3rd eCoin4dummies Guide: Bitcoin Mining –The Basics, Cloud vs. Hardware
What is Mining?
Mining is the process of maintaining, verifying and adding new transactions to the blockchain. The transactions are added in sets called blocks. These blocks are linked together in such a way that illegal manipulation of transactional information and blocks is not possible in any way. Read more about Bitcoin Mining here.
The Bitcoin network nodes are the elements which perform mining operations. When a miner publishes a new block and all other nodes in the network accept it, the block miner is rewarded with Bitcoins. In order to publish a block, in addition to verifying the transactions, the miner should solve a complex computational problem. The problem is structured in a way that is easy to check the solution. The network nodes will verify this solution and will check the transactions to accept the block.
What is SHA-256?
It is an algorithm. And this is used as proof of work algorithm in the Bitcoin ecosystem. The SHA-256 algorithm is used in generating the Bitcoin wallet addresses. The algorithm takes any data as input and produces a 256-bit data as output. The input can be a single bit or a terabyte, it does not matter, and the output would be a 256 bit.
The algorithm is irreversible. You cannot bring back the input data by giving the output as input. Also, there is no such alternative system exists to reverse an SHA-256 mechanism.
When you add a specific number to the data you are sending as input, the output will generate a particular sequence of zeroes at the beginning of the output data. The unique number is called nonce.
To find the nonce, you have to try adding a different number as a tail to your data and see whether you had the expected result. Hashing power is the one that determines how fast you can perform these trial and error operations to get the required result. More the number of zeroes you need at the beginning of the output higher the hashing power required to get the needed result faster.
As soon as a miner constructs a block of transactions and finds the nonce, he would publish the block. The other nodes in the network check everything to accept the new block.
How is Hashing Power calculated?
The output of the SHA-256 algorithm is known as a hash.
If your hardware can produce one hash per second, then the hashing power is one hash per second (1 H/Sec).
Likewise, if it can compute one thousand hashes per second, then the power is said to be 1 KH/Sec.
To understand how profitable a mining operation can be you should understand the higher the Hashing power the more Bitcoin you will produce.
In order to start bitcoin mining you should do the following steps:
1) Get a Bitcoin Miner
Average CPU was used to mine the Bitcoin in the early stages. As the block number of the Bitcoin blockchain grew up the complexity of solving the SHA-256 based algorithmic problem is increased. Moreover, GPUs are not fast enough for the current hash power required. Today, you should buy SHA-256 algorithm specific hardware. These specific processing units are not useful for any task other than solving the particular SHA-256 algorithm.
The Application Specific Integrated Circuit Miners a.k.a. ASIC miners are low power consuming high-throughput hardware designed especially for mining Bitcoin. A lot of different manufacturers sell the ASIC miners. When choosing the best miner for your bucks, it comes down to three factors: Hash rate, Efficiency, Price. More the Hash rate better the mining throughput, and higher efficiency keeps the electricity bills low.
This ASIC miner gives 14 TH/Sec. And will cost 3,000 USD. Currently, the total Bitcoin network hash rate is around 8 million TH/Sec. As per the inputs discussed above, the antminer S9 will produce 0.285 BTC per month and 3.36 BTC not including the price of the Bitcoin miner or the electricity. The Antminer S9 is considered the best mining hardware and will get you the most BTC possible.
This is another best ASIC miner available with 3.5 TH/Sec. And costs 560 USD. Today this miner can deliver 0.11 BTC per month or 1.32 BTC a year.
2) Get a wallet to store the Bitcoin
After starting Bitcoin Mining, you will earn Bitcoin. You need a wallet to store the coins.
There are different types of wallets like web, mobile, desktop, hardware, paper, and exchange wallets.
Having a cold storage wallet is crucial. Storing the Bitcoins offline is nothing but cold storage.
Why storing offline is important? Remember the infamous Mt.Gox hack. Storing online is always risky and prone to hackers.
There are a number of Bitcoin wallets available out there and you can read about them in my article about Bitcoin Wallets, be sure to read about Cold Storage Wallets if you are going to hold high sums of Bitcoins.
3) Find a mining pool
When you do the Bitcoin mining, the reward will only be given if you had published a block. Currently, for every 10 minutes, a new block is published. So, in 10 minutes you have to construct a new block, finish the proof of work, and should be accepted by the network to get the reward.
Think of the hashing power you should have to publish a block. You can never have that much power unless you got deep pockets. This is where mining pools come into the picture. These are a group of individual miners contributing their hashing power towards the group and agree to share the rewards earned. Most of the mining pools are based in China, and many of them only have Chinese websites and support. Not every pool will open their gates for everyone. Let’s take a look at the public mining pools which allow anyone on the planet to join them.
This public pool has 62,735 Bitcoin miners on board with 909.5 PH/sec. Until now this group has found 46931 Bitcoin blocks.
This group celebrates itself as the world’s first Bitcoin mining pool. This is a good pool to join and has a mining power of 455.7 PH/Sec. Slush pool has mined 3% of all Bitcoin bocks present today.
This is another pool based in China with a current hashing power of 666 PH/sec. This pool has mined 5-6% of all blocked in the last six months.
4) Get a Mining Software
You got the hardware ready. Finally, you need a software program to put the hardware at work.
The software helps you to communicate with the Bitcoin network, perform the mining task, and to connect with the pool you may have joined.
This mining program also helps to monitor the statistics of the hardware like the hash rate, temperature, fan speed, etc.
