Bitcoin Mining Explained
What is Bitcoin mining? Does it mean I can generate free Bitcoin from my computer? Is it still profitable to mine Bitcoin these days? Well, stick around… Here on Bitcoin Whiteboard Tuesday, we’ll answer these questions and more. Bitcoin was created as a decentralized alternative to the banking system. This means that the system can operate and transfer funds from one account to the other without any central authority. With a central authority, transfering money is easy: Just tell the bank you want to remove $50 from your account and add it to someone else’s account.
In this case, the bank has all the power, since the bank is the only one who is allowed to update the ledger that holds the balances of everyone in the system. But how do you create a system that has a decentralized ledger? How do you give someone the ability to update the ledger without giving them so much power that they will become corrupt or negligent in their work? Well the rules of the Bitcoin system, known as the protocol solves this in a very creative way I like to call “Who Wants to Be a Banker?” In short, anyone who wants to participate in updating the ledger of Bitcoin transactions, known as the blockchain, can do so. All you need to do is guess a random number that solves an equation generated by the system. Sounds simple, right? Of course this guessing is all done by your computer. The more powerful of a computer you have, the more guesses you can make per second, thus increasing your chances of winning this game. If you managed to guess right – you earn Bitcoins and get to write the “next page” of Bitcoin transactions on the blockchain.
Here’s a more detailed breakdown of the mining process: Once your mining computer comes up with the right guess, your mining program determines which of the currently pending transactions will be grouped together into the next block of transactions. Compiling this block represents your moment of glory as you have now become the temporary banker of Bitcoin who gets to update the Bitcoin transaction ledger known as the blockchain. The block you’ve created, along with your solution is sent to the whole network so other computers can validate it. Each computer that validates your solution updates its copy of the Bitcoin transaction ledger with the transactions that you chose to include in the next block. As you can imagine, since mining is based on a form of guessing; for each block, a different miner will guess the number and be granted the right to update the blockchain. Of course the miners with more computing power will succeed more often, but due to the laws of statistical probability, it is highly unlikely that the same miner will do so every time.
After this stage is complete, the system generates a fixed amount of Bitcoins and rewards them to you as a compensation for the time and energy you spent in solving the math problem. Additionally, you get paid any transaction fees that were attached to the transactions you inserted into this block. So that’s Bitcoin mining in a nutshell. It’s called mining because of the fact that this process helps “mine” new Bitcoins from the system. But if you think about it, the mining part is just a by product of the transaction verification process. So the name is a bit misleading, since the main goal of mining is to maintain the ledger in a decentralized manner. Now that you know what Bitcoin mining is you might be thinking “cool! Free money! So where do I sign up?” Well, not so fast…. Satoshi Nakamoto, who invented Bitcoin, crafted the rules for mining in a way that the more mining power the network has, the harder it is to guess the answer to the mining math problem.
So the difficulty of the mining process is actually self adjusting to the accumulated mining power the network possesses. If more miners join, it will get harder to solve the problem; If many of them drop off, it will get easier. And this is known as the mining difficulty. So why on earth did Satoshi do this? Well, he wanted to create a steady flow of new Bitcoins to the system. In a sense, this was done to keep inflation in check. The mining difficulty is set so that on average a new block will be added every 10 minutes. Now remember, this is on average. We can have two blocks being added minute after minute and then wait an hour for the next block. In the long run this will even out to 10 minutes on average. As you can imagine, this type of self adjusting mechanism created some sort of an “arms race” to get the most efficient and powerful miners as soon as possible.
When Bitcoin first started out there weren’t a lot of miners out there. In fact, Satoshi, the inventor of Bitcoin, and his friend Hal Finney were some of the few people mining Bitcoin back at the time with their own personal computer. Using your CPU, meaning your Central Processing Unit or your computer’s brain, was enough for mining Bitcoin back in 2009 since the mining difficulty was low. As Bitcoin started to catch on people looked for more powerful mining solutions.
