What is Bitcoin Mining?
Bitcoin operates as a peer-to-peer platform. This peer-to-peer platform generates Bitcoins through Bitcoin mining.
Why do we need Bitcoin mining? We need it because there’s no central government managing Bitcoin. Typically, a central government issues new coins for a currency. The U.S. Mint issues U.S. dollars, for example.
With Bitcoin, there’s no Bitcoin mint. There’s just Bitcoin users. That’s what makes it a peer-to-peer currency.
Bitcoin users generate new Bitcoins by running specialized software on their computers. This software solves math problems (Bitcoin algorithms).
The more math problems that computer can solve, the more Bitcoins that user will generate. Computers solve these problems using their processing power: the more processing power you have (like in your GPU and CPU), the more Bitcoins you’ll be able to mine.
As more and more Bitcoin users run their mining software, the math problems become harder and harder to solve. This keeps the growth of Bitcoins at a steady pace – which means the currency won’t suddenly collapse if a million people downloaded and install Bitcoin mining software.
The difficulty of Bitcoin mining doesn’t change on-the-fly. Instead, it changes about every 2 weeks based on the changing computational power of the Bitcoin network.
Bitcoin Mining Computers
Hardcore Bitcoin miners invest tens of thousands of dollars into their computers (or multiple computers). Early in the days of Bitcoin, miners realized that graphics cards were much better suited to solving Bitcoin algorithms than traditional CPUs.
As a result, Bitcoin mining computers often have two or three GPUs.
There are also specialized Bitcoin mining computers anyone can buy. These computers are specially built for just one task. They mine Bitcoins using Application-Specific Integrated Circuit (ASIC) chips.
What Are Bitcoin Mining Pools?
Early in the days of Bitcoin, it was possible for one miner to mine a steady number of Bitcoins on his or her own.
As Bitcoin has become more popular, however, the algorithm has proven too difficult for single miners to handle. That’s why miners have started joining Bitcoin mining pools.
Bitcoin mining pools push the processing power of multiple computers together to solve Bitcoin algorithms. Each miner in the pool receives a share of the Bitcoins being mined. That share is proportionate to the amount of processing power input into the pool.
What’s the Point of Bitcoin Mining?
Bitcoin mining is an essential part of the world’s largest cryptocurrency. Bitcoin help keep the Bitcoin network safe, stable, and secure.
How does Bitcoin mining keep the network safe, stable, and secure? Mining Bitcoins does two things.
First, it adds transactions to the block chain.
Second, it releases new Bitcoins.
When you mine Bitcoins, you’re compiling all recent Bitcoin transactions into blocks and trying to solve a difficult puzzle (the Bitcoin algorithm).
Whichever miner solves the puzzle first gets to place the next block on the block chain and claim their rewards. Those rewards include the newly released Bitcoin as well as transaction fees from the Bitcoin transaction that just got added to the block chain. Not all Bitcoin transactions have transaction fees.
The reward for mining Bitcoins has diminished over time. This is done on purpose to slow the release of Bitcoins over time. There will only be 21 million Bitcoins released over the entire course of the project.
The reward for mining is cut in half every 210,000 blocks, or about every 4 years. In 2009, the block reward was 50 Bitcoins. In 2014, it was reduced to 25 Bitcoin.
How to Start Bitcoin Mining
Anyone with an internet connection and basic computer hardware can participate in Bitcoin mining.
Unfortunately, “participating” in Bitcoin mining isn’t the same thing as actually making money from it. The new ASIC chips on the market today are specifically designed for mining Bitcoin. They’re really good at Bitcoin mining, and every time someone adds a new ASIC-powered computer to the Bitcoin network, it makes Bitcoin mining that much more difficult.
Another thing to consider before mining Bitcoins is that you’ll need to pay for electricity and hardware. Those are the only two real costs associated with Bitcoin mining.
Some people have purposely based their Bitcoin mining operations near cheap sources of electricity. By relocating to these areas and operating large Bitcoin mining networks, you can mine Bitcoins at the cheapest possible rate.
North America’s largest Bitcoin mining operation, for example, is run by MegaBigPower and is located on the Columbia River in Washington State. The Columbia River provides an abundance of hydroelectric power to the surrounding area, making that part of Washington State the cheapest source of electricity in the nation.
Electricity is used not only to power the computers, but also to keep them cool. Just like people base their Bitcoin mining operations near sources of cheap electricity, some people have purposely placed their Bitcoin mining operations in places with cool climates.
In any case, here’s a basic step by step guide you’ll need to go through to start mining Bitcoin:
Step 1) Go to Bitcoin.org and download the Bitcoin client for your OS
Step 2) Install the client and let it download the Bitcoin block chain. That block chain is about 6GB in size. You can also order the Bitcoin block chain on a DVD if you don’t want to burn through that much data.
Step 3) Once your client has fully updated, you’ll need to click “New” in the Bitcoin client to get a new Bitcoin wallet. Your wallet is just a long alphanumeric sequence. Make sure you keep a copy of your wallet.dat file on a thumb drive. Print a copy out and keep it in a safe location. Put a copy in cloud storage. You do this because if your computer crashes, then you’ll lose all your Bitcoins if you can’t access the wallet.dat file.
Step 4) Join a Bitcoin mining pool. There are thousands of Bitcoin mining pools on the internet today. If you don’t join a pool, then you’re probably never going to make any money from Bitcoin mining. The algorithms are just too difficult for single users to solve and you’re unlikely to be awarded
Conclusion: Should You Start Bitcoin Mining?
Ultimately, Bitcoin mining is becoming an arms race. In the early days, anyone with a decent PC could generate Bitcoins through Bitcoin mining. Today, you need to collaborate with other Bitcoin miners in pools, strategically choose the location of your Bitcoin mining operation, and purchase ASIC-powered computers that are specially designed to handle Bitcoin mining.
Unless you’re prepared to do all of those steps, Bitcoin mining will be a frustrating and unprofitable operation.