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  • What is Bitcoin mining?

  • Does it mean I can generate free Bitcoin from my computer?

  • Is it still profitable to mine Bitcoin these days?

  • Well, stick around...

  • Here on Bitcoin Whiteboard Tuesday,

  • well answer these questions and more.

  • Bitcoin was created as a decentralized alternative

  • to the banking system.

  • This means that the system can operate and transfer funds

  • from one account to the other

  • without any central authority.

  • With a central authority,

  • transfering money is easy:

  • Just tell the bank you want to remove $50 from your account

  • and add it to someone else’s account.

  • In this case,

  • the bank has all the power,

  • since the bank is the only one who is allowed to update the ledger

  • that holds the balances of everyone in the system.

  • But how do you create a system that has a decentralized ledger?

  • How do you give someone the ability to update the ledger

  • without giving them so much power

  • that they will become corrupt or negligent in their work?

  • Well the rules of the Bitcoin system, known as the protocol

  • solves this in a very creative way I like to call

  • Who Wants to Be a Banker?”

  • In short,

  • anyone who wants to participate in updating the ledger of Bitcoin transactions,

  • known as the blockchain, can do so.

  • All you need to do is

  • guess a random number that solves an equation generated by the system.

  • Sounds simple, right?

  • Of course this guessing is all done by your computer.

  • The more powerful of a computer you have,

  • the more guesses you can make per second,

  • thus increasing your chances of winning this game.

  • If you managed to guess right -

  • you earn Bitcoins and get to write thenext pageof Bitcoin transactions

  • on the blockchain.

  • Here’s a more detailed breakdown of the mining process:

  • Once your mining computer comes up with the right guess,

  • your mining program determines which of the currently pending transactions

  • will be grouped together into the next block of transactions.

  • Compiling this block represents your moment of glory

  • as you have now become the temporary banker of Bitcoin

  • who gets to update the Bitcoin transaction ledger

  • known as the blockchain.

  • The block youve created, along with your solution

  • is sent to the whole network so other computers can validate it.

  • Each computer that validates your solution

  • updates its copy of the Bitcoin transaction ledger

  • with the transactions that you chose to include in the next block.

  • As you can imagine,

  • since mining is based on a form of guessing;

  • for each block, a different miner will guess the number

  • and be granted the right to update the blockchain.

  • Of course the miners with more computing power

  • will succeed more often,

  • but due to the laws of statistical probability,

  • it is highly unlikely that the same miner will do so every time.

  • After this stage is complete,

  • the system generates a fixed amount of Bitcoins

  • and rewards them to you

  • as a compensation for the time and energy you spent in solving the math problem.

  • Additionally, you get paid any transaction fees

  • that were attached to the transactions you inserted into this block.

  • So that’s Bitcoin mining in a nutshell.

  • It’s called mining because of the fact

  • that this process helpsminenew Bitcoins from the system.

  • But if you think about it, the mining part is just a by product of

  • the transaction verification process.

  • So the name is a bit misleading,

  • since the main goal of mining is to maintain the ledger

  • in a decentralized manner.

  • Now that you know what Bitcoin mining is

  • you might be thinkingcool! Free money!

  • So where do I sign up?” Well, not so fast….

  • Satoshi Nakamoto, who invented Bitcoin,

  • crafted the rules for mining in a way that the more mining power the network has,

  • the harder it is to guess the answer to the mining math problem.

  • So the difficulty of the mining process

  • is actually self adjusting to the accumulated mining power

  • the network possesses.

  • If more miners join, it will get harder to solve the problem;

  • If many of them drop off, it will get easier.

  • And this is known as the mining difficulty.

  • So why on earth did Satoshi do this?

  • Well, he wanted to create a steady flow of new Bitcoins

  • to the system.

  • In a sense, this was done to keep inflation in check.

  • The mining difficulty is set so that on average

  • a new block will be added every 10 minutes.

  • Now remember, this is on average.

  • We can have two blocks being added minute after minute

  • and then wait an hour for the next block.

  • In the long run this will even out to 10 minutes on average.

  • As you can imagine,

  • this type of self adjusting mechanism created some sort of anarms race

  • to get the most efficient and powerful miners

  • as soon as possible.

  • When Bitcoin first started out there weren’t a lot of miners out there.

  • In fact, Satoshi, the inventor of Bitcoin,

  • and his friend Hal Finney were some of the few people

  • mining Bitcoin back at the time with their own personal computer.

  • Using your CPU,

  • meaning your Central Processing Unit or your computer’s brain,

  • was enough for mining Bitcoin back in 2009 since the mining difficulty was low.

  • As Bitcoin started to catch on

  • people looked for more powerful mining solutions.

  • Gradually people moved to GPU mining.

  • A GPU or Graphics Processing Unit

  • is a special component added to computers to carry out more complex calculations.

  • GPUs were originally intended to

  • allow gamers to run computer games with intense graphics requirements.

  • Because of their architecture

  • they became popular in the field of cryptography

  • and around 2011 people also started using them to mine Bitcoins.

  • For reference, the mining power of one GPU equals that of around 30 CPUs.

  • Another evolution came later on with FPGA mining.

  • FPGA is a piece of hardware that can be connected to a computer

  • in order to run a set of calculations.

  • They are just like a GPU, but 3 to 100 times faster.

  • The downside is that they are harder to configure,

  • which is why they weren’t as commonly used in mining as GPUs.