Gradually people moved to GPU mining. A GPU or Graphics Processing Unit is a special component added to computers to carry out more complex calculations. GPUs were originally intended to allow gamers to run computer games with intense graphics requirements. Because of their architecture they became popular in the field of cryptography and around 2011 people also started using them to mine Bitcoins. For reference, the mining power of one GPU equals that of around 30 CPUs. Another evolution came later on with FPGA mining. FPGA is a piece of hardware that can be connected to a computer in order to run a set of calculations. They are just like a GPU, but 3 to 100 times faster. The downside is that they are harder to configure, which is why they weren’t as commonly used in mining as GPUs. Finally, around 2013 a new breed of miner was introduced – the ASIC miner.
ASIC stands for Application Specific Integrated Circuit, and these were pieces of hardware manufactured solely for the purpose of mining Bitcoin. Unlike GPUs, CPUs and FPGAs they couldn’t be used to do anything else. Their function was hardcoded into the machines. ASIC miners are the current mining standard. Some early ASIC miners even appeared in the form of a USB but they became obsolete rather quickly. Even though they started out in 2013 the technology quickly evolved and new more powerful miners were coming out every 6 months. After about 3 years of this crazy tech race we’ve finally reach a technological barrier and things have cooled down a bit.
Since 2016 the pace at which new miners are released has slowed considerably. Now that you know what miners are, let’s talk a bit about mining pools. Assuming you’re just entering the Bitcoin mining game, you’re up against some heavy competition. Even if you buy the best possible miner out there you are still at a huge disadvantage compared to professional Bitcoin mining farms. That’s why mining pools came to existence. The idea is simple – miners group together to form a “pool”.
Meaning they combine their mining power to compete more effectively. If the pool manages to win the competition, the reward is spread out between the pool members depending on how much mining power each of them contributed. This way even small miners can join the mining game and have a chance of earning Bitcoin, even though they get only a part of the reward. Today there are over a dozen large pools that compete for the chance to mine Bitcoin and update the ledger. I know you might be thinking, “ok, all this theory stuff is very nice, but is Bitcoin mining actually profitable today?” Well, the short answer is “probably not”, the correct (and long) answer is “it depends on a lot of factors”.
When calculating Bitcoin mining profitability there are a lot of things you need to take into account. Let’s go over them quickly A Hash is the mathematical problem the miner’s computer needs to solve. The Hash Rate refers to your miner’s performance or how many guesses your computer can make per second. Hash rate can be measured in Mega hash per second (MH/s), Giga hash per second (GH/s), Terra hash per second (TH/s) and even Peta hash per second (PH/s). This refers to the number of Bitcoins generated when a miner finds the solution. This number started at 50 Bitcoins back in 2009 and is halved every 210,000 blocks, about four years. The current number of Bitcoins awarded per block is 12.5. The last block halving occurred in July of 2016 and the next one will be in 2020. This is a number that represents how hard it is to mine Bitcoins at a certain moment according to the amount of mining power currently active in the system. How many dollars are you paying per KiloWatt. You’ll need to find out your electricity rate in order to calculate profitability.
This can usually be found on your monthly electricity bill. The reason this is important is because miners consume electricity – whether for powering up the miner or for cooling it down as these machines can get really hot. Each miner consumes a different amount of energy. You’ll need to find out the exact power consumption of your miner before calculating profitability. This can be found easily with a quick search on the Internet or through this list. Power consumption is measured in Watts. If you’re mining through a mining pool, and you should, then the pool will take a certain percentage of your earnings for rendering their service.
Since no one knows what Bitcoin’s price will be in the future it’s hard to predict if Bitcoin mining will be profitable. If you are planning to convert your mined Bitcoins in the future to any other currency, this variable will have significant impact on your profitability. And finally #8 – The Difficulty increase per year – This is probably the most important and elusive variable of them all. The idea is that since no one can actually predict the rate of miners joining the network, neither can anyone predict how difficult it will be to mine in 6 weeks, 6 months or 6 years from now.
In fact, in all the time Bitcoin has existed profitability has dropped only a handful of times, even at times when the price was relatively low. The last two factors are the reason that no one will ever be able to give a complete answer to the question “is Bitcoin mining profitable?” Once you have all of these variables at hand you can insert them into a Bitcoin mining calculator and get an estimate of how much Bitcoin you will earn each month. If you can’t get a positive result on the calculator it probably means you don’t have the right conditions for mining to be profitable. I assume by now you pretty much know if mining is for you or not.
