Computers mining for virtual coins? Is Bitcoin mining just free money?
If you want the full explanation on Bitcoin mining, keep reading…
Bitcoin mining is the backbone of the Bitcoin network.
Miners provide security and confirm Bitcoin transactions.
Without Bitcoin miners, the network would be attacked and dysfunctional.
Bitcoin mining is done by specialized computers.
The role of miners is to secure the network and to process every Bitcoin transaction.
Miners achieve this by solving a computational problem which allows them to chain togetherblocksof transactions (hence Bitcoins famous blockchain).
For this service, miners are rewarded with newly-created Bitcoins and transaction fees.
Miners are securing the network and confirming Bitcoin transactions.
Miners are paid rewards for their service every 10 minutes in the form of new bitcoins.
What is the point of Bitcoin mining? This is something were asked everyday!
There are many aspects and functions of Bitcoin mining and well go over them here. They are:
Traditional currencies–like the dollar or euro–are issued by central banks. The central bank can issue new units of money ay anytime based on what they think will improve the economy.
With Bitcoin, miners are rewarded new bitcoins every 10 minutes.
The issuance rate is set in the code, so miners cannot cheat the system or create bitcoins out of thin air. They have to use their computing power to generate the new bitcoins.
Miners include transactions sent on the Bitcoin network in their blocks.
A transaction can only be considered secure and complete once it is included in a block.
Because only a when a transaction has been included in a block is it officially embedded into Bitcoins blockchain.
More confirmations are better for larger payments. Here is a visual so you have a better idea:
Payments with 0 confirmations can still be reversed! Wait for at least one.
One confirmation is enough for small Bitcoin payments less than $1,000.
Enough for payments $1,000 – $10,000. Most exchanges require 3 confirmations for deposits.
Enough for large payments between $10,000 – $1,000,000. Six is standard for most transactions to be considered secure.
Miners secure the Bitcoin network by making it difficult to attack, alter or stop.
The more miners that mine, the more the secure the network.
The only way to reverse Bitcoin transactions is to have more than 51% of the network hash power. Distributed hash power spread among many different miners keeps Bitcoin secure and safe.
Well, you can do it. However, its not profitable for most people as mining is a highly specialized industry.
Most Bitcoin mining is done in large warehouses where there is cheap electricity.
Most Bitcoin mining is specialized and the warehouses look something like this:
Thats who youre up against! Its simply too expensive and you are unlikely to turn a profit.
For hobby mining, well show you some steps you can take to get started mining bitcoins right now.
When earning bitcoins from mining, they go directly into a Bitcoin wallet.
Our guide on the best bitcoin wallets will help you select a wallet.Read it here!
You wont be able to mine without anASIC miner.
ASIC miners are specialized computers that were built for the sole purpose of mining bitcoins.
Dont even try mining bitcoins on your home desktop or laptop computer! You will earn less than one penny per year and will waste money on electricity.
Once you get your mining hardware, you need to select a mining pool.
Without a mining pool, you would only receive a mining payout if you found a block on your own. This is calledsolo mining.
We dont recommend this because your hardwareshash rateis very unlikely to be anywhere near enough to find a block solo mining.
Byjoining a mining poolyou share your hash rate with the pool. Once the pool finds a block you get a payout based on the percent of hash rate contributed to the pool.
If you contributed 1% of the pools hashrate, youd get .125 bitcoins out of the current 12.5 bitcoin block reward.
Mining is actually NOT the fastest way to get bitcoins.
Buying bitcoin is the fastest way. Our exchange finder makes it easy to find an exchange.Try it here.
Bitcoin mining softwareis how you actually hook your mining hardware into your desired mining pool.
You need to use the software to point your hash rate at the pool.
Also in the software you tell the pool which Bitcoin address payouts should be sent to.
If you dont have a Bitcoin wallet or addresslearn how to get one here.
There is mining software available for Mac, Windows, and Linux.
This wont be much of an issue in MOST countries.
Consult local counsel for further assistance in determining whether Bitcoin mining is legal and the tax implications of doing the activity.
Like other business, you can usually write off your expenses that made your operation profitable, likeelectricityandhardwarecosts.
Do you understand what you need to do to start?
You should run some calculations and see if Bitcoin mining will actually be profitable for you.
You can use aBitcoin mining calculatorto get a rough idea.
I say rough idea because many factors related to your mining profitability are constantly changing.
A doubling in the Bitcoin price could increase your profits by two.
It could also make mining that much more competitive that your profits remain the same.
