“Innovation is the central issue in economic prosperity.” – Michael Porter
This quote stands even more relevant these days where everybody is talking about cryptocurrency – investors, regulators, and media alike. The premise surrounding this young currency is that it does not require a centralised banking system or federal reserves and guarantees to function as money.
You probably have that one friend who wants to get into bitcoin mining but doesn’t possess a clear understanding of the underlying concepts.
Let’s get started so that you can explain the basics to him/her as comprehensively as ABC!
For most of our lives, we have relied on paper and plastic money. Even UPI payments were an alien concept when they were introduced back in the year 2016. But do you see how it turned out to be an indispensable part of our lives now?
Given the reasonably technical nature of cryptocurrency itself, understanding the basics and the working of Bitcoin and other crypto coins can be overwhelming.
If the shiny coin with the ฿ symbol has tickled your interest, let us explore further into the basics of bitcoin and understand how does bitcoin mining work.
Fun fact: This stricken out B is the symbol of the Thai Baht and not Bitcoin. It’s BTC!
Bitcoin Basics: Bitcoin as a Cryptocurrency, and How Does It Work
The creator/s Satoshi Nakamoto launched Bitcoin in the year 2008 from an idea conceived at the depth of financial crises. Bitcoin’s launch and subsequent popularity worked wonders in removing third-party intermediaries that conducted and regulated monetary transactions.
Overview of Cryptocurrency
You might already have decoded it at the back of your head.
cryptocurrency = crypto + currency.
But what exactly does ‘encrypted money’ mean?
Cryptocurrency is a digital asset or money that works as a medium of exchange where the currency ownership records are stored in a virtual ledger called Blockchain (more on this will be covered later). Archives in this ledger are secured using cryptography methods, which significantly reduces any chance of counterfeiting or double-spending.
Crypto coins do not exist in a physical state like paper or plastic money. It is also not issued by any central authority. This means no regulatory authority (for example, RBI) determines the price of Bitcoin.
Some other famous examples include Ethereum, Litecoin, Ripple, and Gridcoin.
With investors and miners seemingly spoilt for choices, taking your pick can certainly be difficult. For your convenience, let’s tackle how Bitcoin is different from the other crypto coins available in the market.
Bitcoin Vs Other Types of Cryptocurrency
In terms of market value, Bitcoin is by far the most popular and the largest. As of December 2020, the value of one Bitcoin stands around Rs. 14.5 Lakhs (USD 19,500), which is the highest among others.
Unlike Bitcoin, many crypto coins are open-source and continuing to evolve. This means there are often scalability and security issues being fixed, even as you are reading this!
Another striking difference between Bitcoin and some other types of cryptocurrencies is that Bitcoins are still being added into circulation; it is not pre-mined before being launched to the public.
You’re possibly wondering what are pre-mined coins, right?
Pre-mined coins have remained under scrutiny because they can be heavily promoted by realtors, driving their demand higher, and in turn, increasing their prices.
Now that you know how Bitcoin is different from, let’s say, Ethereum, let us take a look at where these transaction records are stored.
Blockchain Is Your Virtual Ledger
Think about the last transaction you made at a POS machine. When you paid money to the vendor, it was documented in your bank account passbook and a physical receipt.
Similarly, when a Bitcoin ‘transaction’ takes place, it is documented and clumped together by miners into ‘blocks’. This digital public ledger that contains a record of all these blocks is called a Blockchain.
That being said, if there is no regulatory body, who keeps things in check?
Let’s find out.
The Need for a Trust-Less System = Post-Trust
Here’s a definition that might compel you to throw away your dictionary.
When we say bitcoin Blockchain is trust-less, it means that there are several instructions in place that allows everyone involved to reach and agree on the established truth. It’s almost as if these instructions scream “it’s safe” at you!
Due to this currency’s digital nature, Bitcoin is extremely difficult to tamper with, even though it is entirely public. The cryptographic encryption keys make sure that the blocks of your transactions are tied securely to the Blockchain.
Decentralisation is another way in which the safety of bitcoin transactions is guaranteed. Everyone keeps an eye on everyone, and each transaction is verified before it is added to the Blockchain.
So, What Is Mining?
Bitcoin mining refers to this entire process of logging and maintaining the public trust-less ledger or Blockchain (see above). Miners keep bitcoin users in check. They record each transaction by solving complex mathematical algorithm questions and add them as a ‘proof of work’ to the Blockchain.
But why is mining necessary?
Bitcoin mining is mandatory due to two fundamental reasons.
