Bitcoin Mining for Dummies

    Bitcoin Mining for Dummies

    4 months agoByBob Mason
    1. Mining
    2. Proof of Work
    3. Mining Difficulty

    What is Bitcoin Mining?

    Bitcoin mining is the validation of transactions that take place on each Bitcoin block. The decentralized nature of Bitcoin means that transactions are broadcasted to the peer-to-peer network and once broadcasted, needs to be verified, confirming that the transaction is valid and then having the transaction recorded on the public transaction database, which is known as the Bitcoin blockchain.

    Miners basically are the people involved in the processing and verifying transactions before then recording the transactions on the Bitcoin blockchain.

    Miners will then receive transaction fees in the form of newly created Bitcoins.

    So, what’s involved in the actual mining process?

    Computers are used to include new transactions onto the Bitcoin exchange and while computers will find it relatively easy to complete the verification process, the process becomes more difficult as computer capability becomes more sophisticated with faster processing speeds.

    Attempting to get Bitcoin users from around the world to agree on a single version of the transaction is the challenge and it comes down to what is referred to as “proof of work.”

    Bitcoin protocol requires those looking to include additional blocks of transactions on the Bitcoin blockchain to provide proof that the user expended a scarce resource, in the case of mining being the processing power of the computers used for the verification process.

    Miners compete with everyone on the peer-to-peer network to earn Bitcoins. The faster the processing power, the more attempts are made by the hardware to attempt to complete the verification, and therefore earning the miner the Bitcoins that are highly sought after along with transaction fees.

    The Bitcoin network is self-evolving, to ensure that the time taken for a miner to win a block is steady at approximately 10 minutes.

    The speed of processing power in Bitcoin mining is referred to as the hash rate and the processing power is referred to as the hash power of the hardware.

    To get slightly more technical and introduce some of the more common terms used in the Cryptoworld, the mining process is where Bitcoin mining hardware runs a cryptographic hashing function on a block header.

    For each new hash attempted, the mining software will use different numbers as the random element, the number referred to as the nonce.

    Once a proof of work is produced, through the random calculation of nonces until the correct nonce is discovered, a new block is essentially discovered, which is then verified and agreed upon by the peer-to-peer network.

    At this stage the miner is rewarded with a certain number of Bitcoins, currently set at 12.5 coins, though will halve every 210,000 blocks. In addition to the Bitcoins received, the minor will also be awarded the transaction fees paid by users within the successfully mined block, which is of far greater incentive for miners as the number of Bitcoins per block continues to decline.

    From Start to Finish: Bundle Transactions, Validation, Proof of Work, Blockchains and the Network

    The end to end process can perhaps be best described by the following chart that incorporates the various steps involved from mining to ultimately receiving well-earned Bitcoins and transaction fees:

    Mining

    1. Verify if transactions are valid.
    2. Transactions are bundled into a block
    3. The header of the most recent block is selected and entered into the new block as a hash.
    4. Proof of work is completed.
    5. A new block is added to the blockchain and added to the peer-to-peer network.

    Proof of Work

    1. A new block is proposed.
    2. Header of the most recent block and nonce are combined and a hash is created.
    3. A Hash number is generated.
    4. If the Hash is less than the Target Value the PoW has been solved.
    5. The miner receives the reward in Bitcoins and transaction fees.
    6. If the Hash is not less than the Target Value, the calculation is repeated and that takes the process to mining difficulty.

    Mining Difficulty

    1. More miners join the peer-to-peer network.
    2. The rate of block creation increases.
    3. Average mining times reduce.
    4. Mining difficulty increases.
    5. The rate of block creation declines.
    6. Average mining time returns to the ideal average mining time of 10 minutes.
    7. The cycle continues to repeat at an average 2-week cycle.

    What is Bitcoin Cloud Mining?

    Bitcoin cloud mining provides a medium to receive newly mined Bitcoins, without the need to own Bitcoin mining hardware or even have any mining ‘knowhow’, allowing the mining world to not only attract the technically minded but a far wider audience, who lack the technical knowledge needed to get into Bitcoin mining.

    The Bitcoin novice has certainly embraced the availability of Bitcoin cloud mining, so what’s the difference between Bitcoin mining and cloud mining?

    It boils down to the location of the Bitcoin mining hardware. For the Bitcoin miner, the user will buy and set up and maintain the Bitcoin mining rigs, which is not something for the technophobes as sizeable electricity costs also a consideration, mining rigs requiring plenty of ventilation and cooling, not to mention 24-7 processing.

    Cloud mining is supported by mining companies setting up the mining rigs at their own facility, with a cloud miner only needing to register and purchase shares or a mining contract. The user doesn’t have to do anything else, with the mining company doing all the work and giving the cloud miner returns on a regular basis. The user essentially buying a proportion of the Bitcoin miners hash power.

    One of the major concerns over cloud mining is fraud however, there having been plenty of reports of fraudulent activity, not to mention lower profits and even mining companies having the ability to halt operations if Bitcoin’s price fall below certain levels, so some due diligence on a mining company is recommended, with some basic steps to reduce the risk of being defrauded including:

    • No mining address and / or no user selectable pool.
    • No ASIC vendor endorsement. If there is no advertisements from the ASIC vendor, the mining company may not even own the hardware.
    • No photos of the hardware or datacenter of the mining company.
    • No limit imposed on sales or does not display how much hash rate sold against used in mining.
    • Referral programs and social networking. A mining company willing to pay high referral fees should be avoided as these may well be Ponzi schemes.
    • Anonymous operators should certainly be avoided…
    • No ability to sell your position or get the money out upon sale.

