Getting into cryptocurrency mining is not very complicated for people with all the information about it. However, if you are new to the cryptocurrency market, you will find it complicated, and we will help with this. We will enlighten you about the complete steps of how to start the Bitcoin mining process. If you can understand the details carefully, you will be able to make more money out of the cryptocurrency market.
Bitcoin (BTC) is a cryptocurrency, a virtual currency designed to act as money and a form of payment outside the control of any one person, group, or entity. This removes the need for third-party involvement in financial transactions. It is rewarded to blockchain miners for the work done to verify transactions and can be purchased on several exchanges.
Bitcoin was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. It has since become the most well-known cryptocurrency in the world. Its popularity has inspired the development of many other cryptocurrencies.
These competitors either attempt to replace it as a payment system or are used as utility or security tokens in other blockchains and emerging financial technologies.
Bitcoin mining: Overview
Mining is the process that maintains the Bitcoin network and also how new coins are brought into existence.
All transactions are publicly broadcast on the network and miners bundle large collections of transactions together into blocks by completing a cryptographic calculation that is extremely hard to generate but very easy to verify. The first miner to solve the next block broadcasts it to the network and if proven correct is added to the blockchain. That miner is then rewarded with an amount of newly created bitcoin.
Inherent in the Bitcoin software is a hard limit of 21 million coins. There will never be more than that in existence. The total number of coins will be in circulation by 2140. The software makes it twice as hard to mine Bitcoin by reducing the size of the rewards every four years.
During Bitcoin’s early days, it was possible to almost instantaneously mine a coin using even a basic computer. Now, it requires rooms full of powerful equipment, often high-end graphics cards that are adept at crunching through the calculations. This can sometimes make mining more expensive than it is worth, especially when combined with a volatile Bitcoin price.
Miners also choose which transactions to bundle into a block, so fees of a varying amount are added by the sender as an incentive. Once all coins have been mined, these fees will continue as an incentive for mining to continue. This is needed as it provides the infrastructure of the Bitcoin network.
Understanding Bitcoin and Blockchain
Before understanding how Bitcoins are actually mined, it is important to understand the concepts of blockchain and Bitcoin.
Blockchain is like a general ledger, where all the cryptocurrency transactions are recorded. A blockchain is a kind of digital data structure that makes possible a ledger of transactions done digitally and shares it among a distributed network of computers. In short, a blockchain is a way of digitally documenting data on a distributed ledger.
Bitcoin is created entirely on a blockchain network, which tends to store and record transactions on a huge network of computers. Each block stores transactions, which are then added to the blockchain, only once it is verified and validated by miners. after this, it is impossible to make any changes to the transactions as it is now already on the blockchain.
Digital currencies such as Bitcoin use distributed ledger technology, which is a unique feature of blockchain technology as it ensures no records can be altered, and thus offers much better transparency of transactions. The Bitcoin blockchain network uses the latest cryptographic algorithm techniques of SHA-256, which is responsible for converting the data into a unique string of characters.
How does Bitcoin mining work?
Bitcoin mining leverages economic incentives to provide a reliable and trustless way of ordering data. It is achieved by creating a succession of blocks that can be mathematically proven to have been stacked in the correct order with a certain commitment of resources. The process hinges on the mathematical properties of a cryptographic hash — a way to encode data in a standardized manner.
Hashes are a one-way encryption tool. Hence, decrypting them to their input data is nearly impossible, unless every possible combination is tested until the result matches the given hash. So, how is Bitcoin mined?
Bitcoin miners cycle through trillions of hashes every second until they find one that satisfies a condition called “difficulty.” Both the difficulty and the hash are very large numbers expressed in bits, so the condition simply requires the hash to be lower than the difficulty. Difficulty readjusts every 2016 Bitcoin block — or approximately two weeks. This helps maintain a constant block time, which is how long it takes to find each new block while mining.
The hash generated by miners is used as an identifier for any particular block and is composed of the data found in the block header. The most important components of the hash are the Merkle root — another aggregated hash that encapsulates the signatures of all transactions in that block — and the previous block’s unique hash.
This means that altering even the tiniest component of a block would noticeably change its expected hash — and that of every following block, too. Nodes would instantly reject this incorrect version of the blockchain, protecting the network from tampering.
The Hash
At the heart of Bitcoin mining is the hash. This is a 64-digit hexadecimal number that is the result of sending the information contained in a block through the SHA256 hashing algorithm. This part of the process takes little time to complete—in fact, you can generate a hash in less than one second, pasting some content into an online SHA256 hash generator. This is the encryption method used by Bitcoin to create a block hash.
However, decrypting that hash back to the content you pasted is the difficult part: a 64-digit hash can take centuries to decode with modern hardware.
A hash might look like this (this is the previous paragraph run through a hash generator). If you change one value in that content, like switching one “t” to an “a,” the hash changes:
a54f83a5db7371eeefa2287a0ede750ac623e49a8ba29f248eb785fe0a678559
Here is the same paragraph, but the first word is misspelled as “Aa” instead of “At”:
fbfa33ff980d1492b3a9275a1eb945d89bd6b699ca19c3c470021b8f253654af
This is the number called the block hash. It is used in the next block’s header as part of the information run through encryption. Each block uses the previous block’s hash, which acts to chain them together, thus creating the term “blockchain.”
