Bitcoin operates as a peer-to-peer platform. This peer-to-peer platform generates Bitcoins through Bitcoin mining.
Why do we need Bitcoin mining? We need it because there’s no central government managing Bitcoin. Typically, a central government issues new coins for a currency. The U.S. Mint issues U.S. dollars, for example.
With Bitcoin, there’s no Bitcoin mint. There’s just Bitcoin users. That’s what makes it a peer-to-peer currency.
Bitcoin users generate new Bitcoins by running specialized software on their computers. This software solves math problems (Bitcoin algorithms).
The more math problems that computer can solve, the more Bitcoins that user will generate. Computers solve these problems using their processing power: the more processing power you have (like in your GPU and CPU), the more Bitcoins you’ll be able to mine.
Table of contents:
What is Bitcoin Mining?
Bitcoin mining is a peer-to-peer process of adding data into Bitcoin’s public ledger in order to verify and secure a contract. Groups of recorded transactions are gathered in blocks and then added into the Bitcoin blockchain. Bitcoin mining requires a lot of resources to protect the network from the possibility of altering past transaction data by making all attempts in changing blocks inefficient for the intruder.
Bitcoin mining is rewarded by the network through transaction fees and subsidies of new coins to encourage miners to spend their resources on mining new Bitcoin blocks. As Bitcoin mining is increasingly difficult, it has become impossible to attempt mining as an individual. As a result, most Bitcoin mining is being done by mining pools, which include several participants sharing their reward. Bitcoin mining is controversial, as it is a great tool for securing transactions but complicating the scaling of the network.
Originally, Bitcoin mining was conducted on the CPUs of individual computers, with more cores and greater speed resulting in more profitability. After that, the system became dominated by multi-graphics card systems, then field-programmable gate arrays (FPGAs) and finally application-specific integrated circuits (ASICs), in the attempt to find more hashes with less electrical power usage.
Due to this constant escalation, it has become hard for prospective new miners to start. This adjustable difficulty is an intentional mechanism created to prevent inflation. To get around that problem, individuals often work in mining pools.
What is the Blockchain?
Bitcoin mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady. 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. Bitcoin uses the hashcash proof-of-work function.
The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a “subsidy” of newly created coins.
This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.
Bitcoin mining is so called because it resembles the mining of other commodities: it requires exertion and it slowly makes new currency available at a rate that resembles the rate at which commodities like gold are mined from the ground.
What is Proof-of-Work?
Bitcoin Mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady over time, producing a controlled finite monetary supply. Individual blocks must contain a proof-of-work to be considered valid.
This proof-of-work (PoW) is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses a PoW function to protect against double-spending, which also makes Bitcoin’s ledger immutable.
How Does Mining Create New Bitcoins?
The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Mining is also the mechanism used to introduce bitcoins into the system.
Miners are paid transaction fees as well as a subsidy of newly created coins, called block rewards. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system through mining.
What Are Bitcoin Mining Pools?
Mining rewards are paid to the miner who discovers a solution to the puzzle first, and the probability that a participant will be the one to discover the solution is equal to the portion of the total mining power on the network. Participants with a small percentage of the mining power stand a very small chance of discovering the next block on their own. For instance, a mining card that one could purchase for a couple thousand dollars would represent less than 0.001% of the network’s mining power.
With such a small chance at finding the next block, it could be a long time before that miner finds a block, and the difficulty going up makes things even worse. The miner may never recoup their investment. The answer to this problem is mining pools. Mining pools are operated by third parties and coordinate groups of miners. By working together in a pool and sharing the payouts amongst participants, miners can get a steady flow of bitcoin starting the day they activate their miner. Statistics on some of the mining pools can be seen on Blockchain.info.
Rewards For Mining
As specified by the Bitcoin protocol, each miner is rewarded by each block mined. Currently, that reward is 12.5 new Bitcoins for each block mined. The Bitcoin block mining reward halves every 210,000 blocks, when the coin reward will decrease from 12.5 to 6.25 coins. Currently, the total number of Bitcoins left to be mined amounts to 4,293,388. This means that 16,706,613 Bitcoins are in circulation, and that the total number of blocks available until mining reward is halved is 133,471 blocks till 11:58:04 12th Jun, 2020 When the mining reward will be halved.
