13 Things To Know Before Mining Bitcoins

August 5, 2016

Bitcoin is currently the most popular and widely known cryptocurrency in the world. For individuals who own or have access to large amounts of computing power, it is possible to “mine” Bitcoins. However, before diving headfirst into the life of a cryptocurrency miner, there are some things you should know.bigstock-Smiling-man-sitting-on-floor-c-37534960Here are 13 of the most important things to know before mining Bitcoins:

1. Mining Bitcoin Requires Extremely Powerful Hardware

Mining Bitcoin, or Bitcoin blocks, to be accurate, used to be possible with a regular home desktop (utilizing CPU). However, over time, the computational power required to mine Bitcoin has increased to the point where custom-designed “mining rigs” are required to make any significant profit.

The essential components for a rig dedicated to mining Bitcoin include:

  • Graphics card (GPU) This is the single most important segment of cryptocurrency mining hardware. Understandably, it’s also the most cost-intensive.
  • Power supply If you’re running several GPUs, the recommended power supply is (at least) 1000W and more.
  • Motherboard The only relevant factor here is the number of video card slots available.

On the other hand, people started developing hardware like ASIC with only Bitcoin mining in mind. These machines cannot perform any other operations, but they offer significantly more processing power than even the strongest GPUs. Standard ASIC machinery includes the range between 2 GH/s (Antminer U2) and 9.5 GH/s (Gekko science), with 1.0 W/GH and 0.33 W/GH, respectively.

If you’re still set on building a home mining farm, here’s what you need to know about the “secondary” hardware:

  • CPU Virtually useless with the current level of mining difficulty. Just needed for running the OS.
  • Hard drive Just needed for the OS as well.
  • Computer case Less is more would be your general rule of thumb here. Most modern rigs don’t even feature any casing, due to the high heat released during the mining process.

Bitcoin mining rigs consume an enormous amount of electricity as well. You’ll have to calculate that in, once you start calculating your potential mining ROI.

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2. Mining Bitcoin Requires Exponentially More Processing Power Over Time

Not only is the complexity of mining increasing, but the rate at which mining is becoming more complex is increasing as well (exponential difficulty advance).

Bitcoins are created through increasingly complex calculations that (now) require extremely strong computing hardware and spend a lot of energy. The mining system needs every new Bitcoin to exponentially grow in terms of difficulty, as the mining process continues. Basically, with every new coin, we will need more computer power than before. The more hashing speed provided, the more calculation power extracted.

When they first appeared, the lucky pioneers had it way easier with what was then considered a strong machine. Nowadays, as mining becomes more popular, the computers used at the beginning, can barely mine a small portion of Bitcoin over time.

As mining is designed to always require more computing power, new machines for mining are built with ASIC (application-specific semiconductor) chips, which are able to optimize the processing of Bitcoin mining algorithms.

Of course, as the required power increases, the price keeps rocketing and the electrical bills go over the top as well. But, exponential growth is expected in economics, especially in Bitcoin networks. They will take more power to create and the supply will slow down over time while the cost to produce may go up, with the overall value of each coin.

In conclusion, the value of the coin is related to the cost of production and the overall demand. In general, we count the profit we make from each coin by calculating its net selling price and subtracting the production costs.

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3. Mined Bitcoin Cannot Be Duplicated

Despite fears of counterfeiting, no one has yet been able to duplicate mined Bitcoins. This is due, in part, to the public ledger (also known as a “blockchain”) in which all mining activity is recorded. The main reason, though, is the astronomic difficulty of reversing the calculations that brought you to the block in the first place.

The positive side of the Bitcoin system is that no one can copy it. The Bitcoin network keeps the list of transactions that have taken place, making it impossible to make such transactions again. Every client has a copy of the list in their system. As there is no duplication possible, the only threat would be to make more than one transaction at different places, an action called a double-spend attack. In order to prevent this, programmers have come up with blockchains, which enlist all the transactions. By doing that – the mining is secure. The blockchains alone require a lot of computing power.

So, when you have 20 Bitcoins in your wallet, your wallet file is made of multiple addresses. Combining those addresses, you have 20 bitcoins.

What happens is – you make a network transaction and the program makes sure your address is valid and that it has the proper value. The basic assumption, which is based on an established premise, is that nobody can counterfeit Bitcoin because there’s nothing to be counterfeited.

There are possible fears of theoretical double spending, but only if someone has a ridiculously strong computer – a computer that can control 51% of the network. Since no such thing exists, there is little risk of double spending. In general, Bitcoin is pretty safe when it comes to counterfeiting.

