How to Mine Bitcoin (and Other Cryptocurrency) Explained

Bitcoin mining rig

Bitcoin is a new form of payment system that is taking the internet by storm, thanks to the increasing distrust towards banks, economic downturns and pure speculation among those that are looking to cash in on the craze as it continues to grow in popularity.

Bitcoin, the world’s first successful cryptocurrency, is based completely in the digital world – there are no banknotes or coins involved, simply numbers on the screen and money more numbers behind the scenes. Many people see this as the future of currency, which has seen more than a billion dollars invested in Bitcoin-related businesses and much more spent on Bitcoin purchases – to provide you with some idea of the scale of the Bitcoin trade, at the time of writing, more than $72 million has been spent on the currency in the last 24 hours.

The cryptocurrency has gone from strength to strength since it was created by the famed Satoshi Nakamoto, a pseudonym for the person (or persons) who created Bitcoin back in 2009. Some have already amassed a serious return on their investments, from start-up CEOs such as Charlie Shrem, who first purchased Bitcoins when they were worth just $3 each (they are now worth more than 100 times than amount), to Kristoffer Koch, who made headlines after purchasing $26 dollars worth of Bitcoins in 2009, only to forget about them until 2013 and return to find them valued at nearly $900,000. Although, not everybody chooses to get their hands on Bitcoins by purchasing them from an exchange.

One of the main selling points of Bitcoin is the fact that it is decentralised, meaning that it is not controlled or produced by a central bank, as most standard currencies are. This means that there is no need to go through a bank to store and access your money, there are no transaction fees for payments made to others overseas, and, best of all, there is no chance of your money being taken to fund bailouts. Likewise, it is also becoming increasingly popular with vendors, as they aren’t required to pay any fees for accepting payment in Bitcoins, unlike the fees charged on credit card purchases which can be upwards of 2%.

While there are many negative aspects of the banking world that have been removed from Bitcoin, there are some elements that are still required to make the currency function properly. One such element is the recording, processing and confirmation of transactions. If each transaction wasn’t recorded, it would be impossible to keep track of past payments. Therefore, every time Bitcoins change hands, the event is recorded in the ‘blockchain’. The blockchain is a database which contains the records of every transaction that has ever been executed using the currency, which is stored on the system of every Bitcoin user. This file is made up of a number of ‘blocks’, which is a collection of a number of transactions made during a certain period of time. Although, before they find their way onto the blockchain, they must first be processed by miners, to ensure that the data cannot be tampered with in the future.

 

What’s a Bitcoin Miner?

A Bitcoin miner.
A miner could technically be anybody, even you. There are no rules which dictate who can and can’t process transactions by mining blocks. A miner is simply anybody who has an internet connection and the equipment on hand to run the mining software. This software will attempt to solve what can only be described as a complex mathematical puzzle using the information within the block to generate the correct ‘hash’, which is the information that will eventually be stored in the blockchain.

The Bitcoin protocol acts to make the process of hashing more difficult for miners. It has been predetermined that there will never be more than 21 million Bitcoins in existence in order to avoid unhealthy inflation. If the process of mining was as simple as hashing the data, it would take just minutes for the 21 million limit to be reached. Instead, each block must be presented in a certain way, with a set number of zeroes at the start of the code. The miner’s system will work on a trial and error-like process to figure out the correct hash, which will come out looking something like this:

000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f

Aside from the transaction information stored within each block, the hash will also contain data from the previous block in the blockchain. This is a way of ensuring the legitimacy of the block, to deter people from tampering with the transaction history, as if one block is altered, it would be clear that the block has been tampered with as it would differ from the next block in the blockchain, which contains its original data.

At this point, you might be asking yourself why anybody would bother purchasing the equipment needed to process Bitcoin transactions, but there is a reason why it has been named ‘mining’. If you are the first miner to crack the combination and correctly hash the block, you are rewarded with 25 Bitcoins, which acts as payment for the work that your system is completing.

Once 210,000 blocks have been mined, the block reward will be halved, which has occurred just once so far. The reward started at 50 Bitcoins in 2009 and was halved in 2014. It is estimated that the reward will halve approximately every four years, which would see the 21 million cap reached by approximately 2140.

While most miners mine for the block reward, they are also able to profit from their work through transaction fees. As the cap draws closer, transaction fees should begin to play a bigger role in motivating miners to continue, and once 21 million Bitcoins have been generated, it will be the only motivation. Although, for now, it makes up a miniscule amount of a miner’s generated revenue.

These transaction fees are calculated based on a number of factors, including the amount of Bitcoin being sent and the size of the data being transferred. Although, in most cases transaction fees are voluntary contributions made by the person who is performing the transaction, as it acts as an incentive for the miner to include the transaction in the next block. At the moment, most miners do not expect to receive a transaction fee, as the 25 Bitcoin block reward is more than enough payment for completing the task, but as the reward decreases, transaction fees will become more and more important in the processing of Bitcoin payments.

