What is bitcoin mining, and how does it work?

What is a lightning network?
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Bitcoin mining is insane! Is it possible to mine virtual currencies on computers? Does mining Bitcoin only give you money for free?

That’s not true! It’s far, far more! If you like to understand bitcoin mining better, continue reading.

Bitcoin mining is a critical component of the Bitcoin network. A Bitcoin miner provides security and confirms transactions. 

The Bitcoin network would be vulnerable to attack and dysfunctional without bitcoin miners. Specialized computers are used to mine bitcoins.

Miners process each Bitcoin transaction to secure the network and ensure its stability. Essentially, Bitcoin’s miners solve a computational problem that allows them to chain blocks of transactions together (which is why Bitcoin is known as “blockchain”). Miners receive newly created bitcoins and transaction fees as a reward for this service.

How Does Bitcoin Mining Work?

In reality, what does Bitcoin mining do? Miners provide security and confirmation of Bitcoin transactions. Every 10 minutes, bitcoin rewards are paid to miners in new bitcoins.

Bitcoin mining: What does it do?

Bitcoin mining: What’s the point? This question is asked all the time!

Here we’ll discuss the many aspects and functions of Bitcoin mining. They are:

  • The issuance of new bitcoins
  • Transaction confirmation
  • Security

Bitcoins are issued via mining

Central banks issue traditional currencies, such as the dollar and euro. A central bank can give money whenever it deems it beneficial for the economy. The Bitcoin system is unique. New bitcoins are awarded every ten minutes for miners in Bitcoin. Miners can’t create Bitcoins out of thin air because the code sets the issuance rate. Instead, the miners create new bitcoins by computing.

Confirmation of transactions by miners

Each block in the Bitcoin network includes transactions from the Bitcoin network. Once a transaction is included in a block, it can be considered secure or complete. Why? Because a transaction can only be embedded into Bitcoin’s blockchain after it appears in a block. Larger payments require more confirmation.

Below is a visual overview:

  • You can still reverse payment despite 0 confirmations! At least one will be required.
  • A Bitcoin payment of less than $1,000 needs only one confirmation.
  • Payments of $1,000 – $10,000. Some exchanges require three deposit confirmations.
  • Approximately $10,000 – $1,000,000 for large payments. Transactions that fall into the six-digit range are usually considered secure.

Bitcoin Miners: Why Do We Need Them?

To put things simply, miners protect Bitcoin’s network. They help restrict efforts to attack, alter, or stop the network from accomplishing this. Having more miners makes the network more secure. You need more than 51% of the network’s hash power to reverse Bitcoin transactions. By distributing the hash power between miners, Bitcoin is kept secure and safe.

A Guide to Mining Bitcoins

Are you interested in mining bitcoins? Well, it’s possible. Due to the highly specialized nature of mining, it is not profitable for most people. Most bitcoin mining takes place in large warehouses where electricity is cheap. Let’s be honest, today, the vast majority of people should not mine bitcoin.

Typically, bitcoin mining is characterized by specialized warehouses that look like data centers. That’s what you are up against! So your chances of profiting are slim, as it’s too costly.

In any case, You can get started mining bitcoins right away if you’re interested in hobby mining. Here are some steps to take.

Step 1: Get your Bitcoin wallet.

When Bitcoin is earned through mining, it is deposited into a Bitcoin wallet. A wallet is essential for mining.

If you aren’t sure which bitcoin wallet to choose, our guide to the best bitcoin wallets will help you find the right one.

Step 2: Look for a Bitcoin Exchange

To pay your power bills, you may have to sell coins you earn from mining bitcoins. Additionally, you may need to purchase coins on exchanges.

Step 3: Obtain Bitcoin mining hardware.

Without an ASIC miner, mining is impossible. Computers explicitly designed to mine bitcoins are ASIC miners.

It is not advised to mine bitcoins on your laptop or desktop computer! As a result, you will earn just one penny per year while wasting money on electricity.

Step 4: Choose a mining pool

Next is to select a mining pool once you have your mining hardware. Our recommendation is Slush Pool since it is the oldest and has the best User Interface. 

A mining payout would only be available if you found a block alone. This is known as solo mining. You shouldn’t do this since your hardware isn’t likely to find a block via solo mining even if it had a high enough hash rate.

Mining pools: what are their benefits?