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4. Graphics Processing Units – Current Position In Mining Bitcoin

Although CPUs were originally used to mine Bitcoin, miners quickly realized that GPUs were between 50 and 100 times more efficient for the same power expenditure.

Mining Bitcoins and alternative cryptocurrencies is highly popular these days, which creates an excessive need for more high-end hardware.

GPU mining is faster than CPU, but in order to mine successfully, you’ll need a high-end graphics card. The fastest way to actually mine Bitcoins depends on the architecture you are using. Even now, there is strong belief that GPU is going to become obsolete and that it will lose the battle to faster machines, in spite of current efforts to create dedicated mining graphic cards.

GPUs have been used so far for the complex mathematical operations, as their design is helpful with the operations that need complex graphics. Also, GPUs have been highly valuable for the operations that require dealing with complex graphics and for breaking password protection.

Recently, though, a new generation of hardware that’s emerging might be set to outperform GPUs. For instance, FGPAs – field-programmable gate arrays – can perform more efficiently, as they are integrated circuits, built to perform specialized tasks.

Nowadays, ASIC is another system that might replace the once powerful GPU. ASIC, or application-specific integrated circuits, are programmed by the manufacturer to perform specific tasks, which cannot be configured later, resulting in improved performance.

However, GPU might still be the best idea due to its price. ASIC is probably going to have a wider use than it does now, but it will take some time to become more affordable. There is still time to begin mining with GPU since it’s going to be here for some time, depending on the development and availability of technologies.

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5. Many Bitcoin Miners Join “Pools” To Increase Their Potential Profit

Most Bitcoin miners join a pool of other miners in order to share processing power and profits while reducing variance. If you’re an individual prepared to mine coins on your own, it might be best to join pools, as making profits together is easier. If one computer is not enough to solve a complex algorithm, many computers in the network system can do it more efficiently.

A pool combines computation power to make Bitcoins. The process is more efficient because you receive blocks, mostly 50 at the time. In each pool, an individual computer is required to solve smaller and easier algorithms, which are put together, making it easy for several computers to solve more complex ones. Based on your own contribution, you will earn your coins. The stronger the machine is, the harder your work, and the bigger your contribution is, the more coins you get. This way, you will be more likely to have a steady coin income, as a result of the investment.

With a mining pool, a lot of people contribute to generating the block. Instead of spending a lot of time waiting to generate 10 Bitcoin, for instance, one can get a smaller fraction of the Bitcoin daily. Whoever takes part and can present legitimate proof gets their share of the mined coins. There are, however, ways of cheating, so there are several different approaches that can prevent anyone from breaking the rules.

The slush approach, also known as Bitcoin pooled mining (BPM), is focused on a score-based method. Their way to prevent cheating is to make older shares have a lower weight in order to reduce the motivation to cheat. The Pay-per-Share approach (PPS), first described by BitPenny, offers an immediate payout for each solved algorithm. You can withdraw money after every share, without waiting for the blocks. This way, the operator cannot cheat the miners.

Luke-Jr’s approach combines two previous approaches, but whoever doesn’t manage to mine more than 400 TBC gets his share transferred to the next block. If a miner is inactive, he gets his share eventually, nonetheless. The P2Pool approach works similarly as Bitcoin’s blockchain. After they find the block, they divide its reward among the most recent shares in the blockchain

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6. Bitcoins Are Created By Solving A Math Problem

Bitcoins are mined by solving an increasingly difficult math problem. When someone (or a pool) solves the problem, they are awarded a batch of Bitcoin. The basis of this is solving cryptography, the cipher that appears in strings. For instance, multiplying a number by 6 would be a simple string, but to make Bitcoins, the situation is rather complicated. For this reason, the numbers get larger and larger and the strings more elaborate.

People join mining pools to solve complicated mathematical operations. So, Bitcoin miners do these operations many times only to complete one hash. The operation takes about 65,000,000 hashes per second, so we see why there is a need for powerful machines to solve these problems.

There are hash calculators, in which you have to insert the value in the top and wait for the string in the bottom. After this, you have to keep changing the input by adding stuff until there are strings of zeros at the beginning. But with Bitcoins, you have to attach the information from the last block, so the current block depends on the previous one. The number of zeros increases along with the difficulty of the block. The more people mine, the more complicated the problem. The average time it takes to solve the problem is 10 minutes.

The problem solved with mining assures the transactions occur without a central authority. Otherwise, no secure transactions of Bitcoins would be possible whatsoever. The proof of work also prevents double spending.

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7. Bitcoin Mining Currently Occupies A Legal Gray Area In The United States And Elsewhere

FinCEN and other regulatory bodies have “recommended” that Bitcoin miners and exchanges register with the Federal government. To date, less than 50 have done so. Government agencies are highly concerned about Bitcoin transactions because they are used anonymously, opening ways to launder money. There are also concerns about decentralizing the monetary system and tax evasion.

