An increasing number of people is getting acquainted with the existence of Bitcoin, but we can say with a fair degree of certainty that we are still talking about a niche market. Even among those who regularly trade Bitcoin, there are few who actually understand the underlying technology.
This arises from the fact that cryptocurrencies are, at present, largely used as a speculative tool. A lot of people are chasing profits and don’t care about anything else. Only minimal technical knowledge is required to get involved with trading, but we strongly believe that it is useful to know the basics. Education will eliminate uncertainty and doubt, which are still a large part of the broader public view on Bitcoin and cryptocurrencies in general.
In this article, we will focus specifically on Bitcoin mining. We will give a user-friendly explanation of what is Bitcoin mining and how to mine cryptocurrencies. We hope that you will gain a much better understanding of how Bitcoin mining works.
Table of Contents
What is crypto mining?
We will start with a more formal explanation, and then we will break the subject matter into smaller, more digestible pieces of information.
Mining is a distributed consensus system. This means that a large number of people around the world are involved in the maintenance of the Bitcoin network. Mining is a term used to describe the process of validating transactions that are waiting to be included in the blockchain technology.
A chronological order of transactions is achieved through the process of mining. If a transaction is to be successfully confirmed and included, it has to be packaged in a block that must comply with strict encryption rules. Those are verified and validated by the miners on the network and there is no involvement of any government authorities. This protects the neutrality of the Bitcoin network.
We can make a quick comparison with using credit cards in the traditional electronic money system. Every payment must be verified and recorded by the credit card company (for example, MasterCard or Visa).
We could say that the entire cash flow of the contemporary banking system is recorded in centralized systems, and they are very susceptible to manipulation.
Bitcoin, on the other hand, doesn’t have a centralized organization that confirms transactions. This work is done by Bitcoin miners, and they also create new Bitcoins in the process!
But why is the process called crypto mining? Where does this term come from?
Bitcoin mining: the basics
Everyone is probably familiar with the process of gold mining. We have to put in a certain amount of work to retrieve the raw material that has value in the eyes of the people. Bitcoin is not much different in that regard, except that it is an entirely digital resource, so the mining process takes place in the virtual world.
The basic economics of obtaining gold is simple, but the process can be volatile and unpredictable.
There is an economic incentive for gold mining when the costs associated with the mining of one ounce of gold (labor, paychecks, equipment) are less than the value of one ounce of gold.
Bitcoin is similar in this respect, but there are slight differences in comparison to gold mining. The miners are discovering new Bitcoins at pre-determined, rising levels of difficulty and increased energy consumption.
There is an economic incentive to mine Bitcoin when costs associated with the mining of Bitcoin (electricity, computing power) are lower than the value of the mining reward.
What kind of reward are we talking about?
Bitcoin mining: rewards
The most successful miners are rewarded with new Bitcoins if they successfully add a new block to the blockchain.
Nowadays the prize is never received by one single person because no one in the world has enough computing power at their disposal to solve the complex mathematical operations needed for a successful block.
Miners, therefore, merge into so-called “mining pools” and collaborate on with joint forces. The award is then distributed in proportion to the work involved. Those with a larger input of computing power receive a higher prize.
The reward is halved every 210,000 blocks. At the time of writing this article, the so-called Bitcoin block height is 567,000. This means that the entire Bitcoin blockchain contains 567 thousand blocks.
Each block is chronologically linked to the previous (older) one in the chain all the way back to the original Genesis block.
Miners were initially rewarded with 50 Bitcoins, and in 2012 the reward was halved to 25 Bitcoins. The most recent halving was in 2016, down to the current reward of 12.5 Bitcoins. The next halving is projected for May 2020, and it will happen on block number 630,000. You can monitor the countdown here.
The reward is halved approximately every four years. We can easily calculate this time frame by simple multiplication of ten minutes (average time for a new block) with 210,000 (the exact number of new blocks required for a halving event). As an interesting fact, the halving events coincide with the Summer Olympics.
Bitcoin mining: security and difficulty
More miners guarantee a more secure network because this practically eliminates the possibility of anyone manipulating the network and its assets.
The downside is that an increase in the number of miners also increases the mining difficulty (and decreases profitability). That is what we call a relative measure of how difficult it is to find a new block. Roughly speaking, the difficulty is adjusted according to how much computing power is distributed throughout the miners’ network.
This adjustment ensures that a block is always added to the blockchain roughly every 10 minutes (and not sooner or later due to a varying number of miners).
A higher difficulty, in theory, means a lower profit for the miners. This is because the reward is distributed to a larger number of miners, so each one of them receives a smaller share. That’s not a big issue if the Bitcoin price is high — or if miners have access to cheap or free electricity. Check out the price of cryptocurrencies.
It can happen that the mining reward doesn’t cover the costs of mining. In that case, many people continue with their mining operations, mostly because of their belief that Bitcoin will be worth much more in the future.
In conclusion, Bitcoin mining is the process of verifying transactions and creating new Bitcoins.
How to mine cryptocurrencies?
Now that you have a better idea of what crypto mining is, you may have itchy fingers to try it out yourself. In this chapter, we will take a look at the hardware equipment and the necessary procedures to establish a home mining operation. So get your pickaxe ready!
Hardware equipment for crypto mining
The first step to start mining Bitcoin is to invest in appropriate hardware because it represents the most important factor for success.
