If you’ve been asking yourself whether it’s possible to make your own bitcoins, the answer is – it really depends. Cryptocurrency mining is a fast-growing trend that can certainly be rewarding for many crypto enthusiasts. Especially mining Bitcoin, the first and the most famous of all cryptocurrencies, might seem extremely profitable at first glance, but it may not be suitable to everyone as it is a long-term investment that requires many resources, such as time, money, space, and of course, dedication.
This guide is designed to let you decide whether mining Bitcoin is the right investment choice for you by offering you a walkthrough of how bitcoin mining really works and helping you understand what equipment you need in order to start mining Bitcoin.
What Is Bitcoin Mining?
Bitcoin mining is the process of generating new bitcoins. In order to understand how mining works and why bitcoins are generated this way, you need to have a basic understanding of this asset and its underlying blockchain technology.
Bitcoin was invented as a decentralized alternative to our traditional financial system. Normally, our transactions are recorded and regulated by central authorities, such as banks. Bitcoin, however, runs on a technology called blockchain, which is a peer-to-peer network that records information on a public ledger and thus removes the necessity of having a central authority.
While the idea of digital money had been around for decades, Bitcoin managed to offer a secure decentralized alternative to banks by solving the problem of “double-spending”, thanks to blockchain technology.
Double-spending refers to the problem of manipulating digital assets so that they are used for multiple purchases. With paper money, when you pay for something, for example, when you buy an ice cream cone, physical money changes hands and you aren’t able to use the same banknote for another purchase.
When you pay with a credit card, the bank checks and secures the transactions. However, since digital assets are basically coded pieces of data, protecting the integrity of transactions and preventing fraud without depending on a central authority to secure the transactions is crucial for cryptocurrencies.
What Is Blockchain Technology?
Blockchain technology is an innovative solution that manages to address the problem of running a decentralized cryptocurrency securely. Designed by Satoshi Nakamoto, the group or person who launched Bitcoin into existence, blockchain technology allows for all the users in the system to verify the transactions on the chain, removing the necessity of a central authority to provide security.
Blockchain is basically a public ledger made of blocks added one after the other. You can think of each block as the page of a ledger book, with each page containing the same amount of information, 1MB as per Satoshi Nakamoto’s design.
Now, normally a bank or an auditor would have to go through the ledger in order to make sure there is no double-spending and books are not tampered with by anyone. With the blockchain, each and every Bitcoin transaction gets recorded on a public ledger that is verified by all the users. All transactions are recorded in chronologically generated blocks of information, and each block contains a summary of the past block to maintain the integrity of the whole chain. This makes manipulating the information on a block and falsifying records incredibly hard.
The process of trying to create a new block is basically what Bitcoin mining is all about. While it takes considerable processing power to create a new block due to Bitcoin’s cryptographic protocol known as Proof of Work, updating and verifying the existing copies of the ledger in the network is easily done through the peer-to-peer network.
Bitcoin is designed to have a finite supply. Since mining is the only way to mint new bitcoins into the cryptosphere, the miners’ rewards for successfully creating a block halve approximately every four years in what’s known as the halving process. Since the halve in May 2020, the system awards the successful miners with 6.25 BTC plus a small transaction fee each time a new block is generated.
The Proof of Work Mining Process
Hopefully, you have a better understanding of how Bitcoin mining functions and its role in keeping the decentralized Bitcoin network operating securely. Now, let’s buckle our belts because we will dive a bit deeper into the mining process itself and cover what makes Bitcoin mining so hard.
Different digital currencies use different security protocols to secure their transactions. The Bitcoin network utilizes a mechanism called Proof of Work in order to create each block of information.
Basically, what this means is that in order for a new block to be created in the blockchain, the miners have to perform complex mathematical calculations to reach a target answer, otherwise known as a hash value. The hash value is an alphanumeric string produced by the SHA-256 algorithm approximately every 10 minutes.
Bitcoin miners race each other in order to come up with the closest answer to this hash value. To do so, miners have to come up with as many “nonces” as possible, the 32 to bit “number used only one” to find one that generates a hash equal or less than the target hash. The “winner” of the race gets to create the next block on the chain and gets awarded bitcoin for the work they performed.
The Bitcoin network is specifically designed to generate bitcoin and process data at a steady and controlled pace. This means that as more miners join the race to arrive at the target hash, the difficulty of the hash problem increases to compensate for the increased computing power of the whole network.
The difficulty of the hash value is adjusted approximately every two weeks depending on how much computational power is operating in the bitcoin network. This means that as more powerful computers come into the network and create mining pools, the mining difficulty increases.
What Do You Need to Mine Bitcoin?
In order to successfully mine Bitcoin, you need to have a lot of computing power, which is measured as hash rate. Different mining rigs have different hash rates, which is why it makes sense to use special hardware designed for mining purposes instead of your personal computers.
Hash rates are measured as megahashes per second (MH/s), gigahashes per second (GH/s), and terahashes per second (TH/s). The higher a user’s hash rate is, the more mining power they have and the more successful they are in mining operations.
Since the computing power necessary to mine Bitcoin has increased exponentially in the last decade, it has become almost impossible (as of 2021, the odds are around 20.000 trillion to one) for the individual miner to successfully solve the puzzle and get rewarded with bitcoins for the effort.
Today, most Bitcoin mining is accomplished through mining pools where many users collaborate in order to generate the winning nonce. Block rewards are then divided among the users. It is highly unlikely that a single person could accomplish similar feats, at least without the help of bitcoin farms which have multiple quality rigs running 24/7.
Calculate the Profitability
If you want to mine bitcoin, use the following steps to build yourself a roadmap.
