge mining pool).
Some Additional Costs that will need to be considered include:
The cost of the electricity that drives the ASICs that mine your Bitcoin is significant. Bitcoin mining is very processor-intensive and requires large amounts of electricity. In the past, some miners have been able to take advantage of low-cost electricity, like our buddies in Washington or Oregon enjoy. However, due to public awareness regarding the energy intensiveness of Bitcoin mining, local municipalities and energy cooperatives are working to eliminate these loopholes.
Since it is no secret that mining is just going to get more difficult from here, there has been increased discussion in the crypto community regarding the sustainability of polar powered mining operations. This is obviously expensive requires even more money up front; but in the long run, this seems to be the way crypto mining will be heading.
Your computer will get really hot while mining due to the vast amount of processing required. Heat not only reduces efficiency of computer hardware, it also has the potential to destroy it all together is left unchecked. Since you will be paying thousands of dollars for this stuff perhaps a ventilation solution is something that will need to be considered.
Cooling costs money and depending on how your utilities are set up, typically, this uses electricity as well. Almost all ASICs are rated for the temperature conditions that they will optimally function in and it is wise to keep these figures in mind if you want your rig to operate efficiently and last a reasonable amount of time. If the temperature of your miner exceeds the levels of temperature in which it can perform well, the efficiency of your rig goes down (or catch on fire depending on how hot you let it get).
To give you some perspective on the significance of cooling costs, many mining operations are located in very cold climates, because the reduced cooling burden the miner will experience ( such as Iceland). Many ventilation and cooling systems have been crafted by those who are truly dedicated to keep their mining operations cool. Augmenting the airflow in your mining area and removing the heat produced by the rigs (along with other elements of thermal dynamics) are the fundamental forces you will be dealing wrestling with.
Since you are dealing with a decentralized, distributed network, it is vitally important to get the latest updates as soon as possible. This means that you should have a robust Internet connection where your mining rig resides. If you are part of a mining pool, the actual bandwidth is not so important as its speed and reliability. If you are more of a solo mining guy/girl, ensuring that you are in consensus with the Bitcoin network will be doubly important.
Increasing Mining Difficulty
The difficulty in mining Bitcoin increases every 210,000 blocks (or about every 4 years); this event is referred to as “the reward halving” or my favorite “the halvening”. Basically, as the mining difficulty increases, so too increases the amount of effort that must be expended to obtain the same amount of Bitcoin .
This has a deflationary affect on the Bitcoin economy; by reducing the supply of Bitcoin less is released into circulation as demand continues to grow, thus making it more valuable.
How Bitcoin Price Influences Miners
I think we all can agree that Bitcoin’s price has been volatile to say the least. Just like any mining operation, one of the main factors that affect profitability is the value of the commodity being mined. While unpredictable, there is something sexy about the wild price swings miners endure; an increased Bitcoin value could make you the next Bitcoin millionaire. However, a sharp price decrease could make a once profitable mining operation a failure.
With all that said, it is really up to you. Your personal beliefs about the future of Bitcoin and its future price have a great affect on whether Bitcoin mining will be a worthwhile venture.
Popular Mining Hardware Brands
Currently the largest Bitcoin mining hardware companies include Halong Mining and Bitmain; some of the most powerful mining ASICs they produce are the Dragonmint 16T (Halong Mining), and the Antminers S9, R4 and S7 (Bitmain).
While Bitmain has practically been dominating the Bitcoin mining scene for a while now, Halong Mining has entered the industry in a bold way claiming that it had the most powerful Bitcoin mining ASIC on the market in their Dragonmint 16T. Big players in the Bitcoin community expressed doubts that Halong Mining could perform as promised, but shortly after the Dragonmint 16T shipped Halong Mining unseated the Bitcoin hardware monopoly Bitmain had.
Halong Mining has released other miners since then, some of which is described as world’s most efficient Bitcoin mining hardware. Before purchasing, please do your research to make sure that all your hardware components are compatible with each other.
What Software to Use
Different mining software have different features so finding the one that best fit your needs may take some experimentation. Some popular mining software includes CGminer, BFGMiner, BitMinter and BTCMiner. The CGMiner supports overclocking, monitoring, fan speed control and more. BFGMiner offers fan speed control and overclocking as well, and also supports PCI bus ID device reordering and vector support. BitMinter is part of a mining pool that you will need to sign up for in order to use their software.
Setting Up a Personal Miner
All ASIC miners are similar to each other and the instructions for setting one up will differ slightly from the instructions for setting up another.
Step 1: Chose a miner, and take note of its power requirements. For whatever power requirements your miner has, you will need one or more power supplies to deliver the necessary wattage.
For example, an Antminer T9 uses 1,576 Watts, meaning that you will need power supplies the total wattage of which adds up to 1,576; this can be achieved by using two 800 watt power supplies or one power supply that delivers 1,600.
Step 2: After connecting the power to the miner, you can then turn on the unit. These power consumption ratings come with an error of +/- 7%, so always allow for some buffer in case your hardware runs on the high end of the range.
Step 3: Set up your miner; it is similar to setting up any network device. The miner will either be hard-coded to a specific IP address or will be configured to use DHCP (Dynamic Host Configuration Protocol), in which case you will need to find the IP address that was assigned by your router to the miner. In the case of DHCP, you will need to look at your router or DHCP server’s interface to find what IP address was assigned.
Step 4: Open a web browser to the assigned IP address. The username and password for the miner will normally be provided in the documentation that comes with the device.
Step 5: Log in successfully and configure the settings on the device. If you are joining a mining pool, this is where you would specify that by giving the IP address for the mining pool. After configuration, you can save the settings and begin using your device.
One good piece of advice is to start small and scale up from there. As with any business venture, keeping your costs low is key to being successful when liquidity is scare.
Well there you have it; more than most people will ever know or will ever need to know about Bitcoin mining!
Due to the increased mining difficulty increases that have occurred over the years many small individual miners have been pushed out of the market due to obscene energy bills and lack of capital to scale. Large mining farms ran by venture capital or large institutions are beginning to dominate the mining scene with no signs of slowing down operations anytime soon.
Needless to say, for the majority of people the profitability of mining Bitcoin is fairly low; however, that does not mean it’s impossible. If after hearing this and you are still willing to put in the hard work it takes to succeed; then go for it!
Should you seriously be considering starting a Bitcoin mining venture of your own, just as any profitable business, maximizing your return on investment is key and controlling costs is a huge part of that. Having a solid business plan identifying how you can minimize cost while maximizing block reward is crucial. Ultimately, whether you look Bitcoin mining as a fun hobby or a more involved way to invest in Bitcoin, only you can determine if starting your own mining operation is a good idea.