One, each time a miner (or their computer) solves an equation, a new bitcoin is generated and added to the circulation.
Two, by verifying the transaction history, bitcoin mining remains a trustworthy form of money transaction.
Apart from the mined Bitcoin, miners are also rewarded by the users for transacting over the network.
One might wonder how this information is verified. It’s rather straightforward, to be honest. Keep reading.
Here lies the answer to the question “how does bitcoin mining work?”
In the simplest terms, hashes refer to a string of numbers and characters that verifies the legitimacy of the information, without revealing the information itself. Hashes basically function as the encryption key while keeping the miners in check as well.
Hashes allow the bitcoin network to verify the validity of a block instantly and appear in the following block as well. If not for hashes, miners could simply change one character and pass fraudulent transactions a few blocks back in the chain.
Notice how a string starts with a long series of zeroes?
The hash must be below a specific target called “Difficulty”. Since each string only generates one hash, if the hash is too big, the miner will have to keep trying again and again until the hash is under the said “Difficulty”.
But isn’t that too much work for a single person? This is exactly where a mining pool comes into the picture.
A mining pool refers to a group of miners who combine and contribute their computational resources over a network. Bitcoin miners all around the world who have never seen each other in real life can increase the probability of finding a block by pooling their resources.
If the pool is successful in mining bitcoins, the subsequent reward will be distributed equally among the miners based on their contribution to the pool. In certain conditions, miners may have to submit a proof of their contribution to receive their rewards.
Explaining What Is Bitcoin Mining: How to Choose Hardware?
There are several factors that a miner must consider before buying a bitcoin mining machine. These include the processing and graphics power, hash rate, and energy efficiency, among others.
Hash Rate & Difficulty
Simply speaking, the number of hashes produced in a second is referred to as the hash rate. Difficulty refers to how difficult it is to mine a block compared to how easy it is to mine one. Over the decade, since the launch of Bitcoin, the network can now compute quintillions of hashes every single second (EH/s).
This means your rig should be powerful enough to be able to keep up with that tremendous pace.
Note: The Difficulty and high hash rates are safeguards against counterfeiting and double-spending attacks on the Bitcoin network. A network with a higher hash power will require more miners to complete a 51% attack, making it logistically challenging to realise such a feat.
CPU, GPU, and FPGA
If you are looking to mine bitcoins using a CPU, GPU, or FPGA, you might want to look at other coins available in the market. Since mining difficulty increases as the number of unmined bitcoins decrease, the computational power of traditional CPUs, GPUs, and Field Programmable Gate Arrays (FPGAs) is simply not enough to keep up with the increasing Difficulty.
For example, the Graphical Processing Unit AMD 7970, which was considered the best GPU before the emergence of ASICs, produced approximately 800 million hashes per second. Modern-day dedicated machines can produce over 100 trillion hashes a second.
Energy efficiency plays a significant role when it comes to choosing hardware for bitcoin mining in India.
Your bitcoin mining rig should be power-efficient enough so that the mining procedure itself is profitable, i.e., the return on investment (ROI) is high enough to support the mining process.
Else, you might just end up losing money paying electricity bills without seeing any profit!
The puzzles that miners need to solve aren’t essential in tracking the movement of Bitcoins. Instead, they increase the Difficulty so that spammers cannot fraudulently edit the publicly available Blockchain.
Application Specific Integrated Circuit (ASIC) miner is the dedicated hardware designed for mining a particular type of cryptocurrency. A bitcoin ASIC miner can only mine Bitcoins.
How is that useful, you ask?
As stated earlier, ASICs have remarkably high computational power, meaning they can solve bitcoin puzzles almost 100 times faster than traditional CPUs, GPUs, and FPG Arrays. Additionally, they consume significantly less electricity, contributing lesser to the carbon footprint of bitcoin mining.
Traditionally, you will find the following components within an ASIC:
Cooling system (although typically fans, you can find water-cooled models like the AntMiner C1 and S9Hydro as well)
Before you select a Bitcoin Miner, consider your budget as well. It is a smart move to chalk out the amount you can spend on the machine, its maintenance, and repair. If you end up opting for high-end models, the maintenance is going to cost you a fortune. You will also need to buy connectors, spare parts, and racks.
Remember, your aim should be to maximise your bitcoin mining investment returns. Consider these additional expenses before opting for the best one as per your requirements.