First, you can check whether it is possible for you to profit off of mining by using a Bitcoin Mining Calculator. There are many online Bitcoin calculators that will let you know the cost of mining by factoring in the cost of electricity and equipment prices, in order to help you decide whether you can make a profit from mining Bitcoin. Keep in mind that you will need starting capital, especially because quality rigs necessary for mining are very much in demand and prices have gone up.
Another important factor is access to cheap electricity. As you may have realized, Bitcoin mining is incredibly taxing on the equipment and it is designed to be that way consistently. This means that your rig will require a cooling system that considerably increases the cost of electricity. Also, remember to factor in the other invisible costs such as the fees for the mining pool you will join or the price of the cooling system you want to use.
In fact, it is generally a good idea to make several predictions by calculating according to the different rigs you are thinking of buying because each miner has a different level of energy consumption which you can easily find online. This will give you several scenarios that help you decide whether Bitcoin mining is profitable for you or not.
Remember that there are two other important variables when you’re entering the mining game – the price of Bitcoin and the difficulty of mining. The more users mine, the more difficult mining gets, and it is probably fair to say that mining odds will not get better in the near future. The price of Bitcoin, however, can be somewhat volatile and your estimation of how much it will rise (or fall) will be the deciding factor before you want to make this kind of investment.
Buy the Mining Rig: GPU vs ASIC Miners
Once you have a rough idea of how much it will cost you to start mining, you can buy the necessary equipment or mining rig.
About a decade ago, you could mine Bitcoin simply using your personal computer but those days are fast gone. The increased difficulty of mining has made using your computer’s CPU, the Central Processing Unit, mostly obsolete.
People looking for more efficient and powerful solutions realized gaming computers with quality graphics cards offered better performance for Bitcoin mining and moved to GPU (Graphics Processing Unit) mining instead. GPUs are built for gaming computers to process intense graphics and are 30 times more powerful than CPUs, which is why they became a popular solution for those interested in cryptography and Bitcoin mining.
This was followed by FPGA mining, using a piece of hardware that you can connect to your computer to make faster calculations. While these are 3 to 100 times faster than GPUs, they are also harder to configure, especially if you’re not very tech-savvy.
Finally, specially designed hardware for mining entered the market around 2013, known as ASIC miners. ASIC or Application Specific Integrated Circuit miners are specifically designed for Bitcoin mining and they are now the industry standard. There is a wide range of ASIC miners on the market today with different capabilities, but the prices are quite high as mining became more and more popular over the years.
Pick the Right Bitcoin Wallet
You will also need a Bitcoin wallet in order to keep track of your bitcoins. There are several different wallet types available for keeping track of your coins.
If you are serious about Bitcoin mining, go with the hardware wallets which are generally regarded as the best option for security purposes and long-term investments. Since they are not connected to the internet, the chances of getting your data – essentially your Bitcoin – stolen is pretty low.
However, you should keep in mind that misplaced hardware is a major reason for people losing their cryptos. Look into different wallet types and take as many measures as you can in order to make sure your data will be accessible and safe.
Join a Mining Pool
Picking a mining pool is a crucial step for mining Bitcoin. By now you now know that the increased difficulty of mining Bitcoin has propelled many users to pool their resources in order to be able to beat the odds of guessing the right hash and claiming the block rewards.
Mining pools are platforms that run special software which combines the processing powers of several mining rigs. There are different kinds of mining pools that run different protocols which calculate how the work and the rewards are shared.
There are some important factors you should consider before joining a pool. Check which reward methods are offered, how stable and successful the pool is, and how high are the fees for mining and withdrawing funds.
While some mining pools require better quality rigs and higher processing power in order to benefit from rewards, there are also pools you can join with less investment. Don’t skimp on the research and take care to pick a pool that suits your needs and capabilities. Most importantly, pick a pool with a good reputation in the cryptocurrency community. You can find more about how mining pools work and how to pick a good pool to join here.
Find the Right Software
There is also a chance that the mining pool doesn’t offer you mining software for monitoring and controlling your mining hardware. In that case, it is up to you to find a good mining software to run your operation, which is quite easy to research thanks to dedicated crypto community members.
Other Types of Mining
With all that said, it is important to keep in mind that there are some other types of Bitcoin mining you might want to look into, especially if you think the necessary equipment and the electricity costs of mining are too costly for you.
One of the options is cloud mining where instead of installing and running your own equipment and software, you rent the equipment from a third-party cloud mining service provider. In other words, you are remotely investing in computing power, instead of buying equipment and bypassing the difficulties of storing, cooling, and monitoring your equipment.
However, you should keep in mind that there are a large number of scam companies that offer services without actually having any computing power. If you are considering taking a cloud mining route to mining bitcoin, you should be very careful to pick the right provider. Read more on cloud mining and legit cloud mining services here.
You might have heard of mobile mining apps that you can run on your phone. As you may have guessed after reading all this, your mobile phone’s processing power is a lot smaller compared to the industry-standard equipment. While it is true that you can technically “mine” on your phone, the odds of mining successfully are very poor. A mining app is more likely to drain your phone battery than successfully mine Bitcoin for you.
A Few Words Before You Go…
As you can see, Bitcoin mining can be a cost-effective long-term investment. If you want to give it a go, you can use an online profitability calculator to estimate the starting capital you’ll need. Don’t forget you’ll also need a mining rig such as an ASIC miner or a computer with a strong GPU to start mining Bitcoin or join a mining pool to increase your mining productivity. Hopefully, now you have a better understanding of what you need to do in order to start mining Bitcoin.