Bitcoin mining is the process by which transactions are verified and added to the blockchain. During this process, new Bitcoins are released. Anyone with access to the internet and suitable hardware can participate in mining. The mining process involves compiling recent transactions into blocks and trying to solve a computationally difficult Proof of Work problem.
Proof of work is a demonstration of the difficulty in making the new block. This difficulty involves the costs, time and electricity consumed.
The participant who solves the problem first gets to place the next block on the blockchain and claim the rewards. The rewards are transaction fees (from the transactions in the block) as well as newly released Bitcoin.
It’s supposed to be time consuming
Bitcoin mining is intentionally designed to be resource-intensive and difficult. This is to ensure that the number of blocks found each day by miners remains steady. Remember, individual blocks must contain a Proof of Work to be considered valid. This Proof of Work is verified by other Bitcoin nodes each time they receive a block. The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus.
The Bitcoin mining difficulty
The Bitcoin mining (or network) is the measure of how difficult it is to find a new block (in the blockchain) compared to the easiest it can ever be.
This measure is recalculated every 2016 blocks. It is recalculated to a value such that the previous 2016 blocks would have been generated in exactly two weeks had everyone been mining at this difficulty.
The purpose of this is to control block creation — so if more miners join the rate of block creation will increase. As the rate of block generation increases, the difficulty increases to compensate. This will mean the rate of block creation will decrease, so no more than 2016 blocks are created every two weeks.
Buying the hardware and setting up a miner to mine Bitcoin is pretty straightforward. There are a variety of equipment and mining rigs that you could use. However, what’s considerably more tricky is being able to actually mine any coins.
As the market has matured and developed, more miners have been attracted to the mining effort which has increasingly made it harder to mine coins. The miners’ processing time is expended by their processor. As the difficulty of mining is adjusted every 2016 blocks, the difficulty and PoW increases as more miners are attracted to the mining effort.
How to mine Bitcoin
In the early days it was possible to mine Bitcoin using a desktop PC. Now specialised hardware is required, otherwise the cost of electricity to power a PC would exceed the potential earnings of Bitcoin from the operation. Below, we outline the things you will need to start mining.
1. Bitcoin mining hardware
You will need a high-powered process to get started. You should also consider supporting hardware including cooling fans, stacking racks, processing boards, cards and chips.
The basic way to maximise returns is to have your hardware running for as long as possible every day and as efficiently as possible. Before starting you may want to know if you’re likely to make any money. There are plenty of Bitcoin mining calculators available for you to calculate your potential profit.
To use the calculator you need to know the hashing power of the miner, power consumption, price of electricity in your country and the mining pool fee.
A mining pool is the pooling of resources by miners who share their processing power over a network, to split the reward equally. In return you pay the mining pool a fee (usually a percentage). The difficulty (in terms of computer effort) means realistically this is the most practical option to mine Bitcoin.
The hashing power and power consumption will be included in the miner specs. Hashing power (or hash rate) is basically the power that your hardware uses to run and solve different hashing algorithms (which allow transactions). The price of electricity in your country can be easily found via a Google search and you’ll know the pool fee when you choose the pool you want to join.
In our example, if we were to mine Bitcoin we would make £68 per month profit which would recover the cost of the miner in a year. Although we wouldn’t be able to leave it running 24 hours a day in our office without some fire safety precautions and additional cooling. Or when we’re on holiday. Or away at weekends. So it would take longer than a year for us, but you can see how, with the right set up and the right equipment, it is possible.
2. Get a Bitcoin wallet
Selecting the right cryptocurrency wallet will depend on your particular circumstances. If you hold one currency then using that currency’s official wallet is probably the easiest option. If you hold more than one currency (or are planning to own more than one) then you will need a wallet that can hold more than one type of currency.
These are the three main single currency Bitcoin wallets with a quick overview.
Bitcoin Core is the software that runs the entire Bitcoin network. A secure digital wallet is included in the software and it can be used to send and receive Bitcoin. Storing your Bitcoin in the wallet will allow users to contribute to the Bitcoin network by validating transactions and storing a copy of the blockchain.
Mycelium is a mobile only wallet (so it cannot be accessed via desktop) and users are able to switch between Bitcoin and standard fiat currency. So essentially users are able to buy and sell Bitcoins for fiat. It can also accept Bitcoin stored on other wallets so can help if users are consolidating Bitcoins stored across multiple wallets.
Electrum is a desktop wallet and has been around since the early days of Bitcoin. It is widely used by Bitcoin holders and its able to integrate with the major hardware wallets.
3. Find a mining pool
The reason why joining a mining pool is the most realistic option for Bitcoin mining (particularly if you’re just starting out) is straightforward. Bitcoins are awarded in blocks and unless you are very lucky you are unlikely to get any of the coins (usually 12.5 coins per block). Bitcoin mining pools began when the mining difficulty increased to the extent that a solo miner could take months or years to generate a block. In a pool blocks can be generated more quickly and the miners can receive a portion of the Bitcoin block reward on a consistent basis rather than more randomly over a long time period.
There are wide range of mining pools easily found on the web. The majority are based in China. For beginners most crypto commentators would recommend Slush Pool which has been around since 2010 and was the first mining pool.
The kind of things you should be looking at when considering your pool include:
- The reward method (e.g. proportional, pay per share)
- Any fees charged for withdrawal
- How frequently a block is mined
- How stable the pool is
- How easy it is to withdraw money
Once you’ve selected your pool it’s normally straightforward to sign up and add a “worker” that will have its own ID so the pool can keep track of your miner and its mining efforts.
4. Get a mining programme
Your miner will already have the appropriate software loaded but you will need a programme for your computer to measure, control and monitor your miner. Many mining pools have their own software but if you need to find your own then it’s easily found with a Google search.
You’re now ready to mine!
Want to learn more about mining cryptocurrencies other than Bitcoin? Visit our dedicated series.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.