Bitcoin is the world’s leading cryptocurrency and remains one of the favorites among crypto miners despite the increasing difficulty of mining it profitably.
In this article, you will learn everything you need to know to mine bitcoin, including whether it is still worth it for small, at-home miners to participate in securing the Bitcoin network.
An Intro to Blockchains
Bitcoin is supported by an underlying technology called the blockchain. The blockchain is the creation of Bitcoin’s pseudonymous inventor Satoshi Nakamoto. The blockchain is the technological innovation that makes bitcoin and cryptocurrencies in general, possible.
To understand mining, it is imperative to first comprehend the inner workings of blockchain technology. A blockchain is defined as a decentralized, distributed, and immutable ledger. This ledger records interactions between different parties in a manner that supports the privacy of the users while ensuring security and cryptographically safeguarding the entire history of the supported network. Blockchain technology is also leveraged to support entire digital ecosystems through smart contracts that can be used to create and deploy decentralized applications (dApps).
The Blockchain – as its name suggests – is a long line of data stored in sets that are called blocks. In a blockchain-backed ledger, information is recorded in line with a set of predetermined rules. Each data set is cryptographically connected to the block that preceded it. In this way, it is possible to verify the data contained in the block being the true version of history.
Public blockchains run on a peer-to-peer basis. Any party looking to access and participate in a network backed by a public blockchain is free to do so. However, there needs to be a system in place to coordinate the wants, needs, motivations, and actions of all parties connected. This is a problem faced by all distributed systems, known as the Byzantine Generals Problem.
Blockchains’ employ cryptography to keep data and the network secure. While most blockchains differ on the specifics, most public blockchains will utilize a mechanism rooted in cryptography to secure its network and address the Byzantine Generals Problem. In the Bitcoin blockchain, the mechanism employed is called Proof-of-Work (PoW).
Proof of Work
PoW is a type of consensus mechanism. First used in the Bitcoin blockchain, it has become one of the more popular consensus mechanisms for digital currency networks. Leading projects such as Ethereum and Monero employ the PoW mechanism to secure their networks, albeit with different underlying hash functions.
PoW is an energy-intensive consensus mechanism that involves the use of computational resources to solve difficult mathematical problems. PoW is leveraged in different contexts, but in blockchain networks, it keeps the network secure as new blocks can only be added to the ledger once the cryptographic requirements are met. These include solving the mathematical problem and adding the hash to the transactional data.
In the Bitcoin network, the network is kept cryptographically secure through a class of participators called miners. Parties who choose to participate in the network as miners must validate transactions and add them to the ledger. In exchange for their efforts, they are rewarded with new bitcoins. PoW serves the purpose of keeping the network secure, keeping the miners incentivized to support the network as well as introducing new units of the currency into circulation.
To keep things well-oiled, the Bitcoin network has an inbuilt mechanism called the difficulty adjusting algorithm which was included by Nakamoto “to compensate for increasing hardware speed and varying interest in running nodes over time, the proof-of-work difficulty is determined by a moving average targeting an average number of blocks per hour. If they’re generated too fast, the difficulty increases.”
The algorithm adjusts the difficulty depending on the hash rate recorded over a two week period. Additionally, the block rewards, the number of bitcoin released by the network, halve every so often.
Due in part to its design, there is typically a correlation between mining on the Bitcoin network and price activity. When the price of bitcoin is rallying, there are typically more people looking to participate as miners as they attempt to acquire the block reward, which is worth more. However, when the price of bitcoin is falling, such as in the “crypto winter” in 2018, mining loses popularity as profits fall.
Now that you comprehend the workings of the Bitcoin blockchain and the essential protocols that keep it functional, we can dive into how you can start mining as a beginner.
In the initial days, it was possible to mine bitcoin using just your PC. However, the rise of special digital currency mining machines – called ASICs (application-specific integrated circuit) – that were designed specifically for the Bitcoin network has all but locked out the at-home user from participating as a miner.
To mine bitcoin, you must first purchase the necessary mining hardware. You must first purchase a bitcoin mining rig. There are a number of pre-built mining rigs available on the market today. This equipment helps you to circumnavigate and make the most of Bitcoin’s algorithms to maximise mining profits.
Choosing a mining rig should be taken seriously. These rigs are typically on the higher end of the cost spectrum. However, cost should not be your only consideration when making a choice. Consider the age of the machine, its electricity consumption, and its performance metrics along with its price. You can use this resource to compare ASICs.
While the mining rig is arguably the most important physical resource, you must first have to mine bitcoin; there are other costs you will also incur. For instance, you may have to set up a fan for your machinery as ASICs get quite hot and need consistent cooling.
Additionally, you will have to pay for electricity. This is a cost that may seem easy to overlook, but the fact is that electricity is a large part of the mining equation. If your electricity is expensive, then you are likely to gain little from mining. Fortunately, the inverse is also true. Therefore, bitcoin miners will look for cheap sources of electricity. This is reflected by the congregation of a large population of bitcoin miners in areas where there is cheap hydroelectric power. Kuwait is reportedly the country with the cheapest electricity, but you can do your research here.
Once you have considered and factored in the costs of your mining operation and are willing to continue, then you will need to connect to the Bitcoin network and create your node. When you create your node, you will also be launching your wallet where you can store the gains you acquire from mining.
It is best to download the official client. It is important to note that you will need a large amount of storage space on your device. This is because the client downloads the entire blockchain before you can start adding new blocks to the ledger as a miner. As we mentioned earlier, public blockchains work well because the history is available to all who access the network.
Once you have downloaded the client, you will be faced with a dialogue box asking you to install the software. Once installed, it will take you anywhere longer than two hours to download and sync up the entire ledger. It goes without saying that internet connectivity is required for mining as well as for transacting on cryptocurrency networks.
Once you have downloaded and synced up your Bitcoin node, you must download a mining program. Mining software helps to synchronize the communication between your node and the Bitcoin network, maximizing work. There are many popular choices available today, with examples being MultiMiner and CGMiner.
Lastly, you will need to join a mining pool. As referenced earlier, the rise of bitcoin-specific ASICs has made the bitcoin mining game very competitive. As a result, you will likely need to join a mining pool to see any profits from mining bitcoin. Popular mining pools include F2Pool and P2Pool.
It is important to note that some mining pools may have their mining software so decide on your pool beforehand to avoid any unnecessary downloads. Moreover, you will need to configure your server address to mine through a pool. This adjustment may seem complicated but is a fairly simple short process.
While it may still be possible to mine altcoins from the comfort of your home and still turn a profit, those days are long gone for bitcoin. Unfortunately, the rise of ASICs and the high bitcoin mining difficulty have made it difficult for the at-home user to effectively participate in the Bitcoin network as a miner.
For the many individuals still looking to participate in the Bitcoin network as a miner, joining a mining pool is absolutely necessary. However, even with one ASIC machine and a mining pool, it is still fairly difficult to win the block reward. Due to the comparatively high hash rate of the Bitcoin blockchain, you have a better probability of getting the block reward if you have more chances. This means you need more machines, and their computational power, to increase your possibilities.
Simply, for the Bitcoin network, economies of scale come sharply into play. Unless you have a significant number of ASIC machines to leverage and the ability to access low-cost electricity, then your efforts are not likely to yield any mining profits.