Bitcoin Mining: A Complete Guide for Beginners

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Bitcoin Mining: Hello friends by now you must have got the idea of few buzzwords in the bitcoin arena viz. blockchain technology, bitcoin wallets, proof of work, bitcoin mining etc. So, today we are going to explain you what is bitcoin mining and how bitcoin mining works. Basically, giving you guys a tour on everything you should know about bitcoin mining.

We all know that in traditional currencies, government prints money for its circulation. However, as we already told you that bitcoin is a digital currency which is decentralised. Nobody own bitcoins. Nobody prints bitcoins as well. The only way bitcoins are circulated amongst people is through a process called mining. We have heard that in mining, bitcoin miners solve some complex math problems to issue a certain number of bitcoins in exchange. But, how does this actually work?

Bitcoin Mining

For that, you need to read this article till the end to understand the basics of bitcoin mining. By the end, we promise you will have a clear understanding on how bitcoin mining occurs. So let us begin first with bitcoin mining explained in detailed. We will follow step by step under this for everything it comprises of.

What is Bitcoin Mining

As discussed earlier, being a decentralized currency do you wonder who decides which transactions are valid and should be added to blockchain? How is it ensured that the system can not be forged for ex: spending the same bitcoin twice? Well, the answer is – Bitcoin Mining!

Bitcoin mining is a process of adding and validating transactions to Bitcoin’s general ledger, called the blockchain.

Basically, “blockchain” is called so because it is a chain of blocks, i.e record of past transactions – the blocks. Bitcoins are given to miners as a reward for validating previous transactions.

During the process of mining, Bitcoin miners use computer resources and special program to solve complex mathematical problems. By using cryptographic hash functions, they try to solve a block having the latest transaction data in it. Every time a block comes, it gets converted into mathematical puzzles and miners solve/validate them for further circulation.

This process is complex but that is required so that the number of blocks found every day by miners remains steady. With this process, Bitcoin’s flow is maintained in the network. This way Bitcoins are created or mined and New coins gets disseminated in a decentralized manner. Also, sometimes miners are paid transaction fees too, for solving complex problems.

How Does Bitcoin Mining Works

We’ll talk about the complex process now in detail. In every ten minutes, mining computers collect blocks (pending bitcoin transactions). These blocks are then converted into complex mathematical puzzles. Now, first miner to find the solution announces it to other miners on the network.

The other miners then check if the solution to the puzzle is correct and if the sender of the funds has the right to spend the money. Once approved, the block is cryptographically added to the general ledger and miners move towards the next set of transactions. This justifying the name blockchain (blocks added one after the other as chain).

The miner who finds a solution gets some bitcoins as rewards (once certain fixed number of blocks gets added to the ledger). This acts as an incentive and motivate miners to participate in the network and validate transactions.

Now, when miners solve puzzles for adding the blocks to the ledger, it provides protection. Suppose if frauds would want to double spend a bitcoin, they need to rewrite the blockchain for doing so they have to control more than half of the network’s puzzle-solving capacity. Now this is almost like a  50% attack and would be extremely expensive to replicate, making it a next to impossible kind of task.

If you want to Know how Bitcoin Works, we got that too.

What is Proof of Work

Now comes into picture Proof of work. So what exactly is it? As we already know that blockchain is anonymously maintained by miners on the network. Also, since adding a block to blockchain requires validation, and for that bitcoin network requires that each block should prove a considerable amount of work (proof of work) that has been invested in its creation. Why? Well, to make the process more secure, so that frauds can not modify the past blocks.

Also, with chaining of blocks together, it is impossible to modify transactions included in any block, without modifying all the following blocks. As a result, it gets more and more expensive with every block added to the blockchain – signifying the effect of the proof of work.

Bitcoin use Hashcash proof of work system, for block generation. For new blocks to get added in the blockchain, their hash should be atleast as challenging as expected by the consensus protocol. It is critical to note that difficulty level of this work is adjusted so that the rate of new blocks generation gets limited to one in every 10 minutes.

For a block to get validated, it must hash to a value less than the current target. The reason behind this being each block should indicate that work has been done generating it. Every block contains the hash of the previous block, each block having a chain of blocks together containing a large amount of work. Changing a block could only be done by creating a new block containing the same predecessor. This means changing a block requires regenerating all successors and redoing all the work that they contain. Thus, protecting the blockchain from getting modified.