In principle, anyone can mine cryptocurrencies. You have to run a dedicated mining software on your computer, but you’re unlikely to have any worthwhile profits without some research.
In the first few years of Bitcoin’s existence, it was enough to use ordinary home computers and consumer GPUs, but in recent years this has become largely ineffective. A large contributing factor was the rise of the so-called ASIC (Application-specific integrated circuit) devices as they are much more efficient and competitive BTC miners. They perform only specific types of computational operations that are required for crypto mining. But we are talking about extremely loud and hot devices that are hardly suitable for domestic environments.
Ethereum gained a lot of popularity in 2016 and 2017 because it enabled large profits of coins using home computers, combined with a growing market, as well as large profits.
Miners soon realized that they can easily increase their profits by combining more GPU units. As a result, entire mining farms were built in regions where there is cheap access to electricity and mining equipment. These farms made many millionaires. Some mining companies even outsourced their computing power by renting it to consumers.
In light of the increasing popularity of Bitcoin mining, some people also started to merge into so-called mining pools, which increased the chance of receiving the reward.
How to start mining cryptocurrencies
Now we know that crypto mining demands equipment which uses as little electricity as possible. We are always searching for the best combination of price and performance.
If you decide to start mining cryptocurrencies, you must realize that you will probably have a hard time due to the price of electricity. We call this solo mining, but it is recommended that you join a mining pool or a community that uses their combined computing power in order to mine cryptocurrencies.
But where does the term “pool” come from? Let me explain with an example. Think of computing power as water, and the entire Bitcoin network as one large body of the sea. People with the largest amount of water will have the greatest chance of receiving the reward. Most people only have a small bucket of water. As a result, they group together and pour their water into a pool. If their pool receives a prize, then it will be distributed proportionally according to the amount of water poured by each individual.
Beginners are therefore advised to join a mining pool. But be careful and choose only well-known mining pools.
You will need specialized software without which it will not work, even if you have the best hardware for mining cryptocurrencies. A good deal of technical know-how is required to set up the software, so this process is intended for those with a bit more experience.
We don’t intend to write tutorials on installing and using these programs, so follow this link if you are interested in mining software.
Rewards payout for mining cryptocurrencies
After you set up the Bitcoin mining hardware and software, you can immediately start mining! But you may be wondering where you will receive your potential earnings.
Payouts are mostly carried out with Bitcoin because it is by far the most popular cryptocurrency in the mining community.
You probably already know that Bitcoin cannot be saved to your bank account, so you will need a Bitcoin wallet. Let me remind you that the latter is also supported by Kriptomat.
You need to be very careful when choosing a wallet. Bitcoin transactions are irreversible, so nobody should ever access your private keys.
A Bitcoin wallet is always made of two parts. The first part is the public key of the wallet (also called a public address), which can be shared with others. The second part is a private key, which must never be revealed publicly.
The crypto wallets are divided into two basic categories:
- Hot wallets – constantly connected to the Internet,
- Cold wallets – not connected to the Internet,
and four basic subcategories:
- Hardware wallets
- Paper wallets
- Online wallets
- Software wallets
We recommend wallets like Ledger or Trezor devices, but you can read more about crypto wallets in our blog post.
Cryptocurrency mining: energy consumption
Like any other payment system, the mining of cryptocurrencies comes with a price. In this case, we are talking about power consumption. The mining equipment is constantly working at maximum load and huge amounts of energy are wasted in the form of extra heat. As a result, many major mining operations are housed in northern countries, where it is easier to reduce the cost of electricity associated with cooling.
It is difficult to accurately assess the impact that the Bitcoin mining has on our environment. Older studies estimate that it is more wasteful than gold mining, but these estimates appear to have been exaggerated.
A new report, published by CoinShares at the end of 2018, suggests that crypto mining is much more environmentally friendly than we originally expected. According to their report, the vast majority of mining is being powered by renewable energy sources. They estimate that Bitcoin mining is greener than almost any other large-scale industry.
Cryptocurrency mining: conclusion
We certainly live in interesting times. People are investing a lot of time, effort and energy into mining virtual assets that are recorded with digital ones and zeros. In our opinion, this is just a natural societal and technological development. What was strange yesterday, will be normal tomorrow.
When people started to mine gold centuries ago, it probably seemed ridiculous to some because gold won’t help when there are hungry mouths to feed. Give a chimpanzee an option to choose between a banana and a gold bar, and it will surely choose the former. They have no awareness that gold would provide almost a lifetime of food supplies.
We have simply created a valuation/belief system that enables an exchange of goods. Who says that this system doesn’t have room for entirely digital currency? As it is, the entire financial system is migrating into a digital domain anyway. For example, what do you use for payments? Credit cards or physical cash? If you mostly use the latter, then you are an exception to the rule.
The world is increasingly digital and Bitcoin plays a very interesting role in this. Is it the first real-world currency? Is it a digital version of gold? In any case, miners are a critical part of this system.
We also advise you to read the following articles for a more complete understanding of Bitcoin:
- What Is Bitcoin and How Does It Work?
- How and Where to Buy Bitcoin?
- Complete Tutorial on How to Sell Bitcoin
- What is Blockchain Technology and How Does It Work?
If you have any questions, we will be happy to respond in the comments below. We also invite you to join the debate on our social networks.