Bitcoin Mining- Understanding How Bitcoin is Mined
If you’re looking for a way to earn some side income, particularly from the crypto space, bitcoin mining is a good option. This involves the setting up of good bitcoin mining hardware, connecting them to the network and enjoying the proceeds from the activity.
It can be a pretty good source of passive income, particularly when you live in a low electricity tariff area and can afford a pool of mining hardware. Of course, this endeavor isn’t cheap seeing as it costs a minimum of $1k to buy a used bitcoin miner. But still, if you can afford it, that’s great.
What is Bitcoin Mining?
If you’d like to know that nitty-gritty of bitcoin mining, and how it all works, then this article is a good read. The bitcoin mining process is based on something called the Proof of Work (PoW) consensus. The two-pronged process often involves
- Transaction validation by nodes
- Consistent creation of new bitcoins
So, nodes –which essentially stands for miners- which confirm and validate transactions are rewarded for it with bitcoin. This way, bitcoin would continue to remain in circulation while transaction problems are solved.
Please note that this reward isn’t as lavish as it used to be. Before 2016, miners earned 25 BTC for every new block of bitcoin mined. These days, the network only pays 12.5 BTC per block mined.
The PoW ensures that transactions are pieced together, forming a transaction block in the process. This block size which is usually around 1 megabyte of data contains details of hundreds of transactions.
This block is then encrypted using cryptography and hidden in a puzzle. Miners then try to solve this puzzle as a means of verifying the transactions.
Once solved and verified, the transaction block is then further encoded and encrypted before being added to the blockchain. This is in a bid to prevent hack attempts from hackers and secure the transaction details.
Every block has a unique string of alphanumerical characters as well as other signs and characters, and is generated at random for miners to unlock. Each one is unique, thus making it difficult for miners to guess the hash of the next block.
What then happens is, miners try guessing the hash by proposing nonce (numbers used once) that may match the new hash. There’s no guarantee though, that a miner will get it as there are over 100,000 other miners trying the various nonce. This is why the bitcoin mining niche is fierce and competitive.
Once a miner generates the correct nonce and proposes it, they are compensated for their efforts with a designated amount of bitcoin. Compensation however, isn’t disbursed until another 99 blocks have been unlocked. This way, rewards are sent to the various miners after every 100 transaction blocks are unlocked.
Once done, rewards are automatically disbursed to the various bitcoin wallets without interference or oversight from a third party, thus ensuring that the identity of owners and transactions are private.
What’s the Source of Bitcoin?
One of the reasons why bitcoin isn’t really accepted and even opposed by mainstream financial institutions is that it seems to come from absolutely nothing.
With traditional financial institutions, you at least know where it’s coming from –trade activities, investments etc.- and can quantify or identify its source. With bitcoin, that’s the opposite.
It’s almost as if these funds are pulled out of thin air and allotted value courtesy of people’s collective agreement. To help clarify that, you need to understand that every bitcoin is essentially mined and minted from the network itself.
Crazy we know, but that’s how it works. The network continues and sustains itself in perpetuity by rewarding miners, who often have to wait until another 99 blocks are mined. This slight delay in rewards guarantees continued participation from miners, thus ensuring that miners never really abscond from the network.
How Are Bitcoin Mined?
Solving the puzzles and verifying transactions involves very complex calculations that your standard calculator or even computing equipment can’t handle.
This is why Application Specific Integrated Circuits (ASICs) and high performance Graphics Processing Units (GPUs) are used by miners. These high performance bitcoin mining hardware are solely designed for the singular purpose of mining bitcoin.
While it was easy to mine bitcoins with regular PCs at the beginning, the equations and puzzles have become far more complex than the average computing equipment can handle.
At the time, your average computing equipment could mine 100BTC in 24 hours –those were the good times, huh?- and your PC wouldn’t even feel the impact. These days, you’d be lucky to mine 0.00001BTC with your computing equipment in 90 days –the more accurate figure is 1BTC in about 100 years.
The GPUs and ASICs have a high hash rate –increased ability to solve complex equations faster- and lower power consumption rate. Even then, the bills are still on the high side. This is why bitcoin mining pools are springing up in countries with low electricity tariffs.
Which Bitcoin Miners are Best?
For now, the most popular bitcoin mining rigs are made by Bitmain and Halong Mining. Each unit costs at least $1,000 and does a fairly decent job of mining.
This gives companies like Bitmain and Halong Mining, which manufacture and operate their own ASICs, with top quality rigs going for thousands of dollars, a strong competitive advantage over independent miners.
If you’re looking for specific recommendations, checkout Bitmain’s Antminer S9 and Halong Mining’s DragonMint 16T.
Please note however, that bitcoin mining isn’t as profitable as it once was. These days, equations are a lot more complicated, rewards are far lower and equipments are more expensive.
Before 2016, miners collectively got a reward of 25 BTC for mining one block. These days, that’s down by half to 12.5 BTC, and will continue to be slashed by half for every 210,000 blocks mined –usually takes about 4 years to achieve this.
So, What’s the Way Forward?
The reality is those who are cashing in on bitcoin mining are folks who run mining pools. That, combined with its potential environmental damage makes it very difficult for the average individual to get into it.
The initial prohibitive costs of owning your own mining rig is enough to discourage anyone but the hardiest bitcoin enthusiast.
Smart investors are choosing bitcoin cloud mining options, but that obviously comes with its attendant risks. To make more profit, some are switching to altcoin mining.
They’re mining ethereum and Litecoin for example. Of course, you can mine others, but these are the most common alternatives with considerable income potential.