  • Finally, around 2013 a new breed of miner was introduced -

  • the ASIC miner.

  • ASIC stands for Application Specific Integrated Circuit,

  • and these were pieces of hardware

  • manufactured solely for the purpose of mining Bitcoin.

  • Unlike GPUs, CPUs and FPGAs they couldn’t be used to do anything else.

  • Their function was hardcoded into the machines.

  • ASIC miners are the current mining standard.

  • Some early ASIC miners even appeared in the form of a USB

  • but they became obsolete rather quickly.

  • Even though they started out in 2013

  • the technology quickly evolved

  • and new more powerful miners were coming out every 6 months.

  • After about 3 years of this crazy tech race

  • weve finally reach a technological barrier and things have cooled down a bit.

  • Since 2016 the pace at which new miners are released has slowed considerably.

  • Now that you know what miners are,

  • let’s talk a bit about mining pools.

  • Assuming youre just entering the Bitcoin mining game,

  • youre up against some heavy competition.

  • Even if you buy the best possible miner out there

  • you are still at a huge disadvantage

  • compared to professional Bitcoin mining farms.

  • That’s why mining pools came to existence.

  • The idea is simple -

  • miners group together to form a “pool”.

  • Meaning they combine their mining power to compete more effectively.

  • If the pool manages to win the competition,

  • the reward is spread out between the pool members

  • depending on how much mining power each of them contributed.

  • This way even small miners can join the mining game

  • and have a chance of earning Bitcoin,

  • even though they get only a part of the reward.

  • Today there are over a dozen large pools

  • that compete for the chance to mine Bitcoin and update the ledger.

  • I know you might be thinking,

  • ok, all this theory stuff is very nice,

  • but is Bitcoin mining actually profitable today?”

  • Well, the short answer isprobably not”,

  • the correct (and long) answer isit depends on a lot of factors”.

  • When calculating Bitcoin mining profitability

  • there are a lot of things you need to take into account.

  • Let’s go over them quickly

  • A Hash is the mathematical problem the miner's computer needs to solve.

  • The Hash Rate refers to your miner's performance

  • or how many guesses your computer can make per second.

  • Hash rate can be measured in Mega hash per second (MH/s),

  • Giga hash per second (GH/s),

  • Terra hash per second (TH/s)

  • and even Peta hash per second (PH/s).

  • This refers to the number of Bitcoins generated

  • when a miner finds the solution.

  • This number started at 50 Bitcoins back in 2009

  • and is halved every 210,000 blocks, about four years.

  • The current number of Bitcoins awarded per block is 12.5.

  • The last block halving occurred in July of 2016

  • and the next one will be in 2020.

  • This is a number that represents how hard it is to mine Bitcoins

  • at a certain moment

  • according to the amount of mining power currently active in the system.

  • How many dollars are you paying per KiloWatt.

  • You'll need to find out your electricity rate

  • in order to calculate profitability.

  • This can usually be found on your monthly electricity bill.

  • The reason this is important is because miners consume electricity -

  • whether for powering up the miner or for cooling it down

  • as these machines can get really hot.

  • Each miner consumes a different amount of energy.

  • Youll need to find out the exact power consumption of your miner

  • before calculating profitability.

  • This can be found easily with a quick search on the Internet

  • or through this list.

  • Power consumption is measured in Watts.

  • If youre mining through a mining pool, and you should,

  • then the pool will take a certain percentage of your earnings

  • for rendering their service.

  • Since no one knows what Bitcoin’s price will be in the future

  • it's hard to predict if Bitcoin mining will be profitable.

  • If you are planning to convert your mined Bitcoins in the future

  • to any other currency,

  • this variable will have significant impact on your profitability.

  • And finally #8 - The Difficulty increase per year -

  • This is probably the most important and elusive variable of them all.

  • The idea is that since no one can actually predict

  • the rate of miners joining the network,

  • neither can anyone predict how difficult it will be to mine

  • in 6 weeks, 6 months or 6 years from now.

  • In fact, in all the time Bitcoin has existed

  • profitability has dropped only a handful of times,

  • even at times when the price was relatively low.

  • The last two factors are the reason

  • that no one will ever be able to give a complete answer to the question

  • "is Bitcoin mining profitable?"

  • Once you have all of these variables at hand

  • you can insert them into a Bitcoin mining calculator

  • and get an estimate of how much Bitcoin you will earn each month.

  • If you can’t get a positive result on the calculator

  • it probably means you don’t have

  • the right conditions for mining to be profitable.

  • I assume by now you pretty much know if mining is for you or not.

  • But you may have also heard about other types of mining

  • like cloud mining, mobile mining or even web mining.

  • Cloud mining means that you do not buy a physical mining rig

  • but rather rent computing power from a mining company

  • and get paid according to how much mining power you own.

  • At first this sounds like a really good idea,

  • since you don't have to go through all of the hassle of

  • buying expensive equipment, storing it, cooling it, and monitoring it.

  • However, when you do the math

  • it seems that none of these cloud mining sites are profitable.

  • Those that do seem profitable

  • are usually scams that don't even own any mining equipment,

  • they are just elaborate Ponzi schemes

  • that will end up running away with your money.

  • As a general rule of thumb

  • I would suggest to avoid cloud mining altogether.

  • If you still want to pursue this path

  • make sure to make the right calculations before handing over any funds.

  • Some mobile apps claim to mine Bitcoin on your phone.

  • While in theory this is possible,