I addition to the block reward, Bitcoin miners are rewarded for all of the transactions they process. They receive fees attached to all of the transactions that they successfully validate and include in a block.
Because the reward for mining blocks is so high (currently at 12.5 BTC), the competition to win that reward is also fierce among miners. At any moment, hundreds of thousands of supercomputers all around the world are competing to mine the next block and win that reward. In fact, according to howmuch.com, ” the total power of all the computers mining Bitcoin is over 1000 times more powerful than the world’s top 500 supercomputers combined”.
Evolution of the mining computer
- CPU mining. In the early days of bitcoin, mining difficulty was low and not a lot of miners were competing for blocks and rewards. This made it worthwhile to use your computer’s own central processing unit (CPU) to mine bitcoin. However, that approach was soon replaced by GPU mining.
- GPU mining. A graphics processing unit (GPU) is a powerful processor whose sole purpose is to assist your computer’s graphics card in rendering 3D graphics. GPUs are not built for executive decisions (like CPUs) but to be very good laborers, hence GPUs are able to execute over 800 times more instructions in the same amount of time as a CPU. Mining is a repetitive process that does not require any intelligent decisions, leading to GPUs replacing CPUs in the mining world.
- FPGA mining. Next came mining with field-programmable gate arrays (FPGAs). These greatly outperformed GPUs and CPUs in the mining process as FPGAs are processors that can be programmed to execute specific instructions, and only those instructions (instead of being repurposed for mining, like GPUs were).
- ASIC mining. Similar to FPGAs, application-specific integrated circuits are chips designed for a specific purpose, in our case mining bitcoin, and nothing else. ASICs for bitcoin were introduced in 2013 and, as of November 2017, they are the best processors available for mining bitcoin and they outperform FPGAs in power consumption.
- Mining pools. To offset the difficulty of mining a block, miners started organizing in pools or cloud mining networks. Whenever a miner in one of these pools solves a block, the reward is shared with everyone in the pool in a ratio representative of how much work you put into the pool (even though you personally never solved the puzzle).
- Cloud mining. Clouds offer prospective miners the ability to purchase mining rigs in a remote data centre location. There are many obvious advantages, the most obvious being: no electricity costs, no excess heat, and nothing to sell when you decide to hang up your virtual pickaxe.
Bitcoin Cloud Mining, Is It Safe and Worth It?
Managing mining hardware at home can be hectic, considering electricity costs, hardware maintenance, and the noise/heat generated by dedicated hardware that has to be run in data centers. Because of the high energy costs for running a powerful Bitcoin miner, many operators have chosen to build data centers known as mining farms in locations with cheap electricity. To ease the stress of mining, these operators dedicated to renting out their mining hardware for a service called Bitcoin cloud mining.
As innovative as the idea may sound, it is essential to know that there are both advantages and disadvantages to Bitcoin cloud mining.
Some of the advantages include:
- It removes cloud factors such as investing in Bitcoin mining hardware, having it shipped to your door for a fee, and running the risk of paying VAT on top of all that.
- There are no settings to worry about, as nearly every Bitcoin cloud mining provider will automatically point your rented hardware to a Bitcoin mining pool.
- No shipping costs and VAT risk to take into account, Bitcoin cloud mining seems to be a safe bet when it comes to entering the mining scene.
Also, some disadvantages of cloud mining may include the following:
- No full control over the mining equipment: As a customer, with cloud mining you’re never in full control of the hardware you rent, because you cannot physically or remotely access the miner itself.
- You are forced to trust a third party with your assets. You’ll have to rely on a centralized third‐party service provider to be honest with you and not to pocket a share of earnings for itself.
- Unexpected charges for maintenance costs.
Top 3 Bitcoin Cloud Mining Services
By purchasing Bitcoin cloud mining contracts, investors can earn Bitcoins without dealing with the hassles of mining hardware, software, electricity, bandwidth or other offline issues.
