Most people have probably heard of cryptocurrency mining at one point or another, even if they don’t exactly know how it works. In simple terms, Bitcoin mining refers to the process of creating new Bitcoins and then putting them into online circulation. The process of mining the new coins is also how the system confirms transactions and is a vital part of the development and maintenance of the Bitcoin blockchain, as well as many other blockchains.
We tend to associate mining with mechanical action. But in the cryptocurrency world, mining refers instead to the completion of complex computational maths problems. Bitcoin mining has advanced considerably over the last decade, and while it was once possible to mine new coins using small but powerful computers at home, today Bitcoin mining is done by enormous mining operations that generally take place in warehouses. The interest in mining Bitcoin and other cryptocurrencies has exploded in recent years, especially considering the value of these coins – so valuable, in fact, that many early Bitcoin investors became millionaires overnight.
Mining is a method of acquiring coins without having to buy them outright, although a capital investment is still necessary in terms of the required hardware. There are many people that mine cryptocurrencies in the background all day and night on a single computer. This might not generate nearly as many coins as a full warehouse full of the latest RTX graphics cards, but it’s still a way of earning small percentages of coins over time at a fraction of the cost of the electricity. The hope is that this fully comprehensive Bitcoin guide will provide all the starting information you will need to begin successfully mining cryptocurrencies such as Bitcoin.
Mining software and hardware has progressed rapidly over the last 15 years. The machines that were used to maintain the early blockchain technologies have undergone incredible advancement and are now used to support a multi-billion-dollar industry that has spread across the globe.
The first types of mining were based on the CPU, or Central Processing Unit, found in every single computer in the world. It was during the year 2009 that Satoshi Nakamoto changed the world by mining the very first Bitcoin block. Due to the fact that Nakamoto was the only miner at the time, he did not need to use specialise hardware to create the Bitcoin blockchain. He did it all using his personal computer, which is quite a feat as even the most powerful personal hardware at the time pales in comparison to the average business laptop of today.
The CPU is the component of the computer that process all necessary information. In 2009, creating new blocks was a simple operation that required very little in terms of computational power and electricity. As Bitcoin mining became more complex and more people jumped on the bandwagon, the hardware needed to successfully generate new coins became increasingly powerful. Bitcoin mining became subsequently more difficult with each passing year, and entire component lines were manufactured to address the growing demand for miners.
By the time 2010 had come to an end, not only was Bitcoin gaining value, but a new form of mining was being invested in. This time making use of graphical processing units (GPUs). GPUs, which had primarily been used for video gaming and 3D work, proved to be the best component available for mining. GPUs proved to be extremely efficient for the task of mining, and with a few years, they were built into huge mining arrays capable of creating coins at an unprecedented rate.
The easiest way to understand how Bitcoin works is by imagining the network as a huge ledger that’s packed with transactions. Users can send certain amounts of Bitcoin to other people through this ledger, and the Bitcoins will be sent to the chosen address. This is similar in some ways to traditional types of bank transfers, but instead of having a centralised system that all the banks are connected to, the Bitcoin ledger is decentralised, meaning that there’s no single party that has complete control of the ledger or its value.
Mining is a vital part of the process, as this provides the infrastructure needed for the platform to actually run. Once a transaction has been properly verified, it’s sorted into blocks, which is how users know that the coins they send and receive are as secure as possible. Without the physical mining hardware, the Bitcoin blockchain would not be able to exist.
For a block to be added the miner will need to solve specific mathematical puzzles and will need to arrive at a specific hash, which is known as a proof of work. It’s required that the miner attempt to guess as many different hashes as possible within a limited amount of time until they get the one that they want. This is a relatively simple process if only a single miner is involved. But as more people join the mining pool, the computational problems become more and more complex.
The act of mining Bitcoin comes at a high price when we consider the amount of electricity needed for transactions to be completed. In fact, global Bitcoin mining consumes more electricity than some small countries, which is why there are many governmental and private organisations around the world constantly attempting to make the mining process as efficient as possible.
Today, most large mining operations use hardware known as application specific integrated circuits, although they are commonly called an “ASIC.” These can cost tens of thousands of dollars to set up and maintain, with electricity usage being one of the main considerations of how much profit can be made when the cost of power is factored in.
We’ve already mentioned proof of work, but this isn’t the only kind of crypto creation method around. Another popular method is proof-of-stake, although implementation of this method is still very much in development.
Let’s take a closer look at these two types:
Despite it being called the future of blockchain technology, there are plenty of critics of proof-of-stake. One of the main criticisms is that proof-of-stake crypto mining has the potential to lead to a more centralised system, which would ultimately be bad in terms of security and privacy. At this point, however, and with a few exceptions, most new cryptocurrencies are using proof-of-stake.
There have been other methods theorised and tested over the years, and more might come into the future. For now, Bitcoin mining, or proof-of-work mining remains extremely commonplace in many places around the world and will continue to be the main way that Bitcoins are mined.
While it’s technically possible to start mining Bitcoin using nothing more than a home computer, this is generally not the best way to begin turning a profit. The reason is because a single computer – or even a few computers – don’t generally have the processing power to solve the problems and create blocks. As mentioned above, Bitcoin mining relies on proof-of-work, which means that actual computational “work” will need to be completed. The more processing power available, the more work that can be done. For most people that want to begin making a profit, an ASIC is the answer. These are systems that are designed from the ground up to mine crypto coins like Bitcoin, and now it’s possible to purchase ASIC systems that are completely plug-and-play.
It’s important to keep in mind that Bitcoin mining does not follow a linear and stable pattern. Instead, as the value increases, more miners begin jumping in, pushing up the power needed to complete blocks. Once the values have reached a climax and the cost of electricity begins to outpace the profit, smaller mining operations pull their machines from the network and the cycle begins anew. This needs to be kept in mind when initial cost calculations are being performed, both when there’s a bull market and when there’s a bear market. Sometimes it’s worth purchasing the ASICs in advance, waiting for the market to downturn, and then start mining when everyone else has stopped.
One of the biggest cost sinks when it comes to Bitcoin mining is the electricity. As the value of Bitcoin goes up and the market becomes more saturated, the greater the processing requirements will be to mine successfully and turn a profit. The cost of electricity always needs to be kept in mind when doing calculations, as it doesn’t take very much for Bitcoin mining to suddenly cost more than it makes. Those that are in countries with exceptionally cheap electricity will likely be able to mine for much longer than many other miners who will need to pull their machines once the cost of power becomes too great. Miners that have seen profits from their endeavours are highly advised to reinvest any extra money into hardware – once an edge is gained, it’s important to try and do everything to hold on to it for as long as possible.
Getting started with Bitcoin mining that will make a profit comes with a significant upfront capital investment, and its why many people prefer proof-of-stake cryptocurrencies. But anyone with the money and the knowledge to build a profitable mining rig should consider doing so, as proof-of-work as thus far proven to be the method that works the best. No matter what they say about the electricity and hardware costs, there’s no denying that Bitcoin is by far the most valuable cryptocurrency in the world and has made plenty of people wealthy.
Proof-of-work mining is currently the very best way of running a decentralised network that anyone can be a part of and invest in. Use this Bitcoin guide as a reference along the way as you begin your journey into Bitcoin mining and the many rewards that it has to offer.
Yes, but you will need a powerful PC (or several) and your electricity costs may outstrip your profits.
Yes, but you need the correct set up and system.
A constant supply of power is needed to mine Bitcoin and energy costs in some countries are extremely high.
This is open to debate and there’s no definitive answer as yet.