If you join a mining pool, your hash rate is shared. You get paid once the pool finds a block based on the percentage of the hash rate you contribute. If your hash rate is 1% of the pool in the current block reward system, you will receive .125 bitcoins from it.

Step 5: Obtain Bitcoin mining software.

The Bitcoin mining software connects your mining hardware to the mining pool of your choice. If you want to point your hash rate at a pool, you must use the software. Furthermore, you can specify the Bitcoin address to which payouts should be sent in the software. 

Mining software is available for Windows, Mac, and Linux.

Step 6: Is Bitcoin mining legal where you live? 

In most countries, this won’t be an issue. Contact local council. You’ll likely find more information on the legality of bitcoin mining and its tax implications. For instance, electricity and hardware costs can be written off, as well as other expenses that helped make your operation profitable.

Step 7: How profitable is bitcoin mining for you?

How will you start? Do you know what you need to do? Consider doing some calculations to determine whether Bitcoin mining would be profitable for you. Using a Bitcoin mining calculator, you can estimate how much it costs.

Many variables affect the profitability of your mining operations, so I say rough idea. Your profits could double if Bitcoin’s price doubled. Moreover, it could make mining extremely competitive, thus ensuring the same profit margin.

What is the best way to mine bitcoins on Android or iOS?

This is what I find funny: In actuality, any Android device is capable of mining bitcoins. You can mine bitcoins or any other cryptocurrency using mining software for Android devices.

What’s not so fun about it? You will likely make less than one penny per year!

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Why? It is simply not possible for Android phones to compete with serious mining hardware. Perhaps it would be interesting to try setting up a miner on your Android phone. However, don’t expect to make money from it.

Be prepared to lose a lot of battery power!

Bitcoin mining hardware – what is it?

The mining hardware used to mine bitcoin (ASICs) is highly specialized. ASICs are becoming increasingly complex and competitive. Currently, mining hardware is only located in places where electricity is cheap. Satoshi released Bitcoin intending to mine it on computers. However, as soon as coders discovered this, they developed mining software to utilize graphic cards’ higher hashing power.

GPU Mining

GPU mining involves using a graphics card to mine Bitcoins (or any cryptocurrency). You’d likely see something similar to this piece of hardware on your desktop computer if you opened it right now.

As a result of the introduction of ASIC miners, GPU mining is no longer a viable mining method. ASICs have since overtaken GPUs.

ASIC Miner

The acronym ASIC refers to application-specific integrated circuits. It is a chip that does one particular type of calculation. An ASIC Bitcoin miner is based on the SHA256 hashing algorithm and uses a chip designed to solve problems. The major Bitcoin mining takes place on ASICs, usually in data centers with low-cost electricity and thermal regulation. Also, economies of scale have led to a concentration of mining power in fewer hands.

Bitcoin mining pools: what are they?

A mining pool allows small miners to receive mining payouts more frequently. With a pool, miners can find blocks more often since they are grouped with other miners. Yet, mining pools have some issues, which we would discuss.

Satoshi did not foresee the emergence of mining pools, as he had with GPU and ASIC mining. The concept of mining pools refers to cooperative groups of miners who agree to share block rewards based on their contributions to the pool.

The average miner may find pools attractive since they smooth out rewards and make them more predictable; however, this might result in the mining pool’s owner concentrating power.

The Bitcoin mining industry

From the early days of graphics card mining, the mining industry has made significant progress. In today’s world, many industrial mining operations are very professional. Let’s consider how they operate:

What does a mining farm look like?

A mining farm looks similar to a data center. These devices have rows of hardware and powerful fans to prevent overheating. Most mining farms look very industrial – they don’t have a very glamorous appearance. The majority of them are just large warehouses with excellent climate control. Bitcoin farms exclusively use ASIC miners to mine various coins. These farms mine several Bitcoins a day.

Crypto mining farms: how much do they make?

Several factors determine the profitability of a mining farm:

  • Electricity costs
  • Its mining hardware’s age
  • Operational scale
  • Bitcoin’s price at the time it is sold by the miner
  • Bitcoin mining difficulty

A mining farm’s electricity costs are by far the most significant determinant of its profit. Almost all mining farms use similar hardware.

In this case, since the reward for discovering blocks is fixed and the difficulty of finding blocks is based on the amount of processing power working on it at any given time, the only variable cost is electricity. It may be possible to spend less on mining for the same output if you’re able to find cheaper electricity than other miners.

What is the electricity consumption of mining farms?