Target Hash
The target hash, used to determine mining difficulty, is the number miners are trying to solve for when they mine. This number is a hash generated by the network converted from hexadecimal to decimal form.
So, a block hash might look like this (block 786,729):
00000000000000000005a849c28eb24b8a5e04fcecc1ccb3eb2998e4730a456e
And the target hash looked like this (with a lot more zeros in front and behind):
0x1705c739
So, miners needed to generate a number equal to or less than the above number. It might look simple to randomly guess a number less than this, but because of the encryption, it isn’t. Block 786,729 used more than two billion nonces from one mining pool.
Mining
Bitcoin mining requires the mining program to generate a random hash and append another number to it called the nonce, or “number used once.” When a miner begins, it always starts this number at zero. The nonce changes by one every attempt — first, it’s 0, then 1, 2, 3, and so on. If the hash and nonce generated by the miner are more than the target hash set by the network, the attempt fails, and the miner tries again.
Every miner on the network does this until a hash and nonce combination is created that is less than or equal to the target hash. The first to reach that target receives the reward and fees, and a new block is opened. Once that block fills up with information (about one megabyte), it is closed, encrypted, and mined.
The Bitcoin network is made up of thousands of devices that mine 24 hours per day. Because the mining reward goes to the first to solve the problem, they are all competing. This competition led miners to create pools to gain an advantage over other miners because they needed more computational power to increase their chances of winning.
Proof-of-Work
The mining process is called proof-of-work (PoW). It takes a lot of energy and computational power to reach the goal of less than or equal to a target hash. The work done is viewed as the validation proof needed, so it’s called proof-of-work.
Confirmation
Each block contains the hash of the previous block — so when the next block’s hash is generated, the previous block’s hash is included. Remember that if even one character changes, the hash changes, so the hash of each following block will change. This secures the blockchain.
However, the block you closed and received a reward for isn’t yet confirmed. The block isn’t confirmed until five blocks later when it has gone through that many validations. With that said, it is possible to alter information in a block before reaching six validations. However, it is highly unlikely because the network must be controlled by someone attempting to change information for it to work.
Rewards
The reward for successfully validating a block is Bitcoin. In 2009, you’d receive 50 Bitcoins for mining a block. However, the block reward is halved every 210,000 blocks or roughly every four years. So in 2013, the reward amount declined to 25, and in 2016, it became 12.5. In Bitcoin’s most recent halving event, the reward was changed to 6.25.6
Another incentive for Bitcoin miners to participate in the process is transaction fees. In addition to rewards, miners also receive fees from any transactions contained in that block of transactions. When Bitcoin reaches its planned limit of 21 million (expected around 2140), miners will be rewarded with fees for processing transactions that network users will pay.
These fees ensure that miners still have the incentive to mine and keep the network going. The idea is that competition for these fees will cause them to remain low after halving events are finished.
How do you start Bitcoin mining?
Here are the basics you’ll need to start mining Bitcoin:
Wallet
This is where any Bitcoin you earn as a result of your mining efforts will be stored. A wallet is an encrypted online account that allows you to store, transfer and accept Bitcoin or other cryptocurrencies. Companies such as Coinbase, Trezor and Exodus all offer wallet options for cryptocurrency.
Mining software
There are a number of different providers of mining software. Many of them are free to download and can run on Windows and Mac computers. Once the software is connected to the necessary hardware, you’ll be able to mine Bitcoin.
Computer equipment
The most cost-prohibitive aspect of Bitcoin mining involves the hardware. You’ll need a powerful computer that uses an enormous amount of electricity in order to successfully mine Bitcoin. It’s not uncommon for the hardware costs to run around $10,000 or more.
How long does it take to mine one Bitcoin?
It takes around ten minutes to mine one BTC, although this is only true for strong processors. The Bitcoin mining hardware you use will determine how quickly you can mine.
How does Bitcoin mining affect the price of Bitcoin?
In most cases, miners sell a significant portion of their earned bitcoins to cover the costs associated with mining. These costs, then, contribute to the net sell pressure. The miners’ attempts to maximize profitability by holding or selling Bitcoin based on market momentum may have an impact on Bitcoin’s price volatility.
Here, the argument is that when the price of Bitcoin is rising, miners may attempt to hold longer in the hopes that they can extract more profit. This would result in less net sell pressure, leading to a faster rise in the price.
When the price of Bitcoin is falling, however, miners are likely to sell not only their reserves but also newly acquired bitcoin. This, in turn, would contribute to volatility on the downside.
Why mine Bitcoin?
In many aspects, Bitcoin mining is comparable to mining for gold. Crypto mining (in Bitcoin’s case) is a computer operation that creates new Bitcoin and tracks transactions and ownership of the cryptocurrency. Bitcoin and gold mining are both energy-intensive and can produce significant financial rewards.