For proving that you did some extra work in creating a block, you must create a hash of the block header. This does not exceed a certain value. Let’s understand this with an example. Suppose if the maximum possible hash value is 2256 − 1, you can prove that you have tried upto two combinations by producing a hash value which is less than 2255.

In the above stated example, you will produce a successful hash on an average at every other try. Also, you can estimate the probability that a given hash attempt would generate a number below target threshold. In bitcoins, it assumes a linear probability – that the lower it makes the target threshold, the more hash attempts will need to be tried (on an average).

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What is The Bitcoin Mining Ecosystem

Mining ecosystem comprises all the elements (hardware + software) that it comprises of. Let us take a look of these in detail:

Bitcoin Mining Hardware:

For bitcoin mining, users have used several types of hardware from time to time.  Couple of them are listed below:

bitcoin mining farm

  1. CPU Bitcoin mining: In the starting days, bitcoin mining was done with a CPU. It was done using the original Satoshi client. However, during the years, in the quest to secure the network and earn more bitcoins, miners keep innovating this. With the advent of GPU mining, CPU mining became financially redundant. This option is thus removed from the bitcoin client’s user interface.
  2. GPU Bitcoin Mining: GPU Mining is far more efficient and faster than CPU Mining. Because of its massively parallel nature, few GPU’s allowed 50X to 100X increase in bitcoin mining power. It also uses much less power per unit of work.
  3. FPGA Bitcoin Mining: Now after CPU and GPU Bitcoin Mining, technology progressed up to the Field Programmable Gate Array. With the introduction of this, mining hardware landscape gave way to specifically manufactured hardware. FPGAs did not enjoy a 50x – 100x increase in mining speed as seen with the transition from CPUs to GPUs. They provided a benefit through power efficiency and ease of use. Basically, the new-age bitcoin mining industry was born with this.
  4. ASIC Bitcoin Mining: The bitcoin mining world has now entered in the era of the Application Specific Integrated Circuit (ASIC). An ASIC is a chip designed only to do one thing Unlike FPGAs, an ASIC can not be re-purposed to perform other tasks. An ASIC designed to mine bitcoins could only mine bitcoins and will only mine bitcoins ever. The inflexibility of an ASIC is stated by the fact that it offers a 100x increase in hash power while reducing power consumption 7x times as compared to the previous technologies. There is nothing that can replace ASICs now or in the immediate future.

Bitcoin Mining Software

There could be two basic ways to min – One – on your own and Second – as part of Bitcoin mining pool or with bitcoin cloud mining. Appended below is the detailed description of the same.

Bitcoin Mining Pool: Increasing number of miners competed for the limited supply of blocks. As a result, they found that in spite of their working for months, they could not find a block and receive any reward for their mining efforts. This made mining something like a gamble. To address this issue and the variance in their income, miners started organizing themselves into pools in order to share rewards more evenly.

Today, almost every miner choose to mine in a pool because it ease out the luck inherent in the mining process. Before you join a pool, you need to make sure you have a bitcoin wallet. With a wallet, you have a place to store your bitcoins.

With pool mining, profit from each block that any pool member generates is divided amongst the members of the pool according to the amount of hashes that they contributed.

Bitcoin Cloud Mining Contract: Mining contractors often provide mining services with performance specified by a contract – referred to as a “Mining Contract”. With this, they could rent out a specific level of mining capacity for some set amount of price and for some specific duration.

What are Hash Functions & its use for Bitcoins

A hash function is a mathematical process, taking input data of any size and performing an operation on it while returning output data of a fixed size.

To specify with even more concrete example, this can be utilized to take a sequence of letters. This sequence could be of any length input that we call a string and also return a sequence of letters with a fixed length. Whether the input string is a single letter, or a word, or a sentence, or an entire novel, the output, also called the digest will always be of the same length. A very common use of this type of hash function is to store passwords.

Whenever you want to create a user account with any web service that requires a password, the password gets run through a hash function, and the hash digest of the message is stored. While you type your password to log in, the same hash function gets run on the word that you’ve entered, and the server now checks if the result matches the stored digest.

What is difficulty in Bitcoin Mining?

Bitcoin mining a block is difficult because the SHA-256 hash of a block’s header must be lower than or equal to the target in order for the block to be accepted by the network.