    Bitcoin Mining Hardware

    Mining hardware has changed since the early days of Bitcoin, when Bitcoin was mined with CPUs. However, as miners have continued to use their technical abilities to develop hardware capable of earning at much greater number of Bitcoins, leaving CPU and laptop users behind, using a laptop is now unlikely to yield a single Bitcoin even if mining for years.

    In place of CPUs came Graphic Processing Units (GPUs), as miners found that using high end graphics cards were far more effective in mining for Bitcoins. The use of GPUs increased mining power by as much as 100x, with significantly less power usage, saving on sizeable electricity bills.

    Next came FPGAs, Field Programmable Gate Aray, the improvement here being in the power usage rather than actual mining speed, with mining speeds slower than GPUs, while power consumption fell by as much as 5x.

    Power savings led to the evolution of mining farms and the Bitcoin mining industry as it is known today, where Bitcoin mining power is controlled by a mining few more commonly known as the Bitcoin Cartel.

    Since FPGAs, the mining community shifted to Application Specific Integrated Circuits (ASICs), where an ASIC is a chip designed for the sole purpose of mining, with no other functional capabilities.

    While an ASIC chip has only a single function, it offers 100x more hashing power, while also using significantly less power than had been the case with CPUs, GPUs and FPGAs.

    Evolution of software has slowed, with nothing in the marketplace at present or in development that is expected to replace ASICs, with ASIC chips likely to see minor tweaks at best to try and squeeze out greater efficiencies, though it will only be a matter of time before the Bitcoin world comes up with something newer and faster as miners catchup on hashing power.

    What is Proof-of-Work?

    Proof of work is also referred to as PoW. All of the blocks in a Bitcoin blockchain have a series of data referred to as nonces, these are meaningless data strings attached to each block of a Bitcoin blockchain.

    Mining rigs / computers need to search for the right nonce and, with no simple way in which to find the correct nonce, random computation is used until the correct data string is calculated by the mining rig.

    The proof of work is therefore difficult to produce, while considered simple to verify, the production of a proof of work being a random process, requiring mining rigs to calculate as many computations per second as possible so as to increase the probability of producing the proof of work.

    It is for this reason that hash rates / hash power are key considerations in the ability of a mining pool being able to deliver reasonable returns on investment.

    What is Bitcoin Mining Difficulty?

    Bitcoin mining difficulty is the degree of difficulty in finding a given hash below the target during the proof of work.

    Bitcoin’s target value is recalculated every 2,016 blocks, with mining difficulty inversely proportional to target value. As mining difficulty increases, target value declines and vice-versa.

    In basic terms, as more miners join the Bitcoin network, the rate of block creation increases, leading to faster mining times. As mining times speed up, mining difficulty is increased, bringing the block creation rate back down to the desired 10 minutes as mentioned previously.

    Once the mining difficulty is increased, the average mining time returns to normal and the cycle repeats itself about every 2-weeks.

    How Can You Start Mining Bitcoins?

    To begin mining and become a node within the peer-to-peer network, and begin creating Bitcoins, all that’s needed is a computer with internet access.

    Wallets can be downloaded for free as can miner programs and once downloaded its ready to go.

    The reality is that your desktop computer or laptop will just not cut it in the mining world, so the options are to either make a sizeable investment and create a mining rig, or joining a mining pool or even subscribe to a cloud mining service, the latter requiring some degree of due diligence as is the case with any type of investment.

    In mining pools, the company running the mining pool charges a fee, whilst mining pools are capable of solving several blocks each day, giving miners who are part of a mining pool instant earnings.

    As a minimum, you’ll need a GPU and somewhere cool for the mining hardware with fans set up to keep the hardware cool, with a stable internet connection also a must.

    Two GPU manufacturers are Ati Radeon and Nvidia, whilst Radeon cards are considered much better for mining than Nvidia cards. While you can try to mine with GPUs and gaming machines, income is particularly low and miners may in fact lose money rather than make it, which leaves the more expensive alternative of dedicated ASICs hardware.

    The best ASICs chips on the market that might be essential for Bitcoin mining in consideration of price per hash and electrical efficiency are Antrouter R1, Antminer S9 and BPMC Red Fury USB, Antminer the most expensive with a price tag of $2,264.51.

    How Can You Make Money in Bitcoin Mining?

    Miners make Bitcoin by finding proof of work and creating blocks, with the current number of Bitcoins the miner receives per block creation standing at 12.5 coins and then the transaction fees for each block, which is approximately 1.5 Bitcoin equivalent in value for each block.

    The ASIC mining hardware is estimated to pay for itself in about 15-days, assuming a retail price of just under $2,500 and after than it ultimately boils down to the rate of increase in miners, which then requires greater computing power to be able to maintain the same level of coin creation and receipt of transaction fees.

    In an nutshell, if you’re going to try to use a CPU or laptop, mining pools are going to be a possible option and even then you’re not going to be making much if any, as your contribution to the mining pool’s mining power will be limited at best, which leaves you with cloud mining as the only real option unless you’re willing to invest in the hardware and accept the electricity costs that come from all year round mining and that’s before the necessary upgrades and new equipment that is to be expected with overuse.

    Can you get rich off the mining process? More likely from the appreciation in Bitcoin value than the mining itself, with a few mining pools accounting for the lion’s share of Bitcoin’s mining power making it difficult for new miners to enter the fray.

    While users have looked at the cloud mining option, the real experience is in owning your own mining rig and learning the technology and processes behind Bitcoin mining, something that you wouldn’t experience through cloud mining.

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