Therefore, you can mine BTC to earn profit/rewards. Some BTC miners build Bitcoin mining pools by combining their efforts with other miners. Groups of miners who work together have a more significant chance of earning rewards and splitting the profits. In addition, members of a mining pool pay a fee to be a part of the pool.
If your focus is not on money, you might want to mine Bitcoin if you enjoy playing with computers and learning about this new technology. For example, while doing Bitcoin mining configuration, you can learn how your computer and blockchain-based networks work.
Is Bitcoin mining profitable?
To find an answer to the above question, you need to conduct a cost-benefit analysis (using web-based calculators) to see whether Bitcoin mining is worth your effort. A cost-benefit analysis is a systematic method that organizations use to determine which actions should be undertaken and which should be avoided.
First, determine whether you are willing to invest the required initial capital in hardware. Then, determine the future value of Bitcoin and the level of difficulty before committing your resources. It is also crucial to examine the amount of difficulty specific to the cryptocurrency you wish to mine to see if the mining operation would even be lucrative.
When both Bitcoin prices and mining difficulty fall, it usually means fewer miners are mining BTC and that acquiring BTC is easier. Nonetheless, expect more miners to compete for fewer BTC as Bitcoin prices and mining difficulty climb.
Even if Bitcoin miners are successful, it’s not clear that their efforts will end up being profitable. This is due to the high upfront costs of equipment and the ongoing electricity costs. The electricity for one ASIC can use the same amount of electricity as half a million PlayStation 3 devices, according to a 2019 report from the Congressional Research Service.
Bitcoin mining is a business venture. This means that profits generated from its output —Bitcoin — should outweigh the input for it to be considered profitable. Hence, you need to consider the three main costs of Bitcoin mining:
Mining systems
Contrary to the popular narrative, desktop computers and regular gaming systems can be used to mine by joining a mining pool. However, the returns are limited because most pools split the rewards based on the amount of work each miner contributes. These systems cannot compete with the ASIC mining machines, but it is possible to come out a few hundred dollars ahead after accounting for the energy used.
If you want to be competitive, you’ll need to buy several ASIC miners and join a pool. This can set you back between $4,000 to $12,000 per rig. The faster they can mine, the more you’ll pay.
Electricity
This is the power that runs your mining systems 24/7. It can run up to a substantial bill. When you consider that the process consumes as much electricity as certain countries do, the costs can be pretty high.
It’s also important to consider the costs to cool the area your mining system is in. They produce a lot of heat while mining — the more you have, the more heat they produce. These rigs need to be cooled, so the air conditioning you need to keep them that way can become very expensive.
Network infrastructure
Network speeds do not significantly affect the Bitcoin mining process, but latency does. Latency is the amount of time it takes to communicate with the network. Also, mining farms require multiple internal connections to connect each mining rig to a main router or server with a connection to the internet.
However, if you’re using your gaming rig to mine and join a pool, you shouldn’t need any extra bandwidth. Just low latency to the pool you joined.
The total costs for these three inputs should be less than the output for you to generate profits from your venture. Considering the fluctuating — and often rising — price of Bitcoin, the idea of minting your own cryptocurrency might sound like an attractive proposition.
But given the economic difficulties of Bitcoin mining, you may have to resign yourself to accepting lower profits and a longer time to break even after purchasing equipment to participate in the lottery that Bitcoin has become.
Is Bitcoin mining legal?
Bitcoin mining is legal in most countries, including the U.S. and Europe. In most regions, Bitcoin miners simply need to be cognizant of laws pertaining to the utilization of electrical power and data infrastructures to ensure they adhere to local rules and regulations.
In some regions, local regulators have imposed or moved to impose restrictions on Bitcoin mining. The most common reasons cited are that Bitcoin mining has a negative impact on local electrical grids and/or that it has negative environmental impacts.
For example, the Vice Chair of the European Securities and Markets Authority Erik Thedéen, said in November 2021 that cryptocurrencies constitute a risk to achieving the Paris Agreement’s climate change targets. China officially banned the mining of Bitcoin and other cryptocurrencies in mid-2021. However, a significant portion of the Bitcoin hash rate continues to emanate from the country.
Is Bitcoin mining bad for the environment?
Bitcoin’s environmental impact is a subject that has received significant attention. Critics often argue that Bitcoin is bad for the environment because it consumes a lot of electricity, which they associate with negative environmental and ethical consequences.
However, these claims need to be dissected and carefully examined.
While Bitcoin does consume a significant amount of electricity, it’s crucial to consider how this electricity is generated and to make proper comparisons to other industries. Moreover, the environmental impact can vary greatly depending on the energy source, and the proportion of renewable energy used in Bitcoin mining is debated.
Additionally, it should be noted that things that are bad for the environment are not necessarily ethically bad.
An example here would be an energy-intensive but beneficial service like hospitals. The environmental impact needs to be weighed against the potential benefits. In Bitcoin’s case, this can include reducing international remittance fees, financial inclusivity, and the creation of economic freedom.
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