Being listed in this section is NOT an endorsement of these services and is to serve merely as a Bitcoin cloud mining comparison. There have been a tremendous amount of Bitcoin cloud mining scams.
- IQ Mining Review: Smart mining is “bitcoin mining 2.0” - the new step in cryptocurrencies mining industry. It combines lower costs of Gh/s, thanks to smart contracts with electricity suppliers and higher mining efficiency, due to automated altcoins mining switch. At the end you get 3 times more for lower cost.
- Hashflare Review: Hashflare offers SHA-256 mining contracts and more profitable SHA-256 coins can be mined while automatic payouts are still in BTC. Customers must purchase at least 10 GH/s.
- Genesis Mining Review: Genesis Mining is the largest Bitcoin and scrypt cloud mining provider. Genesis Mining offers three Bitcoin cloud mining plans that are reasonably priced. Zcash mining contracts are also available.
What is Bitcoin Mining Difficulty?
The Computationally-Difficult Problem
Bitcoin mining a block is difficult because the SHA-256 hash of a block’s header must be lower than or equal to the target in order for the block to be accepted by the network.
This problem can be simplified for explanation purposes: The hash of a block must start with a certain number of zeros. The probability of calculating a hash that starts with many zeros is very low, therefore many attempts must be made. In order to generate a new hash each round, a nonce is incremented. See Proof of work for more information.
The Bitcoin Network Difficulty Metric
The Bitcoin mining network difficulty is the measure of how difficult it is to find a new block compared to the easiest it can ever be. It is recalculated every 2016 blocks to a value such that the previous 2016 blocks would have been generated in exactly two weeks had everyone been mining at this difficulty. This will yield, on average, one block every ten minutes.
As more miners join, the rate of block creation will go up. As the rate of block generation goes up, the difficulty rises to compensate which will push the rate of block creation back down. Any blocks released by malicious miners that do not meet the required difficulty target will simply be rejected by everyone on the network and thus will be worthless.
The Block Reward
When a block is discovered, the discoverer may award themselves a certain number of bitcoins, which is agreed-upon by everyone in the network. Currently this bounty is 25 bitcoins; this value will halve every 210,000 blocks. See Controlled Currency Supply.
Additionally, the miner is awarded the fees paid by users sending transactions. The fee is an incentive for the miner to include the transaction in their block. In the future, as the number of new bitcoins miners are allowed to create in each block dwindles, the fees will make up a much more important percentage of mining income.
Are people still making money mining bitcoin?
Making money mining bitcoin is much more difficult today. Some of the issues contributing to this difficulty include:
- Hardware prices. The days of mining using a standard CPU or graphic card are gone. As more people have begun mining, the difficulty of solving the puzzles has too increased. ASIC microchips were developed to process the computations faster and have become necessary to succeed at mining today. These chips can cost $3,000 or more and are guaranteed to further increase in cost with each improvement and update.
- Rise in corporate miners. Hobby miners must now compete with for-profits — and their bigger, better machines — when mining to make a buck.
- Puzzle difficulty. Bitcoin’s protocol adjusts the computational difficulty of the puzzles to finish a block every 2,016 blocks. The more computational power put toward mining, the more difficult the puzzle.
- Power costs. Power in the United States is more expensive than it is in other parts of the world, making it further difficult to compete with big-miner money.
When discussing the feasibility of bitcoin mining, an unexpected variable rears its head: power consumption. This catches a lot of prospective miners off-guard. After all, we rarely consider how much power our electric appliances are consuming. But computing hashes is a very intensive process, pushing whatever processor you’re using to the limit, and to its maximum power consumption. So the question we have to answer is this: will the small reward you earn from bitcoin mining be enough to offset the cost of power consumed?
If you’re using CPU/GPU/FPGA to mine, the answer is a definite no. As of November 2017, the BTC reward is so small that it doesn’t pay for the energy your computer will consume to verify a block.
This leaves us with Pools, ASICs and Cloud Mining. If you’re not willing to put a lot of money into setting up a mining operation, your best bet could be to get a cloud mining rig. These are relatively low cost, and require no hardware knowledge to get started, no extra electricity bills, and you won’t end up with a machine you can’t sell when bitcoin mining is no longer profitable.