You actually CAN mine bitcoins on any Android device.
Usingmining software for Androidyou can mine bitcoins or any other coin.
Youll likely make less than one penny PER YEAR!
Android phones simply are not powerful enough to match themining hardwareused by serious operations.
So, it might be cool to setup a miner on your Android phone to see how it works. But dont expect to make any money.
Do expect to waste a lot of your phones battery!
Bitcoin mining hardware (ASICs) are high specialized computers used to mine bitcoins.
The ASIC industry has become complex and competitive.
Mining hardware is now only located where there is cheap electricity.
When Satoshi released Bitcoin, he intended it to be mined on computerCPUs.
Enterprising coders soon discovered they could get more hashing power fromgraphic cardsandwrote mining softwareto allow this.
GPUs were surpassed in turn byASICs (Application Specific Integrated Circuits).
Nowadays all serious Bitcoin mining is performed on ASICs, usually in thermally-regulated data-centers with access to low-cost electricity.
Economies of scale have thus led to the concentration of mining power into fewer hands than originally intended.
Mining pools allow small miners to receive more frequent mining payouts.
By joining with other miners in a group, a pool allows miners to find blocks more frequently.
But, there are some problems with mining pools as well discuss.
As with GPU and ASIC mining, Satoshi apparently failed to anticipate the emergence of mining pools.
Pools are groups of cooperating minerswho agree to share block rewards in proportion to their contributed mining power.
Thispie chartdisplays the current distribution of total mining power by pools:
While pools are desirable to the average miner as they smooth out rewards and make them more predictable, they unfortunatelyconcentrate powerto the mining pools owner.
The media constantly says Bitcoin mining is a waste of electricity.
But, there are some problems with their theories as well discuss.
Certain orthodox economists have criticized mining as wasteful.
It must be kept in mind however that this electricity is expended on useful work:
Enabling a monetary network worth billions (and potentially trillions) of dollars!
Compared to the carbon emissions from just the cars of PayPals employees as they commute to work, Bitcoins environmental impact is negligible.
As Bitcoin could easily replace PayPal, credit card companies, banks and the bureaucrats who regulate them all, it begs the question:
Not just of electricity, but of money, time and human resources!
If only 21 million Bitcoins will ever be created, why has the issuance of Bitcoin not accelerated with the rising power of mining hardware?
Issuance is regulated byDifficulty,an algorithm which adjusts the difficulty of the Proof of Work problem in accordance with how quickly blocks are solved within a certain timeframe (roughly every 2 weeks or 2016 blocks).
Difficulty rises and falls with deployed hashing power to keep the average time between blocks at around 10 minutes.
For most of Bitcoins history, the average block time has been about 9.7 minutes. Because the price is always rising, mining power does come onto the network at a fast speed which creates faster blocks. However, for most of 2019 the block time has been around 10 minutes. This is because Bitcoins price has remained steady for most of 2019.
Satoshi designed Bitcoin such that the block reward, which miners automatically receive for solving a block, is halved every 210,000 blocks (or roughly 4 years).
As Bitcoins price has risen substantially (and is expected to keep rising over time), mining remains a profitable endeavor despite the falling block reward at least for those miners on thebleeding edge of mining hardwarewith access to low-cost electricity.
To successfully attack the Bitcoin network by creating blocks with a falsified transaction record, a dishonest miner would require the majority of mining power so as to maintain the longest chain.
This is known as a51% attackand it allows an attacker to spend the same coins multiple times and to blockade the transactions of other users at will.
To achieve it, an attacker needs to own mining hardware than all other honest miners.
This imposes a high monetary cost on any such attack.
At this stage of Bitcoins development, its likely that only major corporations or states would be able to meet this expense although its unclear what net benefit, if any, such actors would gain from degrading or destroying Bitcoin.
Pools andspecialized hardwarehas unfortunately led to a centralization trend in Bitcoin mining.
Bitcoin developer Greg Maxwell has stated that, to Bitcoins likely detriment, ahandful of entitiescontrol the vast majority of hashing power.
It is also widely-known that at least 50% of mining hardware is located within China.
However, its may be argued that its contrary to the long-term economic interests of any miner to attempt such an attack.
The resultant fall in Bitcoins credibility would dramatically reduce its exchange rate, undermining the value of the miners hardware investment and their held coins.
As the community could then decide to reject the dishonest chain and revert to the last honest block, a 51% attack probably offers a poor risk-reward ratio to miners.