Mining farms consume a great deal of electricity, as previously discussed. Their consumption varies depending on their operation size. In contrast, the latest Bitmain ASIC miner uses 1350 watts.

According to estimates, mining farms will use approximately 127 Terawatt hours of electricity per year by 2022. The amount is roughly equal to Norway’s annual energy consumption.

What are the locations of mining farms?

Globally, there are many mining farms. While we can’t tell the exact location of every mining farm globally, some educated guesses are possible.

China has historically been home to the majority of mining. Why is mining so abundant in China? BTCC mining pool’s former CTO, Samson Mow, explains the process.

Samson Mow, CSO, Blockstream, says “that mining in China is mainly driven by shorter setup times and lower capital expenditures, as well as the proximity of the ASIC manufacturers.”

Colocation Mining

This bonus chapter will learn about cloud mining and colocation bitcoin mining. If you’re interested in cloud mining but are afraid of scams, then here is the next best thing.

Colocation Mining – What Is It?

Colocation mining is a contract between a bitcoin mining company and a client. After the management company sets up a bitcoin mining facility, an agreement is reached with a power company to negotiate favorable electricity rates. In addition, the management company offers mining ASICs at highly favorable prices through its relationships with ASIC producers.

 

Lastly, workers are employed by the management company to ensure the ASICs are running well while keeping a safe location. Colocation miners are unique because most of the ASICs may not be owned by the management company.

Who owns the miners? The customer does.

You purchase ASICs from the company running the colocation mine. This company essentially acts as a broker.

After purchasing your ASICs, they are received and installed at the mining company’s location by the management company.

The Colocation Company – How Do They Make Money?

Colocation management companies use several ways to make money. 

Although management companies make money in different ways, they all use one or more of the following methods:

  1. The company charges you a monthly fee for the maintenance of the miners and ensuring their safety.
  2. If you purchase ASICs from them, they make a commission.
  3. The company takes a cut of all mining profits.
  4. They charge you a surcharge for the electricity your ASICs consume.
  5. You can take advantage of our ASIC repair service whenever your miners need repairing.

Essentially, you own, monitor, and control your own ASICs in a colocation mining operation. They are kept by the mine, which keeps you informed of any issues. Additionally, they secure and maintain the mining site to ensure their safety.

Now you might ask, how does colocation mining differ from cloud mining? Before understanding cloud mining, it is first necessary to define it.

Cloud mining – what is it?

Cloud mining is the operation where miners own all the ASICs in their mines. You, as the customer, will get any bitcoin mined with his hashing power if he sells some of it to you. You do not own anything when you mine in the cloud.

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The miner is practically renting you their hashing power in exchange for potential profits in bitcoins.

Cloud mining: The Big Problem

This arrangement has just one flaw. The ASICs do not belong to you, so you cannot control what, when, or how they mine. This makes cloud mining attractive to scammers. An operation involving cloud mining seldom involves miners.

Your only source of income is when someone else pays the cloud miner to start.

Thus, most cloud mining operations are Ponzi schemes. Existing customers pay off new ones until no new customers sign up.

The founders have run off with as much cash as possible by this time.

There is no asset to liquidate to pay back the victims since no ASICs are owned (not even the cloud miner).

All of it is fictitious.

What is the difference between Colocation Mining and Cloud Mining?

There are differences between these two mining operations, even if you assume their operations are honest. Firstly, you own the ASICs in colocation mining. You don’t hold ASIC in cloud mining.

Secondly, you are in charge of choosing the coins you mine in colocation mining and how you mine them since the ASICs are yours. The cloud mining method entails paying money to a miner and hoping to get more than you put in. It is up to the miner to determine how and what to mine.

Cloud mining versus colocation mining: Which is better

Those who want to mine but do not have the finances or experience to start their farms can find colocation an excellent alternative.

By doing so, you’ll be able to leverage the bargaining power of a large mining operation on electricity and ASICs without having to spend millions. To start, you need little expertise and only pay a small fee. Set up an account at Compass Mining right now to begin colocation mining.

Getting started is super simple, and you’ll be mining in no time! You’ll be redirected to the compass website when you select a piece of hardware (subject to availability).

Term glossary for bitcoin mining

We will look at some of the terms associated with bitcoin mining in this bonus chapter.

You will need to understand these terms if you plan to enter the mining industry at any level.

Miner

Miners of Bitcoins (or any other cryptocurrency).