Where do I store my mined bitcoin?
Once miners receive bitcoin, they are given a digital key to the bitcoin addresses. You can use this digital key to access and validate or approve transactions.
You can keep these digital keys safe with a number of wallet options:
- Desktop wallets. Software like Bitcoin Core allows you to send and store bitcoin addresses and also connects to the network to track transactions.
- Online wallets. Bitcoin keys are stored online by exchange platforms like Coinbase or Circle and can be accessed from anywhere.
- Mobile wallets. Apps like Blockchain store and encrypt your bitcoin keys so that you can make payments using your mobile device.
- Paper wallets. Some websites offer paper wallet services, generating a piece of paper with two QR codes on it. One code is the public address at which you receive bitcoin and the other is your private address you can use for spending.
- Hardware wallets. You can use a USB device created specifically to store bitcoin electronically and your private address keys.
Bitcoin Mining Hardware
The best Bitcoin miners for 2018
While you can find a wide variety of miners on the market, it’s highly recommended to use the latest models out there since they will give you the best return on investment. Here’s a short overview of the top miners around.
Antminer S15
This 7nm miner deployed in December 2018 is Bitmain’s flagship miner. The miner can reach 28 Th/s, with a power consumption of around 1600 Watts. The miner has two modes – high performance and energy saver.
Innosilicon T3
The most powerful miner on the market yet the T3 can supply up to 43TH/s with a power consumption of 2100 Watts.
GMO miner B3
This 7nm miner by GMO is one of the leading contenders on the market. With a maximum of 33TH/s and a power consumption of 3400 Watts it gives the Terminator T3 a fair fight.
EBIT E11 ++
Scheduled for deployment in February 2019 this might be one of the most impressive miners yet. With an ideal hashrate of 44TH/s and a power consumption of around 2000 Watts this is the most efficient miner at the moment.
DragonMint T1
The latest Bitcoin miner to be deployed, the DragonMint T1, can reach up to 16 Th/s with a power consumption of 1600 Watts. The miner is also relatively efficient, which makes it a highly sought-after product.
Best Bitcoin miners comparison
I put the leading miners against one another in our Bitcoin mining calculator. For electricity costs I used $0.12 which is high, just to get a better idea of how important low electricity costs are for profitable mining. For pool fees I used the standard 2% fee that can be found on most pools. Calculations are done according to November 2018 values.
I compared the results after 1 month of mining since mining stats such as Bitcoin price and difficulty change frequently, so using the same results for the course of a year would be unrealistic.
I got the following results:
Antminer S15
The S15 seems to be making a decent profit of 0.0289 BTC before electricity costs. However you can see that in this case the high electricity accounts for almost 90% of the expenses.
Innosilicon T3
The T3 makes a whooping 0.0442 BTC before electricity costs. Being more efficient than the S15 electricity takes only about 75% of the revenues.
GMO Miner B3
The B3 reaches 0.034 BTC before electricity costs. The problem is that this miner isn’t very efficient meaning that in area where electricity is expensive you’ll end up losing money.
Ebit E11++
Probably the most surprising miner is the E11++ which isn’t out on the market yet. The miner manages to generate 0.0453 BTC before electricity is taken into account. However this miner is also said to be super efficient making electricity count for “only” 68%.
DragonMint T1
Finally the T1 makes only 0.0165 BTC with electricity eating up all of the revenue and leaving you at a loss. This is because the miner is less efficient than the other two competitors.
Due to the fact that the E11++ isn’t out yet, the Innosilicon T3 is clearly the winner in terms of profitability “on paper”. Keep in mind that the example above doesn’t include hardware costs. For example, at the time of writing this article, the T3 costs almost 50% more than the Antminer S19 however in the long run this difference gets covered by the higher profitability.
The reason I don’t include prices in this article is because these miners tend to sell out pretty fast, and most of the time people buy them on second hand markets such as eBay or Amazon, so their prices can vary a lot.