In April 2012, the FBI published a document which displays their fears of Bitcoin and its decentralized nature. The USA did however, put regulations on Bitcoin, but when used offshore, there might be money laundering involved. Criminals that are using Bitcoin for illegal activities cannot be traced in countries that have not regulated Bitcoin.

Politicians in the US follow the “crypto trend” with their ever more frequent announcements that they will accept donations in Bitcoin.

“One day, you’re printing so much currency, it will become worthless and that’s why it’s important to have gold and other things that are static that no one can fluctuate at a rapid rate,” said USA congressman Steve Stockman. “And that’s why it’s so good to have Bitcoin. It’s a fixed amount of currency at a fixed rate. So it’s very good for the market.”

Even though every US state has different regulations on cryptocurrency, one can expect to see some national regulatory body. The feds are interested in controlling the virtual currency by overseeing the legislature on a national level.

The Financial Crimes Enforcement Network (FinCEN) first started dealing with cryptocurrencies by publishing guidelines for their use. Cryptcurrencies were defined as money services businesses (also commonly known as money transmitting businesses or MTBs). Anti-Money Laundering (AML) and Know Your Client (KYC) measures must be set straight and all the money-launderers have to be prosecuted by law.

CTFC, the US Commodity Futures Trading Commission, and SEC, the US Securities and Exchange Commission (SEC), have also expressed interest in dealing with these issues.

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8. Bitcoin Miners Actually Maintain The Overall Bitcoin Network

The process of mining Bitcoin actually generates the public ledger (blockchain), which records all transactions. This effectively means that the act of mining Bitcoin generates Bitcoin’s financial structure.

Blockchains represent the transactions databases that are shared by all the nodes (each personal user) that participate in the mining process. All of this is based on the Bitcoin protocol. All the transactions made in the currency are kept as a full copy within the blockchain. This way, miners can discover how much each address earned.

Every block also carries a hash of the previous block, so that’s where the name comes from. This also means that every block carries the information from the previous block. This happens in chronological order, so the previous block remains known. Blocks cannot be modified once they are in the chain. These properties of blockchains make double spending of Bitcoins very difficult, almost impossible. Blockchains are what keeps Bitcoins running in order.

Each block of the chain has only one path to the genesis block. The path can be forking. One-block forks are created every once in a while, after two blocks are created just seconds apart.

Basically, mining is actually maintaining the blockchain. Those who mine receive newly created Bitcoins, transaction fee included. Users can mine from every country and payments will be verified by each transaction and validated as a part of the blockchain. Since 2014, users receive 25 newly created Bitcoins for every block. With current regulations, the reward will get halved in 12.5 Bitcoins in 2017. The same will happen again four years later.

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9. Mining Is Becoming Less Profitable Due To The Processing Power Required

The computational power required to mine Bitcoin has grown so large that the cost of electricity makes the margins on mining far smaller than most expect. Without the right setup, you could actually lose money mining Bitcoin.

The computer power required for mining Bitcoin was doubled in October last year, which pushed out all the hardcore miners out of the game. Some are arguing that an alternative currency, such as Litecoin, could be the solution.

Computers with chips built for mining have the hashrate more than 1 quadrillion hashes per second. The Bitcoin network makes it up by increasing the average number of hashes that a miner has to compute to produce Bitcoins.

When Bitcoin mining was starting with technologies such as CPU and GPU, power efficiency was far less required. As more efficient processors such as FPGAs and ASICs significantly improved the efficiency of Bitcoin mining, CPU and GPU mining became less profitable. At the same time, became less efficient, especially CPU, which is now obsolete. As the network pays 25 Bitcoins to miners every 10 minutes, the difference gets reduced if you have weaker machines. The only way to become a competitive miner now is with specialized hardware known as ASIC. These are currently the strongest processing machines to solve mathematical puzzles required by the Bitcoin network, but one still has to be careful that the electricity bill does not exceed earnings.

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10. Bitcoins Are Awarded Every 10 Minutes

Every 10 minutes, the Bitcoin system awards 25 Bitcoins to one miner or pool of miners.

The Bitcoin network was programmed in such a way as to overlook the creation of new Bitcoins during the mining process. The network also monitors the transactions between users. Every log is collectively maintained by the transactions and every new transaction is broadcast though the Bitcoin network. The computers take part in the process and update files on the official log. The complex and demanding process is what makes the Bitcoin mining process.

