In order to understand bitcoin mining methods, let me explain a few basics about Bitcoin itself:
- Bitcoin (BTC) is an encrypted code that is influenced by market demand.
- BTC supply is capped and the supply amount is known in advance.
- The emission is not controlled by state, so anyone can receive it.
Mining means the extraction of encrypted and limited in the amount of cryptocurrency code and calculation based on it, the necessary combination for which is formed by a random selection of numerical variations.
There are three ways to mine Bitcoin:
- Solo-mining. You purchase equipment yourself, mine coins and keep all your income. In 2018 Bitcoin solo-mining is practically impossible due to network’s total capacity and no one can compete with the pools.
- Mining in pools. A lot of users are united in a virtual pool, connect their mining equipment, mine and distribute the cryptocurrency according to their share. Even large cloud-based mining services mine BTC as part of a pool.
- Cloud mining. In 2017-2018 this method has become the most effective one. It provides maximum profitability and does not require you to deal with technical part of the process at all, you just need ti top up your balance (buy contract) and withdraw funds (bitcoins received via mining at leased capacity).
What is mining?
In a nutshell, mining means producing cryptocurrency (coins or tokens). Since Bitcoin is the most popular cryptocurrency, let’s discuss its mining process.
Firstly, you need to understand the essence of mining. This virtual process is an algorithm for creating digital money (cryptocurrencies), which are later sent to a bitcoin wallet.
The process of mining is rather complicated, time consuming and requires a lot of processing power. That is why mining bitcoins at home or other cryptocurrencies is often compared with mineral extraction. That is why it’s called “mining”.
From a technical point of view the algorithm is as follows:
- Specialized software, using the processing capacity the computer solves the problem proposed by the cryptocurrency system.
- When the solution is found, it results is a block of digital data that meets all the requirements of the system.
- The generated block is saved in the database, and the miner or pool that created it gets a certain number of coins as a reward.
As soon as new coins are credited to the miners’ wallets, these transactions will be reflected in the block. Of course, this open archive does stores only encrypted codes.
Blockchain is a block sequence in which information about all transactions (money transfers within the network) is recorded since the creating of the network. All transactions (bitcoin transfers) for the last 10 minutes make up a separate block, which is bound to the previous one by a special number and will be bound to the next block.
You can’t replace the block without changing the whole blockchain or, at least, most of it.
A new block is created every 10 minutes and its size should not exceed 1 MB today. The size cap was made by bitcoin developers to protect it from DOS attacks.
What hardware can be used for mining Bitcoin?
Special ASIC chips have been created due to the growing mining demand. ASIC have high processing speed. Mining has become more secure, as the ASIC protects the system from hacker intrusion and ensures blockchain operation.
In 2018 several ASIC model lines have been developed, these devices are more productive than conventional computers and completely replaced them in BTC mining.
ASIC chips are released only under a certain encryption algorithm for a specific cryptocurrency, such as SHA-256 (Bitcoin) and SCRYPT (Litecoin), some independent developers have released their cryptocurrencies under another algorithm, so there is no ASIC for them. This is done to save the computing power and mining difficulty did not increase drastically. But this does not apply to Bitcoin, for several years it is being mined by ASIC miners.
Cloud bitcoin cloud mining
Cloud mining is a more promising way of earning money than conventional mining. It requires less investment, but the general principle remains unchanged – the more money you invest, the greater the profit. Since the price is fixed at the time of the purchase, and given the growing coin price, the cost of new contracts for cloud services is also increasing.
In order to mine Bitcoin you need to:
- Register a Bitcoin wallet where the coins will be transferred automatically.
- Select the cloud-mining service and register there.
- Buy (lease) capacity, a contract usually lasts for 2-3 years.
- Receive profit based on the pool production capacity.
There are several advantages of cloud mining:
- Firstly, you do not have to buy expensive equipment, you lease it, which is much cheaper, because services like HashFlare and Genesis Mining produce ASIC equipment (more precisely, they are manufacturer subsidiaries);
- Secondly, you do not have to worry about uninterrupted electricity supply, safety and serviceability of equipment because the cloud company deals with this;
- Thirdly, such a crypto-currency mining is guaranteed to generate passive income regardless of the equipment’s serviceability, as any large company has reserve capacity.
There are several varieties of farms:
- GPU farms (not effective as of 2018);
- FPGA farms (not effective as of 2018);
- ASIC farms.
Note! Originally, mining was done with GPU. However, today these are useless.
The whole point is that today blockchain technology has become more complicated, which is why old equipment is not coping any longer.