Block Reward

A block reward consists of a fixed amount of Bitcoins awarded to a miner or mining pool when they find a given block.

Mining Pool

Mining pooling is the process of multiple miners pooling their efforts together and sharing the block reward. Mining pools let you increase the chances of earning a block reward for miners.

Block Reward Halving

Approximately every four years, the block reward is halved. The oldest block reward was mined in 2008 and was for 50 Bitcoins. In 2012, the first halving occurred, and the block reward was halved to 25 Bitcoins.

In 2016, the reward was halved again to 12.5 Bitcoins. The third halving will occur on May 11th, and the reward will be reduced to 6.25 Bitcoins at this time. Our bitcoin block reward halving clock shows the latest estimation of when the next halving will occur.

Hashing Power (or Hash Rate)

Hashing power is the ability of a miner to perform calculations (hashes) per second. This can also refer to the sum of the hashing on a chain done by all the miners combined.

Difficulty

Mining difficulty is measured in trillions and corresponds to the problem of finding a block. Currently, Bitcoin mining is not profitable for most people due to the current level of difficulty on the Bitcoin blockchain.

Difficulty Adjustment

Here, every 10 minutes, a  new block is generated in Bitcoin. A block’s difficulty must adjust proportionally to the total hashing power (or Net Hash) in the network because the full hashing power is constantly changing.

For example, if there are four miners on the network, all of the equal power, and two stop mining, blocks would occur every 20 minutes instead of every ten. It is also necessary to reduce the difficulty of finding blocks in half to continue finding blocks every 10 minutes.

A difficulty adjustment occurs every 2,016 blocks. When blocks are added every 10 minutes, the difficulty level will change every two weeks in this situation. Its 10-minute rule, however, is merely a guide. So after more than 10 minutes, other blocks are added. Others are added sooner. If left to chance, it is a law of averages. While blocks are generally added every 10 minutes, it doesn’t always mean that they’re reliable.

Kilowatt Hour

KH is the amount of energy consumed per hour. The majority of ASIC miners will report their energy consumption using this metric.

Bitcoin mining: Is it a waste of electricity?

Bitcoin mining is constantly portrayed as a waste of electricity in the media.

But, as we’ll see, there are some problems with their theories.

Doesn’t mining waste electricity?

Mining has been criticized as being wasteful by some orthodox economists. Nevertheless, one must remember that electricity is being used to produce valuable work: Making possible a monetary system worth billions (and possibly trillions) of dollars!

Bitcoin is comparatively less environmentally impactful than the carbon emissions from the cars of PayPal’s employees as they commute to work.

Because Bitcoin could potentially replace PayPal, credit card companies, banks, and the bureaucrats who regulate them all, the following questions arise:

Isn’t traditional finance wasteful? This is true for electricity, money, time, and human resources.

Mining Difficulty

Given the limited number of Bitcoins that will ever be available, why has the creation of Bitcoin not increased with the power of mining hardware?

The issue of a new coin is determined by the algorithm Difficulty, which adjusts the difficulty of the Proof of Work problem based on how quickly blocks are solved within a given time (roughly every two weeks or 2016 blocks).

With the deployment of hashing power, the difficulty ebbs and flows, maintaining an average block time of 10 minutes.

The average block time for most of Bitcoin’s history has been 9.7 minutes. As a result of the rising price, mining power comes onto the network rapidly, resulting in more blocks created faster. As of now, block time is around 10 minutes. This is because Bitcoin’s price has been stable for most of 2019.

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Block Reward Halving

As part of Satoshi’s original design, blocks are halved every 210,000 blocks (or roughly four years), which minimizes the miners’ automatic reward.

Despite the dropping block reward, mining remains a profitable undertaking (at least for those miners who have access to low-cost electricity) despite the significantly increasing price of Bitcoin.

Honest Miner Majority Secures the Network

To create blocks with a false transaction record and attack the Bitcoin network successfully, a dishonest miner will need the majority of mining power to maintain the longest chain. A 51% attack is defined as the ability to spend the same coins repeatedly and to block the transactions of others at will. Defeating all honest miners requires an attacker to own more mining hardware.

Such attacks incur high monetary costs. The business costs of destroying or degrading Bitcoin are unlikely to be covered by anybody other than major corporations or states. However, it is unclear what benefit such actors would gain from destroying or degrading Bitcoin.

