Bitcoin Mining – What You Need to Know to Get Started

Bitcoin mining is a term that is used to reference the work done by a miner to earn Bitcoins. In the initial days, Bitcoin mining was relatively easy. However as the popularity of the cryptocurrency grew, more miners joined the network.

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Evidently, Bitcoin mining became difficult due to the high level of competition.

These days, there are established bitcoin mining businesses. People might think that it would be easy to mine for Bitcoin. However, there are a lot of things to consider. Chances are that as an individual, you might not even be able to pull it off.

There are costs involved and in today’s competitive age, Bitcoin mining is tedious and expensive.

To become a miner, you need to understand how cryptocurrency mining works. This is useful because it helps to not just mine for bitcoin but also every other cryptocurrency.

At the very core, almost all cryptocurrencies follow the same protocol. The devil is of course in the details. Some cryptocurrencies might require additional work to be done. However, the bottom line is that you can earn cryptocurrencies by simply mining.

Bitcoin's public ledger, the blockchain began on January 3, 2009. It is said that this was started by the legendary Satoshi Nakamoto. The first blockchain is fondly dubbed the Genesis block. It was the first transaction that was recorded. And believe it or not, the genesis block paid the miner 50 bitcoins.

In today’s value, those 50 bitcoins would be valued at 328,050 U.S. dollars. But on January 9th, 2009, Bitcoin was worth nothing. Bitcoin’s first recorded price was in 2010. The highest price of a bitcoin back in 2010 was just $0.39!

Bitcoin historical price chart

Bitcoin historical price chart

You can read more about the Genesis block in this research paper by Vrije Universiteit Amsterdam. The paper goes into minute details of the world’s first blockchain transaction. But of course, if you are more interested to know how mining works, read on.

How bitcoin works?

In order to know how Bitcoin mining works, the first step is to understand how the cryptocurrency or Bitcoin works.

Bitcoin uses encryption to transfer the tokens or the Bitcoin between the wallets. The transactions are confirmed and recorded into a public ledger. Blockchain is another name of this public ledger. The work that goes into this and the value of the cryptocurrency itself gives value to the Bitcoin.

The transaction in the blockchain is at the core of Bitcoin mining. In a transaction, anyone who has ownership of the Bitcoin can send a message to everyone else in the public ledger (the blockchain) saying that they want to transfer ownership of their bitcoin to another member in the network.

The bitcoin transaction message consists of a list of Bitcoins that the sender is using. It also includes information from where the sender received the bitcoins from. Then, the message comprises how many bitcoins they want to send.

When this message is relayed, the sender puts in their digital signature on the message.

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Anyone in the network can verify and authenticate the validity of the signature, which is the sender.

This is done by using cryptography. Bitcoin mining comprises of the transaction and the proof of work which relies on the public ledger.

The blockchain is also the essential part of the cryptocurrency. Another key feature is the transaction block chain.

This is a public ledger that records every transaction that has taken place. It records everything from the initial point of origination of the Bitcoin.

When you check the public ledger, you can verify two main things. That the sender indeed has the bitcoins and that they haven't spent the bitcoin during the process of the transaction.

The blockchain and mining nodes

When the message is broadcast, the transaction enters the network. The transaction has to be incorporated into the public record permanently. This ensures that anyone can verify that the bitcoins were indeed spent by the sender.

The mining Nodes in the network are the members who help to record the transactions. These members are mining nodes or simply miners for short. The miners collect all the transactions that people want to make over a period of time.

The miners verify the transaction by checking the public ledger and to verify that the sender owns the bitcoins that they want to spend or send. The mining nodes then combine all this information into a verifiable transaction into a block. This block is known as a transaction block and is part of the blockchain.

Simple as it may sound, the miner has to solve a computational puzzle or a problem. The solution is not that easy but at the same time, it is easy to check if the solution is correct.

This puzzle is what is known as proof of work protocol. The proof of work is required because there are many miners working at the same time. Of course, proof of stake also continues to evolve, according to this white paper which discusses pool of stake; the next step in the proof of work concept.

The miner who solves the puzzle first sends their solution to everyone else. When the solution is broadcast to the network, the transaction block is added. This makes the transaction complete and is permanently added to the record.

From here on, anyone can check the ledger to see that the sender spent or sent money in the past and the new owner of the bitcoin.

Bitcoin mining – Tools of the trade

Just as with anything that you want to build requires tools it is the same case with bitcoin mining as well. To get started with bitcoin mining, the first thing you need is, of course, a good computer. But do not be mislead. Your trusty old desktop might not be powerful enough.

Bitcoin mining is resource intensive and if applied carelessly, the activity could potentially heat up your computer's motherboard and burn the circuits rendering it useless.

There are three main things you need to get started with bitcoin mining

  • Mining hardware
  • Mining software
  • Bitcoin wallet

To start bitcoin mining, you need to have the appropriate hardware. Custom Bitcoin ASIC chips offer a higher performance and dominate the industry today. This is also essential because the more resource intensive it gets, the more electricity is consumed.