Bitcoin farms consist of several ASIC devices assembled in one place to increase production speed, maintenance and cooling.
ASIC Market leaders
Until 2017, about 100 technological solutions were produced by various manufacturers. Popularity growth gave rise to competition among dozens of IT companies that manufacture equipment for mining.
CoinTerra was one of the first companies to enter the market, introducing TerraMiner that has its own liquid cooling system and a set of chips providing an impressive computing power. CoinTerra equipment has proved to be effective not only in terms of capacity, but also in terms of low energy costs.
KnCMiner was the first company to use the chips of its own design creating the most high performance device, the power of which allowed to earn at least 1.5 bitcoins per day at the time of the release of the first model. In this case, ASIC KnCMiner is about 2 times more expensive than CoinTerra. However, despite its high price, KnCMiner currently provides most of bitcoin mining. You can purchase it only by pre-order through the company’s website.
Among other manufacturers Black Arrow and UFOMiners are the most popular ones. The first company on this list has been on the market for a long time, UFOMiners iares rapidly gaining popularity, releasing devices not only for Bitcoin production, but also for other popular crypto-currencies, including Litecoin.
Bitcoin Mining Software
You have to install mining software before you can start mining. Please check compatibility with your equipment first. Top mining software is:
- Characteristics: app which is also a pool, for GPU mining, ASIC mining possible, it is compatible with all OS;
- Pros: suitable for both beginners and experienced miners, easy installation;
- Cons: no revenue: in 24 hours you will get coins equivalent to $0.5.
- Characteristics: console client, GPU and FPGA mining, Scrypt support, RPC;
- Pros: easy pool adjustment, control of computer cooling system;
- Cons: high hardware requirements (ASIC only).
Bitcoin mining pools
To increase the chances of receiving btc coins, specialized web services (pools) provide their services to miners, the services actually mean maximum parallelization of computations. This method provides for the pool members to search for solutions without linking them with others.
Miners provide their processing power with the pool acting as a solo-miner. When choosing a pool, you need to understand reward distribution and pool capacity.
Is mining relevant in 2018?
Is mining still relevant in 2018? On the one hand, the profits are reduced, the amount of resources and energy needed is increasing. On the other hand, technology development is always evolving. There is new “hardware”, its cost is reduced, chips demonstrating unprecedented performance are produced. So much depends on the entry point.
In a nutshell, the relevance depends on how much you are willing to invest in the first place. Profitability depends on a variety of factors, including cost of electricity and equipment, large farms show the highest payback, since it is cheaper to buy ASIC gross, , large investments payback is always higher.
Small investments (up to 20k usd) will be more profitable if you invest in cloud mining and scale up after the investment has been returned.
In order to understand mining prospects, it would be feasible to know what the experts think. They claim that by 2018 Bitcoin can reach 13 thousand dollars, and by 2020 will again fall to 5-10 thousand.
The other prognosis seems unreal. Some argue that by 2030, Bitcoin will cost up to 500 k dollars. Actually, Bitcoin depends only on one factor – demand. If the latter falls, all assumptions will fall apart like a house of cards. For example, large states may impose a ban on cryptocurrency, making it illegal. Some countries are already discussing this.
Basic terms that you need to know before mining bitcoins
- Hashrate is a capacity applied to certain mathematical calculations that constitute the process of block generating. Miner programs have different hasgrates measured in mega, giga, terahashes per second.
- Bitcoins per block – a certain number of Bitcoins is created when a miner has solved a task. At the beginning the reward was 50, after 210 thousand blocks it was halved – 25, then – 12,5, and so on (the generation of 210 k blocks takes about 4 years, after which reward is halved).
- Bitcoin difficulty grows with increasing network capacity, meaning that an increasing number of miners directly affects the complexity of solving mathematical problems.
- Electricity rate is different in each region, and since the process requires very high energy costs, electricity rate is also an important indicator of future profitability.
- Power consumption – every device consumes a different amount of power, so without energy consumption data for your miner, you can not calculate your future income.
- Pool fees – we have already touched upon the fact that you need to be part of the group – pool – if you want to mine (a pool consists on miners just like you). A certain platform provides you with services and charges a fee.
- Time frame – the time that you devote to mining.
- Profitability is an important but difficult to determine indicator, as no one can accurately predict the number of participants and mining difficulty in a few months.
- Conversion rate is another variable that hinders future profitability prognosis. Conversion rate is not important is you are willing to accumulate first but should be taken into consideration if you want to convert the coins into fiat.