When we discussed the bitcoin network and it’s security the topic of mining was naturally part of that. Let’s now dig into how bitcoin mining works and what the options to do so are.
This post is part of a running series on bitcoin and blockchain basics
Find previous posts here:
Bitcoin Mining
Bitcoin Mining in its most basic form is the action of generating new coins until the full supply of 21 million coins is reached.
To go another step, mining is the process of solving mathematical equations using algorithms in order to discover new coins.
This isn’t the only thing mining produces though. Granted, without miners new coins would not be found, but it would also mean transactions would not be confirmed on the network.
If you remember, bitcoin transactions require confirmations. Those confirmations are attained as each new block is formed.
Miners are solving blocks in order to discover new coins. Since bitcoin transactions are recorded in a block of data they are also by default generating confirmations for bitcoin transactions with each block they discover.
21 Million Coins
You may be wondering the same thing as me:
- What happens when all the coins are mined?
Luckily new coins are not the only incentive for miners. They also earn transaction fees for the transactions included in the next block that they mine.
It will be interesting how fees are impacted once all 21 million coins are mined.
The Mining Process
There are two ways a person can go about mining
- Hardware Mining
- Cloud Mining
Hardware Mining
This is exactly as it sounds. A person acquires the needed hardware to run a full bitcoin node and process blocks in an effort to discover new bitcoins.
The process has become more and more difficult as time has passed because every 2,016 bitcoin blocks the mining difficulty is recalculated and gets more difficult nearly every time.
With that said, mining has become tough enough that the days of mining bitcoin from your computer’s graphical processing unit (GPU) are long gone.
Today it takes dedicated application-specific integrated circuit (ASIC) machines and quite a bit of electricity. Depending on where you live in the world it may not even be profitable to mine this way based on the cost of power.
Because of this mining pools have become more and more popular in recent years and continue to grow.
This trend has led to the other mining option…
Cloud Mining
The plus side of cloud mining is you do not need to acquire, maintain or run any mining hardware yourself.
Rather you purchase mining contracts that give you a piece of a miners overall mining operation. You are essentially renting mining hardware from someone else and letting them handle the maintenance.
Mining contracts can be all different length of time. Yearly or even lifetime contracts exist. Once you sign up a few minutes later your rented piece of the hardware is working for you. Then you just wait for earnings to slowly trickle in.
Of course there are disadvantages to this too. You need to find a legitimate reputable cloud mining firm as there have been spoof firms out there before. Since it’s a large mining operation it is also more of a target for hackers, which would impact your earnings substantially.
Even after that, you still need to trust a firm is charging you maintenance costs appropriately and paying out revenue correctly.
Take into account that the cost of mining contracts fluctuates constantly so you may sign up for one and see a better one the next day, that’s just part of a market’s fluctuation though.
All of those concerns could even be moot if the price of bitcoin isn’t high enough to generate a profit after costs.
However, profits can be made in the right circumstances and I know a few people that have done well with cloud miners. One miner that is considered legitimate is https://www.genesis-mining.com/. I do not use them and have no affiliation though.
More Miners is Good
The good thing about more and more people mining and pools being created is it reduces the risk of a 51 percent attack, which we discussed in the last post (Part VII).
As long as there are coins to mine this will not be an issue. Once we hit 21 million its will be interesting to see if there is a downtrend in miners with only fees to be had.
In the next post we will discuss Bitcoin and Taxation
Some things I use:
- 1broker to trade stock and currency using my bitcoin
- Bitconnect to earn daily interest lending my bitcoin (risky investment though)
Best Regards,
Disclaimer: All content in this post is my opinion and for informational purposes only.