Mining Centralization

Unfortunately, Bitcoin mining is becoming more centralized due to pools and specialized hardware. Bitcoin developer Greg Maxwell stated that a handful of entities control the vast majority of hashing power, potentially detrimental to Bitcoin. In addition, about half of all mining equipment is located in China.

However, a miner may argue that attempts at such an attack are not in their long-term interests. Falling credibility would lead to a significant decline in Bitcoin’s exchange rate, undermining the mining hardware investment and coins held by miners. In light of the possibility that the community could reject the dishonest chain and revert to the last honest block, a 51% attack presents a poor risk-reward ratio to miners.

 

Mining Bitcoin: How Does It Work?

To explain: Here is a simplified illustration:

1) Spending

Suppose the Green user would like to purchase goods from the Red user. The Green user sends Red 1 bitcoin.

2) Announcement

Wallet Green sends one bitcoin to wallet Red. Many Full Nodes connect with Green’s wallet – typically 8 – broadcast the information referred to as a transaction (abbreviated as “tx”) in a distributed manner. Full nodes maintain a copy of the complete blockchain and act as transaction relays.

3) Propagation

The full nodes then compare Green’s spending with the remaining pending transactions. A complete node broadcasts a transaction without conflicts (for example, Red did not send the same coins to Green and a third user). The transaction hasn’t yet entered the blockchain at this point. It would be risky to ship any goods to Green before the trade. So how do transactions get verified? That’s where miners come into play.

4) Processing by Miners

Similar to full nodes, miners monitor the network for newly-announced transactions and keep a complete copy of the blockchain. It is possible for Green’s transactions to reach a miner directly and not be relayed through a node. After a block has been created, each miner attempts to fit all of the new, valid transactions into it.

To “package” the current block, miners compete against one another to be the first to finish the work. Blocks that include a solution to a Proof of Work computation problem are acceptable.  

As a miner expands his computing power, the hash rate will increase, and the chances of solving the block also increase.

Mining hardware is expensive. So why do miners race to solve blocks? Each solved block entails substantial Bitcoin rewards for the miners, who verify and record everyone’s transactions.

What exactly is a hash? You will need to enter every character from “But” to “block!“ into the hashing utility. IfIn the case of Bitcoin, the SHA-256 algorithm should yield the following: If you pasted the hash correctly – without spaces after the exclamation point:

“6afc21238f2d33e24e168195888721dd5ace05d76196671d6739789af92201ed.”

Any changes to the characters will cause the result to differ. Thus, a hash is a method of verifying the accuracy of any amount of data. The goal of block solvers is to modify non-transaction data in the current block so that their hashes begin with zeroes (according to the current difficulty level discussed below). You will soon recognize why this is considered “Proof of Work!” if you manually modify the string until you get a result of 0…”””

5) Blockchain Confirmation

Green’s payment to Red is announced to the network by the first miner to solve the block containing it. There’s the addition of a new block to the blockchain when other full nodes agree it is valid, and the process is restarted. Green’s payment becomes confirmed once it is recorded in the blockchain.

It is now possible for Red to send the goods to Green. However, reversing Green’s payment becomes increasingly difficult as more blocks are stacked on top of the block with Green’s payment. We recommend waiting for at least six confirmations for large amounts of money. It shouldn’t take more than an hour since new blocks are generated every ten minutes on average.

The Longest Valid Chain

Since Bitcoin transactions are irreversible, why is it advised to wait for multiple confirmations? Answering this question requires a firm grasp of the above mining process:

Consider two miners working on the same block, A in China and B in Iceland. From Beijing, A’s block (A1) spreads to nodes in the East through the internet. First, B1’s block reaches nodes in the West. Two blockchain versions now exist! Which blockchain will prevail? 

Simply put, the most valid chain prevails. Let us suppose that the next miner to solve a block adds B’s chain, thus creating B2. B’s chain is the winner if B2 propagates across the entire network before A2. The mining reward and fees A gets are lost because they exist only on the invalidated A chain.

To continue with the example of Green’s payment to Red, let’s say A included this transaction, but B rejected it, claiming a higher fee than Green demanded. It will be as if Green’s transaction never appeared in B’s chain if B’s chain wins – that is, no funds would have left Green’s wallet.

Despite the rarity of such splits, they pose a credible risk. Transactions are considered safer the more confirmations they have hadForfor this reason, “0 confirmations” or “0-conf” on the Bitcoin Cash blockchain is so risky.

 

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