Bitcoin Mining

 

What is bitcoin mining?

Does it mean I can generate free bitcoin from my computer or is it still profitable to mine bitcoin these days.

Bitcoin was created as a decentralized alternative to the baning system this means the system can operate and transfer funds from one account to another without any central authority. With the central authority transferring money is easy you just tell the bank you want to remove $100 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 Bitcoin system, known as the protocols solves this in a very creative way which we can call, Who wants to be the banker?  In short anyone who wants to participate in updating the ledger of Bitcoin transactions known as the block chain can do so.

All you need to do is guess a random number that solves an equation generated by the system, sounds simple but of course this guessing is all done by your computer. The more powerful the computer you have the more guesses you can make per second, thus increasing your chances of winning this game.

If you mange to guess right you earn Bitcoins and get to write the “next page” of Bitcoin transactions on the block chain. Here is a more detailed breakdown of the mining process; once your mining computer comes up with 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 of the ledger known as the block chain. The block you have created, along with your solution is sent to the whole network so as other computers can validate it. Each computer that validates your solution updates its copy of the bitcoin transaction ledger with the transactions they you chose to include in the next block.

As you can imagine since mining is dependent on guessing for each block a different miner will guess the number and be granted the right to update the block chain. Of course the miners with the more computing power will succed 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 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 is Bitcoin mining in a nutshell. It is called mining because of the fact this process helps “mine” new Bitcoins from the system but if you think of it the mining part is just a byproduct 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 may be thinking cool wow free money where should 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 posses. 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? He wanted to create a steady flow of new bitcoins into the system in sense this was done to keep inflation at a 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 infact satoshi the inventor of Bitcoin, and his friend Hal Finney were some of the few people mining bitcoin back at their own personal computer  using your cpu meaning the 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 up 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 artitecheture they became popular in the field of cryptography and around 2011 people started using them to mine Bit coins.

For reference the mining power of one GPU equals that of around 30 CPUs. Another revolution 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 absolute rather quickly even though they started out in 2013 the technology quickly evolved and new more powerful miners were coming out every 6months after about three years of this crazy tech race we have finally reached a technological barrier and the 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 abit about mining pools. Assuming your just entering the bitcoin mining game you’re up against some heavy competition even if you buy the best possible miner out there your still at a huge disability compared to professional bitcoin mining firms 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 power each of them contributed. In 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 of large pools that compete for the chance to mine Bitcoin and update the ledger o I know you may be thinking ok all this theory 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 a lot of things you need to take into account lets go over them quickly.

1. 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), Tera hash per second(PH/S) and even peta hash per second(PH/S).

2. Block reward

Refers to a number of bitcoins generated when a miner finds the solution. This number started at 50 Bitcoins back in 2009 and is halved every 210000 blocks about four years, the current number of Bitcoins awarded per block is 12.5.

3. Mining difficulty

This is a number that represents how hard it it is to mine Bitcoins at a certain moment according to the amount of mining power currently active in the system.

4. Electricity cost

How many dollars are you paying per kilowatt you need to find out your electricity rate in order to calculate profitability? This can usually be found on your monthly electricity bill whether for powering up the miner or cooling it down since these machines can really get hot.

5. Power consumption

Each miner consumes a different amount of energy you need to find out the exact amount of energy of your miner before calculating your profit and this can be found easily with the ease of internet.

6. Pool fees

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.

7. Bitcoin’s Price

Since no one knows what bitcoin’s price will be in future its 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.

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.

 

When you look into these factors and don’t favor you then try other mining like;

1.       Cloud mining

2.       Mobile mining

3.       Web mining

 

If you have any other information regarding mining you can share with us in the comments below.