What Is Bitcoin Mining And How Does It Works?

Date:

June 11, 2018

What is bitcoin mining

Bitcoin mining is making headlines all over the world, and you cannot wait to join the ranks of proud owners of those shiny digital coins. But there are so many things to learn, buy, and download.

If you ask a hundred people on the street what is bitcoin, half of them would have no idea, and some of the others would probably tell you that it’s not considered money. Some of the people would tell you it’s a scam. Only one or two of them would have a vague idea, and only one in a thousand thought of investing or earning them.

Cryptocurrency optimists say that digital currencies will eventually replace our current financial system, while pessimists predict the scenario of early 2000s collapse of Dotcom boom. Realists believe that cryptocurrency will inject the traditional finance system which has been in place for the last few hundreds of years with so-much-needed vitality and agility. Based on blockchain principle the Bitcoin network offers more accessible ways to complete transactions and move money between people and businesses, eliminating thousands of middlemen—the bank teller, the cashier, the advisor.

Bitcoin gained massive popularity both as a mean of payment and also as an investment asset only recently. Yet, according to experts, more than 80 percent of Bitcoins being mined by now. Maybe the train has gone and to mine Bitcoin doesn’t make sense anymore? Absolutely not, experts say.

To make the right choice, you must understand that no one is going to use a pick and a shovel up in the clouds chasing some bits of digital gold. The process of Bitcoin mining involves solving complex math computations that verify transactions that are added to the new block in the ledger. This solution uses the results of previous block solutions, so there’s no way to pre-calculate answers for a future block without knowing the solution to the previous block. For doing this, miners are rewarded with the block reward as well as transaction fees.

The more coins have been mined, the more people join the network, the more difficult it gets to release new blocks and get new Bitcoins. The mining difficulty is increased to maintain the number of Bitcoins in the system so that not all coins will be mined instantly. This way the coin will remain stable and has value for everyone, not just miners. For Bitcoin, the target is to generate each new block solution every 10 minutes on average. As a result, the miner machine’s computational power is also becoming more important.

Bitcoin was created using a SHA-2 which in turn was created by the National Security Agency (NSA) and published in 2001. SHA stands for Secure Hash Algorithm, which makes fine sense for cryptocurrencies as you will need to solve the hash algorithms to release coins. The more coins that will be mined, the difficulty of the hash algorithms will become higher as it is originally used as a part of security tools for companies and governments.

How to join a cryptocurrency movement

There are two main ways of joining the cryptocurrency movement: to build your own rig, join one of the thousands of pools, or start cloud mining. If the solo miner is like a solo gamer, large guilds, called mining pools, are better positioned to earn block rewards. Pools work together to combine the mining power and distribute the rewards among all participants, usually based on a percentage of the mining pool hashrate. Your hardware gets smaller portions of work from the pool. Even if you only contribute 0.00001 percent of the hashrate, you still get that percentage of every block the pool solves. To join a pool you can start with a very basic hardware setup.

Most pools will provide instructions on how to get set up the system to mine, including where to download the software. But all software isn’t created equal, and even things like drivers, firmware revisions, and memory clockspeeds can affect your speed. Make it a habit to frequently consult places like Bitcointalk, Github, and other forums.

Building your own rig may sound like an obvious way to start earning on cryptocurrencies. However, this way works for some technically advanced people, ideally with IT or computer engineering background and some pretty hefty cash deposited to spend on hardware. Consider this:

  • You need to spend up to $2000 on the basic hardware equipment including the mining processing units with ASIC chips, a motherboard, processor, power risers, mounting rack, plus a basic monitor, keyboard, and a mouse to set up the software. The success of your cryptocurrency endeavor depends on how much computational (hashing) power your hardware has.
  •  You will need to dedicate a well-aired place in your house or apartment because mining rigs are incredibly noisy and produce a lot of heat. While some people may use standard PC cases with zero cooling or sound-proofing, many use unusual casings, such as beer crates, which allow for increased air flow around the components. Some people even use mining rigs for heating.
  • When you decide to mine at home, you must be prepared to pay up to 300% on electricity bills because of the cooling of the equipment — and these are the expenses you must pay before you earn anything. Data centers located near cheap electricity will always outperform those where electricity is expensive. Many places will provide calculators for cryptocurrencies, so you can see how much you could potentially earn.
  • To avoid being scammed and to make sure you mine the right stuff you must continuously monitor the software while preventing someone from stealing the content of your cryptowallets.

Just Bitcoin is so hot right now, it doesn’t mean you will become a millionaire overnight. The Bitcoin network depends on miners to complete transactions and releases new bitcoins to the blockchain, so there will always be room for growth. Bitcoin is now an investable asset, same as gold or oil, although with a lot higher promise.