Approximately every 10 minutes, the network gives reward to the user whose log gets approved by the network. The user receives the fixed number of Bitcoins, which is currently 25 new Bitcoins. The reward in Bitcoins has inspired many users to mine with top class computers, as more power is required to mine more Bitcoins. There were reports of other people hijacking other people’s computers in search of computing power.

Bitcoins or their fractions that are given to the miners can be bought with goods or fiat currencies. Online gambling and web hosting have found that paying in Bitcoins may be the best form of money transfer. On the other hand, there are fears that criminals can find their niche in Bitcoin exchange and payment. Money launderers and drug smugglers may find this system highly useful for covert transfers. However, the transfers are monitored, so as long as nobody’s doing any harm, there should be no repercussions to the Bitcoin system.

The Bitcoin system may not be attractive to everyone, as it requires some time and effort to “mine” the complex algorithms for Bitcoins. Also, miners are currently concerned about its future value since it is not regulated by the official government. But as BitTorrent is not the only torrent system and as Skype does not have the monopoly on Internet-calling services, another more efficient currency might appear and rival the current one. Although other currencies exist, Bitcoin is still the most popular one.

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11. The Amount Awarded In Each Block Is Reduced By Half Every 4 Years

Bitcoin used to be awarded at a rate of 50 Bitcoins every 10 minutes and has since been reduced to 25.

New coins are produced as the network node solves the mathematical algorithm, which is increasingly difficult to solve. The award in Bitcoins is given when the computer demonstrates proof of work. There is an automatic adjustment in the system, so in the first four years of the Bitcoin network, 10,500,000 Bitcoins were produced. The amount gets reduced in half every 4 years, which means that the production will drop to 5,250,000 in 4-8 years. Eventually, the number will reach 21 million Bitcoins.

The system has an in-built operation that makes attempts at locating new coins in blocks about every 10 minutes. The number of the miners adheres to constant change, so the more coins are mined, the more difficult it is to mine more of them. The likelihood to find new blocks is based on the strength of the computer a person is using.

Unlike many fiat currencies, Bitcoin’s exchange value is constantly fluctuating. In April 2013, its value was around $100. In 2011, the value of Bitcoin was $2. However, that changed in 2013, as its valued jumped to $260 and continued on rising. Today, Bitcoin is hitting some of its all-time high values, with a value of over 2,500 dollars.

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12. There Will Never Be More Than 21 Million Bitcoins In Existence

The Bitcoin system is designed in a way that there will never be more than 21 million Bitcoin. This means that the cryptocurrency has a built-in controlled currency supply and will likely continue to experience regular deflation. This way, Bitcoin can save itself from the burden of inflation. As the value of fiat currencies decreases over time due to money printing, Bitcoins are safe when it comes to inflations.

The algorithm was created by Satoshi Nakamoto, who set the number of Bitcoins that will be created. There are 12 million Bitcoins already mined that are currently circulating, which means that 9 million Bitcoins are waiting to be mined. With the present rate of creation, estimates are that the final Bitcoins will be mined in the year 2140.

There’s even a notion that the Bitcoin market cap can be stretched much further, so that more Bitcoins could be mined.

George Kikvadze of BitFury believes that if we create more Bitcoins after the initial 21 million, the value of each coin should not drop. He compared the further production of Bitcoin to printing money, claiming that it did not undermine the USA economy. However, as we know, the estate bubble did cause the recession.

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13. There Are Currently Around 16 Million Bitcoins Already Mined

Today, there are 16,415,738 Bitcoin around the world, which makes for 78.17% of the preset cap. Since there will never be more than 21 million Bitcoins in the entire world, this means that over ¾ of all the Bitcoins that will ever exist are already owned.

So, what will happen to all the expensive equipment people have bought? It’s hard to say what might happen if 21 million Bitcoins remain in the virtual network. When the mining stops, transaction fees will be included in the transaction processing.

If you wonder why 21 million was chosen as the limit for the overall number of Bitcoins, there are some explanations. First of all, Bitcoins, as any other currency, have to keep themselves protected against inflation. The more money there is, the less the value of it. Also, there’s some information about why 21 million was chosen. This particular sum of Bitcoins was chosen to represent the number of blocks per 4-year cycles. There are 6 blocks per hour, 24 hours a day, 365 days per year, 4 years per cycle. By multiplying this, we reach the number of 210, 240, roughly around 210,000. If we sum up all the block reward sizes, we have 100. When we multiply the two, we reach the number of 21 million.

So, what will happen when all of the Bitcoins are mined? With government currencies, more money can be printed out, thus creating inflation. The remaining miners might be rewarded afterward and the transactions will continue. The fact is, no one knows yet. But there’s still time to mine.