Notable mining hardware companies
Bitmain Technologies
The most well-known mining hardware manufacturer around, Bitmain was founded in 2013 in China and today has offices in several countries around the world. The company developed the Antminers, a series of ASIC miners dedicated to mining cryptocurrencies such as Bitcoin, Litecoin, and Dash. Their flagship bitcoin miner is the Antminer S9, which was launched in late 2016. Bitmain is also in charge of two of the largest mining pools around: BTC.com and Antpool.
While Bitmain is respected for its technical excellence and reliable delivery, the company is also criticized by many Bitcoin enthusiasts for a variety of reasons:
- Its monopolization of ASIC manufacturing and mining
- Its role in delaying the SegWit upgrade to Bitcoin
- Its support and promotion of Bitcoin Cash
- Its alleged anti-competitive practices
- Its questionable methods, such as the Antbleed vulnerability and the covert AsicBoost scandal
It could be said that Bitmain’s undeniable success has been achieved at the cost of creating widespread and powerful opposition across the crypto space. It’s likely that the bulk of mining equipment today consists of Bitmain miners, based on analysis placing Bitmain’s share of the ASIC market at 70%–80%.
Canaan Creative
Canaan was founded in 2013 in Beijing by N.G. Zhang. Canaan began as a producer of FPGAs, the mining hardware that preceded ASICs. In May 2018, Canaan filed for listing on the Hong Kong Stock Exchange in what could be a $1 billion IPO. Canaan’s filing revealed a highly-profitable company responsible for nearly 20% of Bitcoin’s hashrate.
Canaan is the world’s second-largest ASIC producer. The company has a wealth of experience in electronic design and production. Canaan recently released an innovative new product, a 43-inch “Avalon Inside” TV that doubles as a 2.8 TH/s Bitcoin miner.
It’s clear that this veteran industry player has big plans for its future.
Halong Mining
The newest company on the block is Halong Mining. There’s not much information about this relatively anonymous company, but in early 2018, it delivered the most powerful Bitcoin miner seen yet: the DragonMint T1. Even though the Bitcoin community was fairly skeptical about this new company, the miners were delivered as promised and have performed as described.
Halong is most notable for being involved with two well-known parties:
- South Korean electronics giant Samsung, which is producing the mining chips used in Halong’s ASICs
- Prolific pseudonymous Bitcoin Core developer BtcDrak
Halong Mining has also been tacitly endorsed by cypherpunk legend Adam Back. Cited by Satoshi in the original Bitcoin white paper, Back developed the “Hashcash” proof-of-work system, a modification of which forms the basis of Bitcoin mining.
Innosilicon Technology
Innosilicon is a hardware company with design teams in China and North America, Innosilicon pride themselves of providing low cost, high-performance, fully customizable solutions combined with award winning customer design support.
Their IP can be found in millions of Mobile, multimedia and Consumer electronic devices such as: tablets, cell phones, HD set-top boxes, TV, Camera, networking, computing ICs that have achieved leading market shares.
The company has entered the cryptocurrency mining market and introduced the Terminator series for mining Bitcoin, with their latest miner being the Terminator T3.
GMO Internet
Japanese giant GMO Internet has also introduced a new Bitcoin miner recently. While GMO Internet is mainly engaged in the Internet infrastructure business, it also runs other businesses such as online advertising & media, Internet financial services, mobile entertainment, and of course cryptocurrency. The company has also launched several crypto exchanges and it runs a mining business and cloud mining contracts.
Zhejiang Ebang Communication
Ebang mainly engages in R&D, manufacture and sales of fiber optical telecommunication products. The company is also one of the largest ASIC chip manufacturers in their region. Ebang miners carry the Ebit brand.
Bitfury
A veteran Bitcoin hardware and software company formed back in 2011. The company conducts large-scale mining operations on its own and currently accounts for 2.3% of the Bitcoin network hashrate.
Bitfury sells the BlockBox AC, which is a large 500-square-foot device that includes 176 miners supplying a whopping 8 PH/s mining rate. Naturally, this type of device is more suited for large operations and not for home mining.
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