A quick search on Amazon.com can show you specialized Bitcoin hardware. Some of the well-known names are AntMiner S7, Avalon 6. These are power efficient but do a lot of work.

It is not surprising then that the average weight of the hardware is about 3.5 kilograms.

The next step is that you need to download the Bitcoin mining software. CGminer and BFGminer are command line programs that are very popular. There are also some GUI based mining programs that you can use on a Windows or a Linux operating system.

Of course you also need a wallet where you can store your bitcoins. You can set up a Bitcoin wallet at ease online. But due to repeated thefts, it is better to virtually store your bitcoins in a physical wallet and not online.

Average cost to mine for one bitcoin

The biggest running expense you will come across when mining for bitcoin or any other cryptocurrency is electricity. Depending on which part of the world you live, this can vary. In some places, it costs less than $1000, while in other parts it can be as high as more than $20,000.

This article by EliteFixtures gives a detailed breakdown of the costs of bitcoin mining based on the country.

Bitcoin mining costs (Source: Elitefixtures)

Bitcoin mining costs (Source: Elitefixtures)

Of course, the above costs take into account having the proper hardware. The costs can vary a lot more if you are using the more traditional computers. The biggest competition to the basement bitcoin miners came from established mining companies.

China is the undisputed leader in the business of bitcoin mining. It is ironic that despite the clampdown on bitcoin, mining is still very active.

By some estimates, China is said to have a market share of more than 70% when it comes to bitcoin mining. This is followed by India and the United States comes in at the sixth place. Read this interesting research article that talks about the evolution of Bitcoin mining.

If the above sounds discouraging, then don’t be.

If you want to avoid the costs and find a cheaper solution there are many. However, the rewards are also equally the same, meaning you cannot expect to become a bitcoin millionaire in a few months.

Introducing mining pools

A mining pool, as the name suggests combines the resources of multiple miners. These miners share (or lend) their processing power to the network or the pool. Depending on how much you contribute, you are rewarded equally.

The share of the cryptocurrency is awarded to the mining pool when they submit the proof of work. Mining pools started when it became difficult for individual miners to make a decent buck. As a result, mining pools evolved as the next generation of miners. It still allows you to remain independent but you also belong to the pool.

Interestingly, most of the mining pools are concentrated in China. While there are many mining pools available these days, the biggest mining pools are dominated by names such as BTC.com, Antpool, ViaBTC and so on.

The chart below gives a detail of the biggest mining pools.

Top mining pools (Source: Blockchain.com)

Top mining pools (Source: Blockchain.com)

The first step before you can join a mining pool is to have the appropriate hardware. Without the hardware, it would be a futile exercise. Once you are set up, you sign up to the Bitcoin mining pool and set up your bitcoin wallet.

One of the things to consider when joining a mining pool is the method of distribution. There are also fees involved as the mining pool takes a cut of the share.

If you are thinking of joining two different mining pools, then forget about it. The mining pools make use of sophisticated algorithms to determine when your hardware resources are not fully 100% allocated to the mining pool you joined.

Bitcoin mining clouds

Mining pools are also available on the cloud. This uses shared resources with a remote data center. In this model, you don’t have to buy the software. You can simply rent one of the remote nodes, also known as the mining rigs.

There is some ease in this business model because it saves you the trouble and money to buy and maintain the hardware. But be warned that the returns are much lower compared to purchasing hardware and plugging into a mining pool.

Genesis-mining is one of the largest bitcoin mining cloud service available today. The price can vary depending on the computing power you lease. There is a minimum five-year binding contract that you need to sign. There is also an additional maintenance fee involved.

Is bitcoin mining profitable?

By now you must be wondering how long it would take to make $1000 mining for Bitcoin. The answer to this varies because you also need to account for electricity costs. But this is a good resource to check how much profit you can make with the hardware you have.

If you are considering bitcoin mining, remember that you missed the boat a long time ago. The gold rush, in the initial stages of bitcoin mining, made it a profitable venture. But as word got out and the big players stepped in, profitability as a miner has declined.

Unless you have large capital, lower electricity fees, it can be an uphill task to even break even. What makes this worse is the current slump in the cryptocurrency markets. Bitcoin’s value fell from above $15,000 and is trading just around $6,560.

The profitability of your mining will, of course, be eventually determined by the cost of bitcoin itself.

At the end of the day, you need to consider the pros and cons before you think of starting your bitcoin mining business.

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Al Hill Administrator
Co-Founder Tradingsim
Al Hill is one of the co-founders of Tradingsim. He has over 18 years of day trading experience in both the U.S. and Nikkei markets. On a daily basis Al applies his deep skills in systems integration and design strategy to develop features to help retail traders become profitable. When Al is not working on Tradingsim, he can be found spending time with family and friends.
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