One of the core functions at the heart of Bitcoin is mining. Mining is responsible for everything that happens inside the Bitcoin network; it is also crucial from an overall security perspective. In this article, we will understand what bitcoin mining means and how you can become a BTC miner yourself.
What does mining bitcoins mean?
Let’s start with – where do bitcoins come from? Bitcoin is a proof-of-work (PoW) cryptocurrency that requires a decentralized network of nodes with specialized equipment (ASICs or GPUs) to continually solve cryptographically hard puzzles. Anyone who solves this puzzle gets the privilege of adding a block to the bitcoin blockchain. This process is known as ‘mining’, and the nodes solving these equations are called ‘miners.’
In return for their services, miners get the following rewards:
- A block reward, which is basically new bitcoins entering circulation. The block reward gets slashed in half every four years (or 210,000 blocks). Currently, the block reward is 6.25 BTC.
- The cumulative fees from all the transactions in the mined block
How long does it take to mine one BTC?
To answer this, let’s take a look behind the scenes. Mining is mostly about balancing two features – hashrate and difficulty.
Hashrate
The hashrate is the computational power of the overall Bitcoin network. A higher hashrate means a faster network and higher security.
Bitcoin’s hashrate increases when the mining activity on the network increases. The problem with uninhibited mining is that miners could pump out every single BTC in no time. To stagger the supply over time, it was important for the protocol to have a negating feature. This feature is known as ‘difficulty’.
Difficulty
Difficulty is a metric that’s hardcoded into the Bitcoin protocol. Whenever the hashrate increases, the network difficulty increases to make mining more difficult, and vice-versa.
Hashrate and Difficulty balance each other out to ensure that the time taken to mine one block remains ~10 mins.
This consistent block time is vital since it brings in predictability which is crucial in gauging transaction finality. You will always be confident that your transaction will go through within ten minutes.
How to start mining bitcoin?
So, you have decided to become a Bitcoin miner. Here are some things you will need to do as you start off.
#1 Get a secure Bitcoin wallet
You will first need to get yourself a Bitcoin wallet dedicated only to your mining activities. It is crucial to get a mining wallet for various reasons:
- You need a place to store your mining earnings.
- It is important to keep different wallets from a security perspective.
- When you report your taxes, it is easier to calculate your mining earnings from a dedicated wallet.
We recommend that you use a hardware wallet as your dedicated mining wallet. Not only are hardware wallets easy to use, but they are also highly secure.
#2 Buy Bitcoin mining hardware
In the early days of Bitcoin, one of the romantic aspects was that you could participate in a global financial system and become an integral part by simply mining with your laptop or PC.
Not so much anymore.
Bitcoin loves consuming energy. You will need a system with the speed and the capacity to compute millions of hashes per second. Bitcoin specifically needs an application-specific integrated circuit (ASIC). These ASICs can compute around 100s of terahashes per second. Bitcoin mining companies have colossal mining farms with multiple ASIC rigs connected to each other. Antminer is a popular ASIC manufacturer.
#3 Get the Bitcoin mining software
Now, let’s put that hardware to work. First, you will need to download Bitcoin mining software allowing you to join the network as a full node. Make sure you have sufficient space on your computer and enough RAM to run the software. Popular mining software includes CG Miner and EasyMiner.
#4 Join a mining pool
Unless you can spend millions of dollars building your mining rig, you will own a tiny percentage of the network hashrate. Seeing the state of the Bitcoin network, it will be nearly impossible for you to successfully mine a block. To do so, you will need to join a pool.
So, what is a mining pool?
As the name suggests, it’s a group of miners pooling their computational resources to mine BTC. The reward received is distributed among the pool. So, while the individual reward may be less, you will have a much higher chance of successful block creation.
Currently, F2Pool, AntPool, and Poolin are the three biggest Bitcoin pools in the world.
How much money can you make with bitcoin mining?
As mentioned above, you can earn a 6.25 BTC block reward along with the cumulative transaction fees for each block you mine. Every 4 years, your block reward gets slashed in half. However, the halving has historically been a bullish event for Bitcoin, so that shouldn’t negatively impact your earnings.
But, what about profitability?
As you can see, mining profitability has dropped significantly since October 2020, which coincides with the price action. However, there are specific steps that you can take to remain profitable during a bear market:
- Move to a cooler location since energy wastage (and your bills) will be on the lower side.
- Move to a place which has cheaper electricity.
- Be open to mining other coins on the side.
- If you don’t have the money to buy ASICs, consider mining other PoW coins like ZCash, LTC, and BCH instead of BTC.
In closing
Being a Bitcoin miner makes you a core member of a revolutionary ecosystem. However, before you get swept away, keep in mind that mining isn’t as profitable as it used to be due to the bear market. Do you have enough money in your account to weather the storm before the market flips to bullish? Remember, this is a highly competitive field. Make sure you are not taking any unnecessary risks.
FAQ
What does it mean to mine bitcoins?
Traditionally, mining is the process of extracting valuable materials from the earth. In BTC’s context, adding a block to the blockchain and getting a block reward is known as mining. The process works as such:
- The miner collects all the pending transactions currently queued up in the mempool.
- The ASICs then hash the data and repeat the process until it gets a hash that’s less than the network difficulty.
- When this happens, the miner propagates their newly discovered block through the network.
- Once most of the network has verified the block, it gets added to the Bitcoin blockchain, and the miner receives a reward.
How to set up a Bitcoin miner?
Setting up your Bitcoin mining rig is a simple step-by-step process:
- Get the required hardware.
- Setup a dedicated wallet
- Download and install the mining software.
NOTE: The latest ASIC models are already pre-configured with mining software and BTC address.
The whole process isn’t that complicated, and setting up is relatively easy. However, the network difficulty itself will determine the success of your mining endeavors.
What are the differences between bitcoin and ethereum mining pools?
As of now, both Bitcoin and Ethereum are based on proof-of-work, so their mining pools are pretty similar. The major difference is that Bitcoin uses the SHA-256 hash algorithm, and Ethereum uses Keccak. However, when Ethereum transitions to proof-of-stake (PoS) post-Merge, the mining pools will change to staking pools, wherein users will pool together their coins instead of mixing their hashing powers.