Bitcoin mining is certainly not perfect butpossible improvementsare always being suggested and considered.
This simplified illustration is helpful to explanation:
Lets say theGreenuser wants to buy some goods from theReduser. Green sends 1 bitcoin to Red.
Greens wallet announces a 1 bitcoin payment to Reds wallet. This information, known as transaction (and sometimes abbreviated as tx) is broadcast to as manyFull Nodesas connect with Greens wallet typically 8. A full node is a special, transaction-relaying wallet which maintains a current copy of the entire blockchain.
Full Nodes then check Greens spend against other pending transactions. If there are no conflicts (e.g. Green didnt try to cheat by sending the exact same coins to Red and a third user), full nodes broadcast the transaction across the Bitcoin network. At this point, the transaction has not yet entered theBlockchain. Red would be taking a big risk by sending any goods to Green before the transaction is confirmed. So how do transactions get confirmed? This is whereMinersenter the picture.
Miners, like full nodes, maintain a complete copy of the blockchain and monitor the network for newly-announced transactions. Greens transaction may in fact reach a miner directly, without being relayed through a full node. In either case, a miner then performs work in an attempt to fit all new, valid transactions into the current block.
Miners race each other to complete the work, which is to package the current block so that its acceptable to the rest of the network. Acceptable blocks include a solution to aProof of Workcomputational problem, known as ahash.The more computing power a miner controls, the higher their hashrate and the greater their odds of solving the current block.
But why do miners invest inexpensive computing hardwareand race each other to solve blocks? Because, as a reward for verifying and recording everyones transactions, miners receive a substantial Bitcoin reward for every solved block!
And what is a hash? Well, try entering all the characters in the above paragraph, from But to block! intothis hashing utility.If you pasted correctly as a string hash with no spaces after the exclamation mark the SHA-256 algorithm used in Bitcoin should produce:
If the characters are altered even slightly, the result wont match. So, a hash is a way to verify any amount of data is accurate. To solve a block, miners modify non-transaction data in the current block such that their hash result begins with a certain number (according to the currentDifficulty, covered below) of zeroes. If you manually modify the string until you get a 0 result, youll soon see why this is considered Proof of Work!
The first miner to solve the block containing Greens payment to Red announces the newly-solved block to the network. If other full nodes agree the block is valid, the new block is added to the blockchain and the entire process begins afresh. Once recorded in the blockchain, Greens payment goes from pending to confirmed status.
Red may now consider sending the goods to Green. However, the more new blocks are layered atop the one containing Greens payment, the harder to reverse that transaction becomes. For significant sums of money, its recommended to wait for at least 6 confirmations. Given new blocks are produced on average every ten minutes; the wait shouldnt take much longer than an hour.
You may have heard that Bitcoin transactions are irreversible, so why is it advised to await several confirmations? The answer is somewhat complex and requires a solid understanding of the above mining process:
Lets imagine two miners,Ain China andBin Iceland, who solve the current block at roughly the same time. As block (A1) propagates through the internet from Beijing, reaching nodes in the East. Bs block (B1) is first to reach nodes in the West. There are now two competing versions of the blockchain!
Which blockchain prevails? Quite simply, thelongest valid chainbecomes the official version of events. So, lets say the next miner to solve a block adds it to Bs chain, creating B2. IfB2propagates across the entire network beforeA2is found, then Bs chain is the clear winner. A loses his mining reward and fees, which only exist on the invalidatedA-chain.
Going back to the example of Greens payment to Red, lets say this transaction was included by A but rejected by B, who demands a higher fee than was included by Green. If Bs chain wins then Greens transaction wont appear in the B chain it will be as if the funds never left Greens wallet.
Although such blockchain splits are rare, theyre a credible risk. The more confirmations have passed, the safer a transaction is considered.
Bitcoins electricity consumption will grow to rival that of the nation of Denmark by 2020.
Whatever the accuracy of Motherboards math, theres no disputing the fact that Bitcoin uses a great deal of energy.
On an industrial level, Bitcoin may be considered a system which converts electricity directly into money.
Theeco-consciousseek to generally diminish global power consumption.
Given that electricity is, at present, primarily generated through unsustainable methods, eco-activists hold that all energy expenditures must be critically weighed against their (debatable) contribution to climate change.
Secondly, there are thosedubious economistswho doubt Bitcoins viability.
This group is best exemplified by Paul Krugman, whoarguesthat Bitcoin (and to a lesser extent,gold) has no real value to society and so represents a waste of resources and labour.
