A bitcoin is created when a computer program solves a mathematical puzzle. The program that runs the calculations is called a miner. It connects to a network where every other miner on that network is trying to solve the same puzzle.
Find out how people are taking advantage of technology to generate bitcoin, and what is involved in the process.
- A bitcoin is created every time a puzzle is solved by a program designed to solve the puzzle, called a miner.
- Bitcoin becomes increasingly difficult to mine as more people join, which lowers the chances of a puzzle being solved by one program, person, or group.
- Mining pools were created to share the computing power across many miners to increase the chances of solving a puzzle.
- Pools split the profits when a bitcoin puzzle is solved, but this reduces the payout for everyone in the pool.
Review Some Bitcoin Basics
Bitcoin is a type of cryptocurrency that is created when computer programs solve a puzzle. Many thousands of people have purchased hardware and programs designed to "mine" bitcoin. For a puzzle to be solved, a miner has to perform thousands of calculations per second.
The number of calculations that your mining program can make each second is called its hash rate. The higher the hash rate, the more puzzles it will successfully solve. The more puzzles it solves, the more bitcoin it earns.
Different miners have different hash rates, and you'll need to take your miner's hash rate into account when assessing profitability. Here's how to choose a bitcoin miner.
Deal With Mining Difficulty
The bitcoin network only wants to create new bitcoins every ten minutes, which means that it only wants someone to win that race every ten minutes. Yet, as more miners try to solve the puzzle, the chance of it being solved by someone quickly increases.
The bitcoin network adapts to this by making the puzzle harder to solve. It does this by adjusting a numerical value that is part of the puzzle, called the difficulty.
Mining equipment can use a lot of power, so electricity bills can rise when it is used. So, slower equipment creates more power usage that must be paid for and decreases your chances of winning.
Slower mining equipment and increasingly difficult puzzles make your chances of solving a puzzle very slim since you're being out-calculated by pools and faster equipment.
The difficulty of generating bitcoin using computing power has risen exponentially over the last few years, thanks to the increasing popularity of the virtual currency and the leap forward in computing power afforded by mining equipment.
This has made bitcoin mining very undemocratic. As people saw the potential profit, they began investing vast amounts in bitcoin mining equipment. Some companies have even set up entire racks full of powerful computers devoted to mining bitcoin.
As more people try to mine for bitcoin, the difficulty continues increasing. The puzzle becomes more complex, taking more time to solve. The rising difficulty is bad for miners because it reduces everyone's chances of winning the race.
So, how do you, with your base-level mining rig, stand a chance of ever winning one of these ten-minute contests? It would be like entering a drag race every 10 minutes with a pedal bike. In the world of bitcoin mining, there are no rewards for effort, only first to solve.
Realize the Costs of Mining
To buy more powerful miners, you’re going to have to spend more cash. The shiny new mining box sitting under your desk may be the most powerful miner known to humankind, but it cost you a lot of money. Before you can make a profit, you have to make back the money you spent on the equipment.
Initial individual mining setups can be very expensive to purchase and run.
Some professionally built miners that can calculate over 100 terahashes per second can cost up to $15,000. You'll then need nearly a year to begin seeing a return on your investment. Others are less expensive but come with less computational power—which means less puzzle solving. This makes it very difficult for someone who is just entering the bitcoin scene to become established and see any real returns.
Join a Bitcoin Mining Pool
Many hands make light work, as the saying goes. This is just as true in the world of bitcoin mining. Miners (the people, not the programs) created mining pools to get around bitcoin mining costs.
The mining software was adjusted to link together and share computational power between miners. This made a pool much more competitive and increased a group's ability to solve the bitcoin puzzle.
Their combined computing power stands a much better chance of winning the contest. The miners (the people) share in the profit when the puzzle is solved by receiving a payout according to their effort.
This approach means that you can still generate a tiny proportion of the bitcoin with your basic mining equipment, even if you don’t win the whole 25-bitcoin reward. In this sense, it’s like entering a drag race with a fully decked-out dragster, rented by an entire community of people. It’s the only way to take on the big boys and win.
Choose a Type of Mining Pool
There are many different mining pools available. Which one you choose depends on a variety of factors. Should you join the largest pool possible to maximize your chance of a reward? It doesn’t work that way. If you join a large pool, your probability of successfully mining a block as part of the pool increases, but the size of the pool means that your payout will be lower. Day-to-day payouts will be more predictable.
A mining pool is an excellent way to get started in bitcoin because of the lower costs and possibility of constant smaller payouts.
Conversely, if you are part of a small pool, you will successfully mine blocks less frequently. When you do, though, your reward will be higher. So, you might go some time without earning anything and then get a large reward.
Single vs. Multi-Crypto Pools
Some cryptocurrency pools focus on one virtual currency, like bitcoin. Others pop around, mining different coins based on which one they think is most profitable at the time. They use various factors to decide this, including the pool's hash rate at the time and the rate of exchange between different coins.
Local vs. Cloud Mining
Some mining pools combine cloud-based mining with pooled activity. This means that you don’t have to buy the mining equipment but can pay for an online mining contract that is automatically woven into the pool. This minimizes your capital outlay but means that you have to pay for your mining capability from your pool profits.
Pool Payout Options
Pools payout in various ways. Some pay participants immediately based on every ‘share’ that they successfully submit. A share is a valid piece of the mathematical puzzle that has been solved. That puts more risk on the mining pool operator because shares may be earned even if the whole puzzle is not solved. The operator may end up paying out rewards for shares, even if they don’t earn a reward from the blockchain.
Most commonly, pools pay using a proportional model, in which the reward is distributed only when the whole puzzle is successfully solved by the pool (which means that a block in the blockchain has been successfully mined).
Understand What You're Getting Into
A bitcoin mining pool's main appeal is as a means of normalizing your reward so that you don’t have to wait years for the off chance of cracking a block. However, it won’t necessarily increase your rewards over time, especially as the block operator may take a percentage of the payout themselves in commission.
Bitcoin mining can pay off in the long run, but there is no guarantee that it ever will. Like other types of investing, gaming, or gambling, much of it depends upon a few good decisions, patience, and luck.