Chapter 7 Bitcoin Mining – Understanding Cryptocurrencies

CHAPTER 7

Bitcoin Mining

What Is Bitcoin Mining?

Bitcoin mining stands for the processing of transactions, in which the bitcoin transactions are verified so as to get added to the blockchain. The processing creates a new block that gets back-linked with the recent block in the blockchain. The blocks must get validated by a proof-of-work. Bitcoin uses HashCash toward this. Upon obtaining a block, this is broadcast to the network. This gets verified by other miners for consensus.

The participants to perform bitcoin mining are called miners. The miners get incentive to do mining. There are two parts to mining: verifying or compiling recent transactions and solving a mathematical problem. Whoever that is, a miner solves these first and gets the incentive in the form of bitcoins, and their block gets added to the blockchain. The miner incentive has two parts: transaction fees of the transactions contained in the block and newly released bitcoin. These newly released bitcoin with the successfully solved block is called a block reward.

Considering the total bitcoin supply of 21 million, a number that was set by bitcoin creator Satoshi Nakamoto, the block reward is set to get halved every 210,000 blocks as per the schedule. It is interesting to note the block reward of 50 bitcoins in 2009. As of 2018, this number has decreased to 12.5 that will further continue to decrease with more mined blocks. At the rate of bitcoin block time of 10 minutes per block, it takes about four years to have 210,000 blocks. This means that one may expect the block reward to get halved every four years. Even if it is 12.5 bitcoin for every block today, still it is a huge amount. The block reward will become zero when all the bitcoins are mined. At that time, the block reward would have halved 64 times from the creation till the end of the bitcoins. With time, mining is getting more and more difficult. With the increase in value of bitcoin over time, the value of bitcoins earned today, even if it is lesser in count, still have much higher purchase value than what it used to be. A bitcoin block is 1 MB in size.

How to Do It?

One does not need any license to do bitcoin mining. In the beginning, that is, 2009, miners used their laptops, but now those days are gone. The hardware costs are too high today to reap a reasonable benefit.

There are two methods to do bitcoin mining. Either do independently or join the mining pool. Regardless, the first step is to have a bitcoin wallet. As discussed in the earlier chapter, a hardware or paper wallet is the most secured one, compared to online or cloud-based wallets.

If one has chosen to do independent mining, it is very difficult to do on the personal laptop. Even if one gains some bitcoins, the benefits are much lower than the expenses on the electricity. Not to forget the wear and tear, hence decreased life of the hardware on personal laptop or desktop. Considering these setbacks, still if one is determined to go ahead independently, then one has to look for an application-specific integrated circuit (ASIC) miner. The ASIC miner is selected based on factors such as hashing power, efficiency, and price. It is recommended to buy an ASIC miner first-hand to avoid the high probability of burnout. In that case, a second-hand ASIC miner may burnout faster, that is, not last long enough for profits. Standard laptops for home use are not recommended to be used for mining due to high use of electricity and risk of burning the hardware.

Hashing power or hash rate is the unit of processing power of the bitcoin network. Hashing power is the power a computer or hardware uses to run and solve different hashing algorithms. The bitcoin network makes use of intensive operations related to cryptography. A hash rate of 10 Th/s means 10 trillion calculations per second. More the hashing power, more expensive is the hardware.

Efficiency is another factor of importance, as it may outweigh the benefits of bitcoin mining. A usable miner costs thousands of dollars. Electricity is the additional expense to run the hardware. Power supply adds to it. There are online calculators for bitcoin mining profit, where one inputs hash rate, bitcoin price, power consumption, and cost per power consumption unit to calculate an estimated profit per day, month, or year.

Another way of bitcoin mining is by joining a mining pool. Cloud mining allows the miners to rent hashing power. So, the first step is to choose a cloud mining service provider. Cryptocompare.com maintains a list of such service providers. The second step is to select a cloud mining package. The considerations for a package are its price and the expected return from it. One must remember that bitcoin price is very volatile; therefore, any promises or calculations based on the higher price of bitcoin may be very misleading. Generally, these mining companies require the miner to join a mining pool. The benefit of joining a mining pool is that it increases the chances of earning bitcoins. In turn, the pool charges a small percentage of the earnings.

Do I Need To Be a Technical Geek to Get Involved in It?

One must understand the underlying principles of what they are investing in. Bitcoin is not an exception. Mining needs a good deal of technical experience. A good understanding of so many concepts and process behind those is required such as bitcoin itself, how it works, wallets, wallets security, miner hardware and software, mining service providers, ability to select an efficient mining pool, and so forth.

It is interesting to note that the difficulty level adjusts itself based on the computational power. The objective is to have a constant block rate. In short, more computational power leads to a higher level of difficulty, whereas mining becomes easier if the computational power is reduced as there is a lower level of difficulty. The presence of increasing number of miners is making bitcoin mining harder, hence a need of more sophisticated equipment. The difficulty of mining gets adjusted every 2,016 blocks that corresponds to roughly every two weeks.

How to Use My Home Laptop Toward It?

In theory, a home laptop dedicated for bitcoin mining can be used. Whether it is profitable to do so is a different story altogether. A dedicated computer connected to the Internet is what anyone needs. The bitcoin mining process is very demanding in terms of processing power and electricity consumed by it. It was a common practice to use home computer for mining in its early days. However, now in 2018, bitcoin mining is rather obsolete.

Earlier in the 2009, the central processing unit (CPU) of a home computer was good enough to do bitcoin mining. On the mining of more bitcoins, it became quite difficult to do so using CPUs. Instead, graphics processing units (GPUs) gained popularity to perform the mining process. In 2013, ASICs became dominant, as these are the integrated circuits those are application specific, in this case, specifically designed for bitcoin mining. ASICs make the mining profitable compared with the use of CPUs or GPUs.

What Are the Required Software or Hardware?

Bitcoin hardware does the actual process of bitcoin mining, whereas bitcoin software is required to connect the miner with blockchain and the mining pool.

As mentioned earlier, the mining hardware has evolved from CPUs, GPUs, and then ASICs. The benefits of this evolution are better speed and lesser power consumption. The general considerations while selecting a mining hardware are the price per hash and electrical efficiency. As ASICs are designed specifically for the purpose of bitcoin mining, they become an evident option.

For the miners not interested in purchasing the hardware, they have an option to participate in the mining pool. This way, they rent the hardware on cloud subscription from the mining service providers. On that note, one can purchase simply a bitcoin cloud mining contract. Similar to altcoins, there had been numerous scams related to the mining service providers, so one needs to stay proactive by visiting bitcoin mining-related prominent forums.

The role of bitcoin software is regarding communicating information between miner and blockchain and the mining pool (if used). The software also monitors and displays various data related to hash rate, average speed, and temperature. There is no dependency on the operating systems (OS) as the mining software can run on any OS, including Windows, Mac, and Linux. There are many open-source free mining software available to perform the job.