While disproving the economic experts is as simple as referring them to Bitcoinscurrent market priceand continued existence, explaining why Bitcoin is worth its electrical cost to the eco-conscious requires a more thoughtful approach.
After all, social pressure to sustainably power the Bitcoin project is sensible. We need to maintain a healthy balance between nature and technology.
That said, until advances in green energy diminish or negate Bitcoins draw on ecologically-costly energy sources, Bitcoiners must endeavor to defend the expenditure by conveying the importance of this revolutionary peer-to-peer currency!
Here are9 good reasonswhich, taken together and in our opinion, completely justify the worlds admittedly high expenditure of electricity on the Bitcoin project:
You mean there isnt an ounce of gold in the bank for every paper Dollar?
Over the millennia, history has repeatedly shown that prosperity depends on sound money. Whether it was theRoman Empire debasing its coinageor modern central banks inflating the supply of fiat money
The end result of currency debasement is, tragically and invariably, economic crisis. Mr. Mike Maloneys superb series, The Hidden Secrets of Money, thoroughly explores this timeless historical lesson inEpisode 5.
Simply put, currency with no backing but faith in its controllers tends to be short-lived and ruinous in its hyper-inflationary death throes.
Bitcoin was designed with one monetary goal foremost in mind: avoiding the dismal fate of previous monetary forms by preventing the evils of debasement.
Rather than trust in some distant, unaccountable human authoritys wisdom and restraint, Bitcoins supply limit isenshrinedin its code; its digital DNA, as a matter of unanimous consensus.
Unlike fiat currency, Bitcoins value is also backed by tangible, measurable resources:coderunning oncomputing hardwarepowered byelectricity.
Given moneys (over-)importance to our modern world, maintaining a technologically-superior alternative to flawed fiat currencies is certainly worthwhile.
Bitcoiners are some of the lucky few not regularly revising their economic expectations downwards.
The major determinants of profitability in the fiercely competitive world of Bitcoin mining are low electricity costs, access to cutting-edge ASIC mining hardware and deep knowledge of Bitcoin and business.
Keen businessmen only need apply for this license to print money.
Mining tends to be concentrated in China due to several regional advantages; China produces most of the worlds ASIC hardware and has several provinces which over-invested in power generation.
Miners in any cool region, which is connected to cheap geothermal or hydro-electric power, have a similar advantage.
its estimated that at least 50% of miners are Chinese. Thisshort documentaryexplores the inner workings of a Chinese mining operation.
Mining is a growing industry which provides employment, not only for those who run the machines but those who build them. Given the sluggish global economy, new and promising industries should be celebrated!
Of course its your money. I just tell you what its worth and what you can do with it.
As alluded to inReason1, many rulers are diluting the value of their national currencies, either as an economic stimulus (mostly to the net-worth of elites) or as a means to cheapen their tremendous debt.
Such debasement punishes savers in particular, as the value of their stored wealth is eroded. Savers naturally seek to protect their fiat savings by translating them to a more durable form, such as foreign currency or investments.
Rulers often block their citizens flight to monetary safety by imposingcapital controls. China is known for its particularly strict limitations.
Bitcoin mining represents an excellent, legal way to circumvent such restrictions.
Investing in a mining operation brings a steady stream of bitcoins; a form of money largely beyond the control of the ruling class.
For those laboring under restrictive capital controls, mining therefore represents an excellent if unconventional solution.
Given the relative costs and risks of other wealth-preservation measures, it may even be worthwhile to mine Bitcoin at a loss!
Consider one of the popular alternatives, real estate:
Bloombergestimates that $1 trillion left China in 2015, 7 times more than was offshored in 2014! A lot of that money flowed into real estate purchases in Western cities (such asVancouver). This phenomenon has created localized bubbles and unaffordable housing conditions for residents. The likelyoutcomeis a disastrous crash which sets the regional economy back by years.
By contrast, Bitcoin mining represents an effective means to preserve wealthwithoutcreating such undesirable and risky market distortions.
If we take Motherboards linear extrapolation that Bitcoin will consume as much power as Denmark by 2020, then add the assumption that Bitcoin will have scaled sufficiently by then to cater to every user of the fiat system it becomes possible to compare the two systems, in an admittedly rough-and-ready fashion.
Allowing that Bitcoin will replace banks, ATMs, brokers, exchanges and payment services (like VISA, MasterCard and PayPal) around the world, we can offset the electricity required by all those services. Considering the combined electric costs for these operations (covering lighting, air-conditioning, data-centers, website hosting, office equipment and more) the total probably approaches or even exceedsDenmarks current power usage.