But you may have also heard about other types of mining like cloud mining, mobile mining or even web mining. Cloud mining means that you do not buy a physical mining rig but rather rent computing power from a mining company and get paid according to how much mining power you own. At first this sounds like a really good idea, since you don’t have to go through all of the hassle of buying expensive equipment, storing it, cooling it, and monitoring it. However, when you do the math it seems that none of these cloud mining sites are profitable. Those that do seem profitable are usually scams that don’t even own any mining equipment, they are just elaborate Ponzi schemes that will end up running away with your money. As a general rule of thumb I would suggest to avoid cloud mining altogether. If you still want to pursue this path make sure to make the right calculations before handing over any funds. Some mobile apps claim to mine Bitcoin on your phone. While in theory this is possible, due to the low processing power phones have compared to ASIC miners you will probably end up draining your phone’s battery much faster and make a very small fraction of a Bitcoin in return.
The apps that allow this, act as mining pools for mobile phones and distribute earnings according to how much work was done by each phone. Remember, mining is possible with any old computer, it’s just not worth the electricity wasted on it since the slower the computer, the smaller the chances of actually getting some kind of reward. Finally, somewhere around 2017 the concept of web mining came to life. Simply put, web mining allows website owners to hijack, so to speak, their visitors’ CPU and use them to mine Bitcoin. This means that a website owner can make use of thousands of “innocent” CPUs in order to gain profits. However, since mining Bitcoins isn’t really profitable with a CPU, most of the sites that utilize web mining mine other coins instead. As of the release of this video over 20 thousand sites have been known to utilize web mining.
The concept of web mining is very controversial. From the site’s visitors’ perspective, someone is using their computer without consent to mine Bitcoins. In extreme cases this can also harm the CPU due to overheating. From the site owner’s perspective, web mining has become a new way to monetize websites without the need for placing annoying ads. Also, the site owner can control how much of the visitor’s CPU he wants to control in order to make sure he’s not abusing his hardware. To conclude this episode of Bitcoin whiteboard Tuesday, here are 3 Questions I get asked a lot: The first is “Isn’t mining a waste of electricity?” While there’s been a lot of criticism regarding the energy consumption that Bitcoin mining employs worldwide there are various arguments against this claim as well.
For starters, you could say that Bitcoin mining ultimately requires less resources than the current banking system. If you take into account banks, servers, ATMs, credit card companies and all other components of the current monetary system, you’ll find out that it is much more wasteful than Bitcoin mining. Especially if you think about all of the paper used for printing money and pollution caused by these institutions. Also, you could say Bitcoin mining is actually optimizing power consumption around the world. Many companies are moving their mining operations to countries that have an excess of electricity. This means that the use of electricity worldwide is actually becoming more efficient. There are a lot of additional arguments in favour of mining but I’ll leave you with these two for now. The second question I usually get is “Can’t Google start mining Bitcoin and blow out the competition?” Yes it can, but it won’t do it much good.
The reason is that Google’s servers aren’t fit for solving the Bitcoin mining problem the same way that ASICs are. For reference, if Google harnesses all of its servers to the sole purpose of mining Bitcoin, and abandons all other business operations, it will account for around one one-thousandth of a percent of the total mining power that the Bitcoin network currently has. And finally, Should I mine Bitcoins? Well now that you’ve about finished watching this video you should be able to answer this question yourself. Keep in mind that sometimes there might be better alternatives to Bitcoin mining in order to produce a higher return on your investment. For example, depending on Bitcoin’s price it might be more profitable to just buy Bitcoins instead of mining them. Another option would be to perhaps mine altcoins which can still be mined with GPUs like Ethereum, Monero or Zcash.
This concludes this week’s episode of Bitcoin Whiteboard Tuesday. Hopefully now you have a better understanding of what Bitcoin mining is – the process of updating the ledger of Bitcoin transactions incentivized with the rewarding of new Bitcoins to those who participate. You may still have some questions. If so, just leave them in the comment section below. And if you’re watching this video on YouTube, and enjoy what you’ve seen, don’t forget to hit the like button. Then make sure to subscribe for notifications about new episodes. Thanks for joining me here at the Whiteboard. For 99Bitcoins.com, I’m Nate Martin, and I’ll see you… in a bit.
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