 

Where do I Start?

You may be thinking that mining Bitcoin sounds like an easy task. You simply set up your computer to do the magic and wait for the block rewards to start rolling in, right? That was certainly the case when the currency was first released back in 2009, but it has come a long way since, and with the mass of people now competing to solve a block, you won’t get very far without investing a great deal of money in a dedicated Bitcoin mining rig.

By far the best option is to mine Bitcoins without even buying, setting up or housing a rig, using a mining pool. These pools allow many people to group together, share resources and mine significant numbers of Bitcoin. Many people buy contracts as a way of getting Bitcoins at a cheaper rate than they would pay on an exchange, without the hassle of maintaining the actual mining operation themselves, with no need to consider the cost of electricity, heat, stalls or downtime.

This is the route I have chosen to go down, with Bitclub Network.
 

Bitclub Network have a state-of-the-art Bitmine in Iceland.
Bitclub Network have a state-of-the-art Bitmine in Iceland.

 

Is Bitcoin a Good Investment?

Bitcoin is often dismissed as an unstable currency that is likely to meet an inevitable collapse somewhere down the line. While the constant stream of Bitcoins coupled with the constant stream of new users can often cause the price of the currency to fluctuate, that isn’t to say that this won’t stabilise as the currency becomes more popular and more accepted. Bitcoin has made many people vast amounts of money, and while the prospect of becoming an overnight millionaire thanks to the cryptocurrency is now unlikely, that isn’t to say there isn’t still money to be made.

As with any investment, you should take some time to learn about what it is you’re investing in and consider the pros and cons beforehand. To say that profiting off of Bitcoin is a guarantee would be untrue, every investment comes with risk, and this is no different. You should therefore only invest money that you can afford to lose. Expect the worst, and if it happens then you won’t be disappointed, and it will make the profits seem a whole lot better too.

 

Bitcoin Mining Hardware

Back in 2009, most mining took place using standard central processing units (CPU), a part found in every computer which is used to execute operations. However, this method was slow, sluggish and often rendered everyday computers unusable during mining. Over time, miners turned to their graphical processing unit (GPU), the part in your computer which renders the images on your screen, to mine Bitcoins. This way was more than 50 times faster than using the CPU and used much less power, too. Although, this was still a low-level operation.

It wasn’t until 2011 that the Bitcoin mining industry took a more professional turn, as companies started to develop equipment designed specifically for the task of mining Bitcoins. The early devices were known as FPGA miners, as they used a field-programmable gate array processor (FPGA) which attached to a computer via a USB connector. The perk to using this device was that it consumed much less power than mining via a CPU or GPU.

Although, the market has since been taken over by application-specific integrated circuit (ASIC) miners, which work at faster speeds and consume much less power than any previously available rigs. The amount that you will save on electricity makes investing in an ASIC rig more than worth it. Likewise, with the amount of people competing for the same block rising drastically day by day, it is important to have a machine that can hold its own in a competitive playing field.

There is a range of Bitcoin hardware available to purchase, suitable for a broad range of budgets, from the $38 dollar AntMiner U2+ to the $2300 AntMiner S5+. There is little research out there that shows one hardware manufacturer to be better than another, but popular brands include AntMiner, Avalon and BTC.

 

Bitcoin Mining Software

Once you have your mining rig in place, you will then need to find some mining software, which effectively acts as the middleman between your hardware and the blockchain. The software will collect the required work from the blockchain, send it to your rig to complete and then relay the hash back to the blockchain upon completion. Most mining software will also keep track of important information and statistics for you to monitor, such as temperate, fan speed and the hashrate, or the speed at which your machine is working – the higher the hashrate, the more profit you are likely to make.

Mining software is available for all major operating systems, including Windows, OSX and Linux. Some have even been built to work on cheaper Raspberry Pi systems, but will require some fiddling about with the settings and drivers to get it working.

Once you’ve got your hardware and your software connected up, your mining rig is all ready to go. It may sound complicated, but all the difficult bits are performed effortlessly by your miner. You just need to purchase the equipment, set it up, and sit back while it works its magic.

But why bother with all that effort when you can have someone else do it all for you?

If you’re not a technical wizard (I’m not!) then Bitclub Network is the best place to get started.

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Steve

Steve

Steve has been investing ever since his first share purchase (in Dunlop) way back in the 1980s. Since then, he has built a diversified portfolio of mainly low-to-medium risk investments but bucked that trend by investing in Bitcoin during 2015 at a price of just $230. This has gone on to become Steve's best investment by far, though his main focus remains on steady compounding.

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