Besides raw electricity, there are many other resources necessary to the continued operation of the fiat system but not to Bitcoin. For example:
In any fair and comprehensive comparison of resource costs between the two systems, Bitcoin is likely to compare very favorably!
Excess heat from Bitcoin mining problem or solution?
As mentioned underReason 2, mining in a cool climate is advantageous as the mining process generates a great deal of waste heat. However, enterprising Bitcoin miners can capture and use this heat productively!
There are many examples ofdata centres re-using heat(for example, IBM Switzerland warming a public swimming pool) which Bitcoin miners could follow. Waste heat can even be useful to aquaculture and its also possible to harness hot exhaust air for drying processes.
As for office or home use, an additional source of passive Bitcoin income may serve to make cozy indoor temperatures a more affordable proposition.
Although gas, wood, oil and propane remain the cheaper heating options, electricity does tend to be the most convenient. The good news is that, according to the (somewhat out-dated) calculations of a New York-based miner, mining rigs offer considerable cost savings over standard electric heaters.
As an additional benefit, mining rigs may be precisely controlled via common computing hardware, such that a customized heating schedule or adaptive climate control system may be programmed with relative ease.
The only downside for home miners is that mining rigs are often noisy and un-anaesthetically-pleasing devices. As a result, they tend to be sequestered in the basement or garage for the sake of domestic harmony. A little ingenuity may be called for to pipe their heat to where its more needed in the house.
Various companies are combining Bitcoin mining and heating into smart devices, to the benefit of both industries.
Rise of theDigital Autonomous Corporationsand otherbuzzwords!
Continuing the theme of Bitcoin integration with household and industrial devices, this is the precise business model of potentially-disruptive Bitcoin .
21 raised $120 million in venture capital, a record for a Bitcoin company. As their initial product offering, 21.co released a Raspberry Pi-like device with built-in Bitcoin features; mining included.
While such low-powered mining devices earn very little income, even a few hundred Satoshis opens the door to automated micro-payments
Its long been known that Bitcoin offers real potential for machine-to-machine payments. This potential is likely to be realised soonwith the deployment of the first Lightning Network. The results are bound to be interesting; perhaps even the beginning of a profound technological shift in how we conduct our lives and business!
Smart, interconnected devices offer great promise in terms of self-reporting of problems and supply shortages, even the self-calibration and the self-diagnosis of problems. Bitcoin and additional layers are the most likely payment avenues to cater for these new, developing industries. After all, machines dont have bank accounts or credit cards. How else will machines pay for their own inputs and how better could they charge for their outputs?
Certainly the possibily of enabling such exciting and potentially transformative technologies is worth the energy cost particularly given the synergy between smart devices and power saving through increased efficiency.
On Sunday, May 8Germany produced so much electric power that prices were actually negative. As in, customers got paid to use the electrical system.
It was recentlyreportedthat Germanys solar and wind generation nearly overloaded its electric grid over a particularly sunny and windy day. Power companies paid their customers to use more power so that the energy could be safely dispersed.
Somewhat ironically, considering Motherboards comparison, similar excess power situations are known to occur in nearby Denmark.
This means that if you set up in a location which experiences electricity oversupply from variable green sources, its possible to get paid for mining Bitcoin as a public service!
If the mining process is the powerful engine driving Bitcoin, then its certainly a unique engine in that it loses no efficiency for driving additional processes. Namecoin, the very first altcoin, uses the same SHA-256 Proof of Work algorithm as Bitcoin, which means miners any find solutions to both Bitcoin and Namecoin blocks concurrently. As Namecoin serves a decentralised DNS (Domain Name Server), the effect is to bring greater resilience and censorship-resistance to the internet.
Somewhat similar to Namecoin in concept, but more closely tied to Bitcoin, areside-chains.These are essentially separate blockchains which are pegged to Bitcoins blockchain. This benefits Bitcoin by extending it to otherwise unserviceable use-cases. It also benefits the side-chain by backing and securing it cryptographically with the huge power of the Bitcoin mining industry.
Tokenized coins are another technology layer with far-reaching implications, which are similarly backed and secured by Bitcoin mining.
By associating particular units of bitcoin with digital, financial or physical assets, ownership of such assets may be exchanged. This works with everything from stocks to in-game items to land deeds and so on. Various stock markets, land registries and patient databases around the world are experimenting with s