What is Bitcoin Mining – A Comprehensive Beginner Guide in 2020

What is Bitcoin mining
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In this article, you will be able to find out, What is Bitcoin mining and related questions beginners may ask when they first time heard about Bitcoin Mining. Bitcoin mining is the process by which transactions on the blockchain are confirmed. It is also the means by which new Bitcoin is minted. You have probably heard these very vague explanations before, but they don’t really explain much, do they?

So, let’s dig deeper into what Bitcoin mining is, how it works, why it’s important, and whether it is right for you.

So, what is Bitcoin mining, really? First, you have to understand the blockchain. As you already know, there are two key tasks accomplished by Bitcoin mining: confirmation of blockchain transactions and minting of new Bitcoin.

What is Bitcoin mining

How does mining accomplish these tasks? It is actually not that complicated. Every transaction on the blockchain is part of a “block” that consists of one megabyte of transaction data. That block can contain anywhere from one very large transaction, though that is unlikely, to thousands of very small ones.

Each transaction in a block is assigned a hash: a 64- character string of hexadecimal code that identifies the transaction within the block as unique, preventing Bitcoin double-spending or other counterfeiting methods.

How is the new Bitcoin minted?

Miners use computer processing power, referred to as “hash rate,” to generate random hashes as quickly as possible. These hashes are then compared to the hashes of the block being mined. If a hash generated by a miner is less than or equal to the hash of the transaction, then that transaction is confirmed. This process is called “proof of work.”

The first miner to generate a confirmation is rewarded with an amount of Bitcoin that is minted by confirming transaction hashes. As of the time of writing, the reward for mining one block is 6.25 Bitcoin. That amount is divided by the number of transactions in the block and distributed to those miners who were the first to arrive at a correct hash for one or more transactions, so the likelihood of one miner being rewarded with all 6.25 Bitcoin is extremely low.

How can I mine Bitcoin?

Now, let’s get to the real question: how does one get in on this action? This part can get a little complex, but I will endeavor to keep it as simple and straightforward as possible. If you want to mine Bitcoin, you basically have two options: hardware mining or cloud mining.

One of these can be very expensive, the other very risky, and both come with a potential for loss just like any other investment. Let’s start with hardware mining.

Bitcoin hardware mining

Hardware mining involves using your own physical devices to generate the hash rates. These miners can be custom-built PCs with high-end specifications with specialized mining software installed or computing devices specifically designed and programmed to do nothing but mine.

Using a PC to mine Bitcoin is not recommended because the processing power is necessarily split between the PC’s operating system and the mining algorithm software, reducing potential hash rate. It can be done, but don’t expect much in terms of profit. That leaves actual mining rigs. Most of these consume very large amounts of electricity, generate a lot of heat, and have noisy fans running nonstop.

That said, they do the job of mining more effectively than anything else because that is the ONLY thing they do. The whales of Bitcoin mining have thousands of these devices filling up warehouses wall to wall, floor to ceiling so, if you’re looking to get into Bitcoin hardware mining, those enormous “mining farms” are your competition. A single unit running on your desk is not going to turn you a profit, as you will likely end up paying more for electricity than you earn from mining.

Bitcoin mining farm

In order to understand this more clearly, one has to compare hash rates. Suppose I have one rig running in my home at 76 TH/s (76 trillion hashes per second). The rig itself costs ~$2,300, so I’ll have to mine at least that much in Bitcoin just to break even. Its power consumption is 3040 watts (that’s equal to more than 30 100-watt light bulbs), so I have to take the cost of electricity for running the rig out of the profits. If one Bitcoin is $11,000, this rig will probably mine ~$10-11 per 24-hour period, consuming 72,960 watts of electricity at that time. Where I live, the cost of running this rig would be about $6.50 per day, leaving $3.50-$4.50 daily profit. Assuming the low-end profit margin and Bitcoin’s price remaining fixed, it would take me just over 1.8 years to mine enough Bitcoin to pay off the rig purchase and start turning a profit.

Bitcoin cloud mining

You remember how I told you one option was expensive and the other risky? That’s because “cloud mining” doesn’t rely on the cloud at all. Mining must be done by a physical rig somewhere. Cloud mining is more like hash rate rental.

Cloud mining websites offer users hash rate at a fixed price per H/s (hashes per second), then take the cost of electricity out of the profits mined with that hash rate along with a portion of the remainder of mining profits. They are not altruistically offering the average Joe the ability to mine without physical rigs.

Cloud mining allows mining farms to double-dip: they get to offload the cost of electricity onto you AND keep part of what your rented hash rate mines. This hash rate comes from a mining farm somewhere, with real rigs doing real mining. This may not seem like a viable business model, but buyers of hash rate contracts are usually still able to turn a profit so everyone wins.

The owner of the physical rigs just wins a little more than you do. I did say that cloud mining is risky. That is because there is an untold number of scam sites out there pretending to be legitimate mining farms. Beware of any cloud mining site that guarantees a fixed rate of profit.

Bitcoin’s price is notoriously volatile, so such promises simply cannot be truthfully made. Also, watch for multiple sites using identical page layouts and phrases. “Our users have already withdrawn Bitcoins since launch” is a dead giveaway that the site is a scam. Hash rate prices that are much lower than the average or the ability to mine multiple currencies with a single hash rate should also send up red flags. Different coins use different algorithms and the hash rate is not convertible directly from one to another.

If you are going to try cloud mining, research the site thoroughly before you invest. The other obvious risk associated with cloud mining is the possibility that a legitimate cloud mining site run from an actual mining farm may shut down without notice if it is no longer determined to be profitable by the owner.

Changes in the cost of electricity, the difficulty of mining, the value of Bitcoin, and a host of other personal finance issues could cause a cloud mining site to go belly up, taking your investments with it.

What about Bitcoin halving?

Halving is the process of reducing the amount of bitcoin mined per block. It is exactly what it sounds like: about every four years, the reward for mining a block is cut in half. The event is hardcoded to happen every 210,000 blocks. Based on this formula, the last Bitcoin will be mined sometime in the year 2140, as there is a hard cap of 21 million Bitcoin that will ever exist.

Previous Bitcoin halving events?

  • 11/2012 Block reward reduce from 50 BTC to 25 BTC
  • 07/2016 Block reward reduce from 25 BTC to 12.5 BTC
  • 05/2020 Block reward reduce from 12.5 BTC to 6.25 BTC

So, if you are going to invest in Bitcoin mining, the sooner the better. Halving keeps mining relevant and prevents an overabundance of new Bitcoin being introduced to the market too quickly, which protects the value of Bitcoin in the long run.

If you want to track next Bitcoin halving event, check out BitcoinBlockHalf.

Conclusion – What is Bitcoin mining?

Bitcoin mining is, in short, the means by which users are rewarded for verifying transactions on the blockchain: giving them newly minted Bitcoin for their efforts. It also protects the currency from counterfeiting and double-spending. Bitcoin mining keeps blockchain trustworthy and secure.

Finally, Bitcoin mining is a sound long-term investment for those who can afford to break into the market, either through hardware or cloud mining.

Other helpful readings

What is Bitcoin?
How to purchase Bitcoin in 2020
Best Bitcoin wallet to try in 2020

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