How to Mine Bitcoin
The Power of the Miner
All miners on the bitcoin network are all racing to try and solve a mathematics puzzle so that they can earn a bitcoin prize. To win the puzzle, the miner tries thousands of calculations a second until it finds the right one.
The number of calculations that your miner can make each second is called its hash rate. The higher the hash rate, the more puzzles it will successfully solve, and the more bitcoins it will earn. 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.
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 someone solving the puzzle more 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.
As more people try to mine for bitcoin, the more the difficulty rises, and the harder it is to solve the puzzle. Rising difficulty is bad for miners because it reduces their chance of winning the race. It’s especially bad for people using slower mining equipment because they stand even less of a chance. This represents a cost because a higher difficulty reduces your probability of winning the race and therefore mining coins.
You can combat difficulty by using a more powerful miner, but this affects another parameter:
The Initial Cost of the Miner
To buy more powerful miners, you’re going to have to spend more cash.
That shiny new ASIC 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 that you just spent on the equipment.
Bitcoin Mining Pools
Many hands make light work, or so the saying goes. In the world of bitcoin mining, that can be a good thing. Mining pools have made it easier to get a return from bitcoin mining, but how are they, and how do they work?
Bitcoin mining used to be a way of generating large amounts of bitcoin. You could plug in your mining equipment, turn it on, and sit back as the bitcoins rolled in. These days, generating this cryptocurrency is much harder.
In traditional bitcoin mining, everyone running a bitcoin mining computer races to complete the same mathematical puzzle. Every 10 minutes or so, a single person wins the puzzle, and get 25 bitcoins as a prize. Then, the puzzle is reset, and it all starts over.
The Difficulty of Generating Bitcoins Using Computer Power
The difficulty of generating bitcoins using computing power has risen exponentially in the last 18 months, thanks to the increasing popularity of the virtual currency and the leap forward in computing power afforded by ASIC mining equipment.
This is 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 bitcoins.
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, using a push bike. Just because you kept trying, doesn’t mean you’d ever place first. In the world of bitcoin mining, there are no rewards for effort.
Enter the Mining Pool
This is where mining pools come in. They are collections of people, who all club together to mine in unison. Their combined computing power stands a much better chance of winning the contest. The poll then pays out all of the participants 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 a whole community of people. It’s the only way to take on the big boys and win.
How to Choose a 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.
Conversely, if you are part of a small the pool, then you will successfully mined 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. Over time, it will all normalize.
Mining Pool Options
- Single vs multi-coin 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 hash rate of the pool 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 mining equipment at all but can simply 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.
- 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 operator of the mining pool, 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.
- More commonly, others 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).
Bitcoin mining’s main appeal is as a means of normalizing your reward so that you don’t have to wait years on the off chance of successfully cracking a block. It won’t necessarily increase your rewards over time, though, especially as the operator of the block may take a percentage of the payout themselves in commission. To find out whether you’re likely to make a profit from bitcoin mining, check out this article.