This problem can be simplified for explanation purposes: The hash of a block must start with a certain number of zeros. The probability of calculating a hash that starts with many zeros is very low, therefore many attempts must be made. In order to generate a new hash each round, a nonce is incremented. This is based on the hashcash function.

The Bitcoin mining difficulty is the measure of how difficult it is to find a new block as compared to the easiest it can ever be. To solve this, every 2016 blocks is recalculated to a value that the previous 2016 blocks would have been generated in two weeks if everyone been mining at this difficulty. On an average, this will yield,  one block every ten minutes.

With more miners joining, this rate of block creation will go up. As the rate of block generation goes up, the difficulty rises. To compensate it will push the rate of block creation, back down. Blocks released by malicious miners which do not meet the required difficulty target will be rejected by everyone on the network and thus will become worthless.

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What is The Block Reward

When a block is discovered, the discoverer may even award themselves some certain number of bitcoins. This has to be agreed-upon by everyone in the network. At present, this bounty is 25 bitcoin. This value will halve every 210,000 blocks.

Also, the miner gets awarded the fees paid by users making transactions. This fee is an incentive for the miner for including the transaction in their block. In the future, with the number of new bitcoins that miners are allowed to create in each block changes, the fees will make up a more important percentage of mining income.

Is Bitcoin Mining Profitable?

The answer to this could be “This depends how much you’re willing to spend”. Also, Bitcoin Mining profitability depends on different aspects. For finding out Bitcoin mining profitability for different factors “mining profitability calculators” were invented.

These calculators take into account varied parameters such as electricity cost, cost of your hardware and other variables also give you an estimate of your projected profit. Before we give you an example of how this is calculated, let’s check out different variables mentioned below:

  • Hash Rate – Hash is the mathematical problem, that a miner’s computer needs to solve.  Hash Rate is the rate at which these problems are solved. As the more miners join the Bitcoin network, the higher the network Hash Rate becomes. Hash Rate is also referred as miner’s performance. Today Bitcoin miners come up with different Hash Rates. Miner’s performance is measured in Mega hash per second, Giga hash per second, Terra hash per second and even Peta hash per second.  
  • Bitcoins per Block – Every time a mathematical problem is solved, some amount of Bitcoins are created. The number of Bitcoins generated per block begins at 50 and is halved every 210,000 blocks in about four years.
  • Bitcoin Difficulty – The Bitcoin network is designed to produce some fixed amount of Bitcoins every 10 minutes. Due to this, the difficulty of solving the mathematical problems has to increase in order to join, the harder it gets to mine Bitcoins.
  • Electricity Rate – Bitcoin miner consumes a lot of electricity. In order to calculate profitability, you’ll need to find out your electricity rate. This can generally be found on your monthly electricity bill.
  • Power consumption – Every miner consumes different amount of energy. Before calculating profitability, make sure to find out exact power consumption of your miner. This can be easily found  with a rapid search on the Internet. Power consumption is measured in Watts.
  • Pool fees – In order to mine you need to join a mining pool. A mining pool is a group of miners that joins together to mine more effectively. The platform which brings them together is called a Mining Pool and it deducts some fee to maintain its operations. Once the pool manages to mine Bitcoins, profits are divided between the pool members. Division depends on how much work each miner has done i.e. their miner’s hash rate.
  • Time Frame – While calculating if Bitcoin mining is profitable you have to define a time frame to relate to. The more time you mine, more Bitcoins you will earn.
  • Profitability decline per year – This is probably the most critical and illusive variable of all. Since no one can actually predict the rate of miners joining the network nobody can even predict how difficult it will be to mine in 5 weeks, 5 months or 5 years from now. This is one of the two are the main reasons that people find difficult to answer “Is Bitcoin mining profitable?”
  • Conversion rate – Another big reason is conversion rate. In this case, you can set an annual profitability decline factor that will help you estimate the growing difficulty. Since no one knows what the BTC/INR exchange rate would be in the future, it’s hard to predict if Bitcoin mining would even be profitable. However, if you are into mining to accumulate Bitcoins only then this should not bother you. But if you are planning to convert Bitcoins to any other currency in the future then this factor will have a major impact of course. At present, stats says yes – bitcoin mining is profitable. Still, this is totally unpredictable as what could happen in future.

Hope that you guys are now clear about the nitigrities of bitcoin mining. For more such updates, you can bookmark this page so that as and when we post something interesting, you can know about it at the instant.

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