The most popular ASIC models throughout the world include the following:
Bitmain Antminer S9i
Pangolin Whatsminer M3X
Bitmain Antminer 7
Halong Mining DragonMint T1
Explaining Bitcoin Mining: How to Choose Software?
Bitcoin mining software communicates between the mining hardware and the Bitcoin network. The software also allows you to communicate with a bitcoin mining pool if you are part of one.
Before selecting bitcoin mining software, here are two things you need to sign up for in the first place:
A Bitcoin Wallet
As the name suggests, a wallet allows you to receive bitcoins securely, store your coins, and use them to buy from a vendor who accepts cryptocurrency. Consider this wallet your digital bank account curated for Bitcoins.
There are two types of wallets – a hosted wallet and an owned wallet. If you are dedicated to bitcoin mining in India, consider opting for the second one where you hold the private keys to your wallet.
Bitcoin Trading Platform
Bitcoin trading platforms allow you to trade your bitcoins conveniently. Basically, these work in tandem with the wallet so you can get cash value out of the mining activity.
While choosing your bitcoin mining software, make sure to verify the specifications and check the following parameters:
Remote interface functionality
Self-detection of new blocks
CPU mining support
Fan speed regulation
There are several popular mining applications available in the market. The most popular ones include:
BTCMiner (open source)
BitMiner (visual interface for BFGMiner)
EasyMiner (visual interface for CGMiner)
RPCMiner (for Mac OS)
What is Cloud Mining?
Here’s Google Stadia for mining!
A decent bitcoin mining hardware can set you back upwards of almost Rs. 1 lakh (USD 1355), making it nearly inaccessible for a vast majority. The saviour for such people comes in the form of cloud mining.
Basically, cloud mining refers to the leasing of cloud-computing power to mine bitcoins and other cryptocurrencies. This feature makes bitcoin mining accessible to a vast majority, as they can participate in the Bitcoin network without having to go through the trouble of installing dedicated hardware or software.
Cloud mining firms allow users to open and hold an account and participate remotely in the process of crypto mining, all for a minimal fee.
The most significant advantage of cloud mining is the reduced cost of having to maintain a mining rig. This means that everyday investors can now use bitcoin mining as an option to diversify their investment portfolio without having to worry about studying technical terms required for mining.
Cloud mining has also been under scrutiny; however, it essentially adds a mediator to digital transactions and makes the profits susceptible to demands. It can be considered to defeat the original purpose for which Satoshi created Bitcoin.
Is Bitcoin Mining Still Profitable in 2020-2021?
As you might have sensed by now, bitcoin mining requires resources, both hardware and technical expertise. The expensive hardware entails sizeable costs of maintenance and electricity.
Add to that the fact that as more miners compete for bitcoin rewards, this process becomes increasingly complicated by the day. New miners may be put off by the thought that bitcoin mining is not profitable anymore.
But how true is that?
How Much Bitcoin Is Yet to Be Mined?
If bitcoins were available for a dime a dozen, it probably wouldn’t be enjoying the craze it does currently.
Given the workings of the bitcoin protocol source code, there will only ever be 21 million bitcoins. This cap is the one constant that has remained intact since the bitcoin ecosystem was founded. Some credit this to mathematical foresight, some say it was fate.
But Satoshi Nakamoto decided to limit the number of bitcoins in circulation to 21 million.
Out of that cap, almost 18.5 million coins (over 80%) have been mined already.
What Happens After All Bitcoins Are Mined?
To further control the circulation of bitcoins in the market, the network protocol halves the rewards provided to miners every four years, in a process called halving. The last halving was in May 2020, when the current reward of 6.25 BTC was set.
Consider bitcoins as coal or gold; it’s a finite resource. Once all bitcoins have been mined, the bitcoin pool will simply have been tapped out.
Will the Bitcoin Protocol Change?
We’ll let you heave a sigh of relief.
The time taken to run out of bitcoins is actually predicted to be over 100 years. To be precise, it is estimated that the last bitcoin will be mined in the year 2140.
Given the popularity bitcoin has gained over the years, along with new security protocols being added, the actual mining process will likely change significantly by the time it’s 2140.
Price of bitcoins depends massively on the demand and supply chain. Truth be told, bitcoin mining remains profitable in 2020-2021, given the cost to mine one coin.
There has been a dramatic decrease in the reward size that has left some (a very few to be honest) miners sour. It is also possible that by the next century, Bitcoin may fall out of favour entirely, possibly replaced by some other crypto coin. Else, by the time the next decade approaches, this entire process might become obsolete altogether.
KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing.