When I first heard the term “Bitcoin mining”, I imagined a 49er dressed in tattered western garb, swinging a pickaxe at a huge data server and yelling “BOYS, I FOUND US SOME BITCOIN!”.
Needless to say, my initial understanding of Bitcoin mining was completely off the mark (although I secretly wish it was true). Bitcoin is entirely digital, so unlike other mineable materials such as gold or coal, swinging a pickaxe at the ground won’t dig up any bitcoins. You actually have to use a mining rig, which consists of mining software and hardware.
The term “mining” is also really just a clever metaphor for the intricate proof-of-work system that gives people bitcoins in exchange for validating the cryptocurrency’s transactions. In other words, the reason why people mine Bitcoin and how they actually do it is complicated. Fortunately for you, though, we wrote an in-depth explanation of what Bitcoin mining exactly is, why people do it, and how you can mine the cryptocurrency.
What is Bitcoin Mining?
To truly understand how Bitcoin mining works, you first need to know the basics of Blockchain, which is the underlying technology for cryptocurrencies like Bitcoin, Litecoin, and Ethereum. The technology acts like a public, digital ledger of every single transaction made in Bitcoin, recording each transaction of the cryptocurrency into a database, copying the database, and sending copies to every computer, or node, in its network.
To make sure this ledger’s true state is verified and updated, each node in its network cross-references and communicates with each other to see if all the copies are the same. This publicizes and validates every single transaction of Bitcoin. It also decentralizes the cryptocurrency, removing the need for a financial middleman to verify its transactions, like a bank.
If a node notices one of the ledger’s copies isn’t the same, due to a manipulation of a transaction’s record after the fact, the network rejects the transaction. This security protocol halts people from altering the ledger to spend bitcoins more than once and prevents them from sending someone else’s digital funds to themselves.
To update a blockchain with these new, verified transactions, a new block, which is a bundle of these transactions, needs to be created and added to the chain, which is all the blocks linked together. But to create and add a block to the chain, the block needs to be validated by the answer to a complex cryptographic puzzle. So Bitcoin rewards the individuals, groups, or businesses who are first to solve the puzzle with a payout of the cryptocurrency.
These validators, who use mining software and hardware to earn Bitcoin payouts, are called miners. Once a miner figures out the correct answer to the cryptographic puzzle, which is verified by each node in the network, they earn the block reward and a new block is created and added to the blockchain. Each block has a unique code, called a “hash”, on one of its sides and the hash of the previous block in the chain on its other side, linking all the blocks together in a chronological and permanent fashion.
For Bitcoin miners, the block reward for validating one megabyte worth of Bitcoin transactions is currently 12.5 tokens. With one token’s value hovering at around $6,374 today, a successful miner could rake in approximately $79,675.
Validation methods like mining are called proof-of-work or PoW, and they’re one of the reasons why Bitcoin and Blockchain are considered so innovative. Incentivizing miners with payouts of Bitcoin to validate its transactions makes the cryptocurrency safe, secure, and trustworthy to use. Mining also releases bitcoins into circulation, which increases the odds that consumers and merchants will be more willing to adopt, accept, and trade it, boosting the cryptocurrency’s value.
But even though mining is economically beneficial to miners, consumers, merchants, and Bitcoin itself, digging for it can actually harm the environment — Bitcoin miners are predicted to consume more electricity than the entire country of Argentina by the end of the year.
Since there’s a limited supply of Bitcoin, they don’t want to issue the supply of the cryptocurrency too quickly, so they make the cryptographic puzzles that validate each block increasingly more difficult to solve. This allows them to cap the number of blocks that miners can package and link to the chain each day. As a result, the more challenging these cryptographic puzzles get, the more electricity miners have to use to mine Bitcoin.
Is Bitcoin Mining Worth It?
Despite the profit potential of mining Bitcoin, the energy costs associated with Bitcoin mining and your mining hardware’s upfront costs can actually do harm to your bank account. Picking the wrong hardware or not having access to a lot of cheap electricity could cost you more money to mine Bitcoin than the maximum number of funds you can earn.
So before you invest in a mining rig to mine Bitcoin by yourself, make sure to use a Bitcoin mining profitability calculator from websites like CryptoCompare, Buy Bitcoin Worldwide, or 99bitcoins to see if you can actually turn a profit.
If you find out you can’t make a profit mining Bitcoin by yourself, not all hope is lost. You can actually pay companies to mine the cryptocurrency for you. This service is called cloud mining and the companies who offer it own huge cryptocurrency mining facilities filled with stacks of mining rigs. All you have to do is rent a rig and they’ll start mining Bitcoin for you.
How to Mine Bitcoin
1. Hire a cloud mining company.
In the crypto community, Genesis Mining is considered the most reputable cloud mining company. Their data center is located in Iceland, so they use renewable energy sources, like geothermal energy and hydropower, to power their mining operation in a more cost-effective and cleaner way than their counterparts who solely rely on electricity.
If you want to check out other cloud mining companies, take a look at HashFlare or a cloud mining company review site, like CryptoCompare. They list most cloud mining companies’ contracts and include their length, the cryptocurrency they’ll mine, price, return on investment, profit ratio, user reviews, and ratings.
2. Pick a mining package.
After you pick a cloud mining company and sign up for a free account, you can choose between a selection of mining packages, which will all have different contract lengths, hashing power, and prices. Your package’s price depends on Bitcoin’s current market value, the cost and difficulty level to mine the cryptocurrency right now, and your preferred hash rate.
3. Select a mining pool.
Once you choose your contract, you can either mine Bitcoin on your own or mine the cryptocurrency with other Bitcoin miners in a group called a mining pool. Joining a mining pool allows you to combine your rigs together and boost your total hashing output.
You’ll have to split your block rewards with the other miners in your pool, but mining pools usually generate more block rewards for individuals than mining Bitcoin on your own. Most cloud mining companies will ask you to join a mining pool right after you choose your contract.
4. Choose a Bitcoin wallet.
To withdraw and store the bitcoins a cloud mining company has mined for you, you need to download a Bitcoin wallet, which is software that allows you to securely receive, store, and send bitcoins in the Bitcoin network.
To find the best-fit Bitcoin wallet for your specific situation, check out this blog post about the top Bitcoin wallets for 2018.