Bitcoin Core – If you are mining alone, it is good to use Bitcoin core. This is available for all modern desktop variants such as Mac OS X, Linux, and Windows. After installing the Bitcoin core, you should have a fixed bandwidth and a free disk space of more than 145 GB to store the full Bitcoin blockchain, for the initial synchronization with the Bitcoin network.
CGminer – Apart from the Bitcoin Core client, CGMiner is a robust program available for all desktop platforms.
This Mining software has features like monitoring, fan speed control and overclocking, etc.
On the other hand, Cloud Bitcoin mining is as same as Amazon Web Services or Microsoft Azure providing computing power by renting the servers. There are services like Genesis-mining.com and cloudhashing.com who can take care of the mining hardware, connectivity, and electricity for a service fee.
Whenever considering Bitcoin cloud mining site, it is important to understand the credibility, authenticity, and reputation of the cloud mining service provider.
Let’s look into a few cloud mining providers who have a good reputation.
As of now, genesis mining entirely sold out. Starting with 30 USD for 200 GH/Sec with additional maintenance fees.
This service provider is also out of hardware to rent new users. The prices start from 2.4 USD per 10GH/Sec. Moreover, the minimum one-year contract is a compulsory requirement.
Cloud Mining vs. Hardware Mining, which is better?
The hardware part needs,
- High upfront costs – as you need to pay the full hardware price
- A setup space
- Good bandwidth
- 24/7 electricity supply
- Regular monitoring
- A human eye is always in need.
- Should understand how to set-up the hardware
- The hardware performance would degrade over time
- Replacing old and failed equipment with new components
- Liquid spills on the hardware are the death sentence to them
- Only useful to mine other Cryptocurrencies with SHA-256 proof of work algorithm
- The chances are that Bitcoin proof of work may move over to SHA-512 algorithm in the near future
Coming to the Bitcoin Cloud Mining,
- Less upfront fee compared to Hardware mining
- Easy to get on board
- No need to worry about electricity, bandwidth, performance, setting space, etc.
- Expenditure is more than Hardware mining over the long-term
- Some service providers ask to agree to long-term contracts, which can be risky
- Some cloud mining providers may cheat the customers
- Easy to shift mining from Bitcoin to any other Cryptocurrency unless held back by a contract
It is you, who can or has to decide whether Bitcoin Cloud mining or Hardware mining best suits you. Your decision would also depend on the Electricity and hardware costs in your city or country.
For example, if you are in China you will get the planet’s cheapest hardware. And if you are in Iceland you can save a lot with the electricity bill.
The decision depends on where you are located, your motives, and the flexibility you have.
Is Bitcoin Mining profitable?
This question is eating up many minds. In my personal view, this is the question of the decade. Within a week, the price of the Bitcoin swung from 4600 to 3000 USD, and to 3500 USD. More the wild swings, more the confusion over profitability.
This is the miners’ worst nightmare. The Difficulty is increasing over time and it's hard to know how much time a miner will remain profitable even if it is, to begin with.
This difficulty adjusts to the mining power the network currently possess for every 2016 blocks. As more and more miners are showing interest, the Difficulty often increases.
Rule of thumb: Higher the Difficulty, heavier the hashing power required.
Reward per Block
Whenever a new block pushed to the network, there is a reward. Daily new Bitcoins come into circulation until 21,000,000th Bitcoin is mined, as a block reward. After the mining of last Bitcoin, the block reward can only be the transnational fees that are inclusive in the block.
Currently, the bounty for a new block found is 12.5 BTC and will become half every 210,000 blocks.
There are many online Bitcoin mining profitability calculators are available. Moreover, Bitcoinx.com provides a good one.
Given the various factors like Difficulty, Reward rate, Current BTC price, Hash rate, Electricity rate, power consumption, and cost of mining or Cloud mining service. You will find whether you could make a profit or not.
The Golden age of Bitcoin Mining, the time before 2013, had gone long ago. During the early stages, the mining Difficulty was minimal, and an ordinary CPU was able to perform mining.
Even though the mining difficulty has increased the Bitcoin price did not go up relatively.
Recently, massive fluctuations in the Bitcoin price is creating a major problem.
The CEO, Jamie Dimon, of the planet’s third-biggest financial institute JPMorgan Chase said Bitcoin would be nothing in the future.
Contradictory to that, a research team from Harvard predicted Bitcoin value would be more than 100,000 USD by the end 2021.
After gaining a lot of traction, the price of Bitcoin is the single most decisive factor in profitability. While the other factors are relatively more stable, an increase in the Bitcoin price can bring more profits and decline could make you bankrupt.
Bytom, a Smart Contract platform, whose mining hardware also solves Artificial Intelligence problems, is also an option on the table to consider.
Also, Minero mining is similar to Bitcoin Mining
Monero (XMR) is a cryptocurrency known for its privacy and security features. If you haven't had an introduction to Monero, read this article.
The differences in Monero mining are:
- Monero uses CryptoNight hashing algorithm which is ASIC resistant. That means your PC is good enough to mine Monero ― and for that reason, some websites mine on your computer when you browse. So, be careful. Read more about that here.
- Using a GPU for Monero mining would increase your profitability.
- The block size is dynamic. It changes depending on the network circumstances like transactional volume.
- The supply is unlimited, though there are some rules; which you can find in the Monero introduction article.
Apart from those differences, the Monero mining mechanism is all the same, that is, proof of work. Only the technical implementation is different.