Bitcoin Mining Basics – How to Start Mining BTC

Possibly the most misunderstood and confusing aspect of Bitcoin’s operation is what is callled bitcoin mining, or how the system processes payments and puts “locked” coins into circulation. While it’s arguably the most mysterious thing about Bitcoin, it’s also the most essential and one of the things that makes the network so revolutionary.

What is Bitcoin mining and how does it work?

Mining is the means by which the network verifies transactions are legitimate. But unlike traditional institutions who centralize their payment processing, the Bitcoin protocol allows anyone to do this. While that sounds dangerous, it actually works incredibly well. The public ledger which all bitcoin clients access is called the blockchain. As you can guess by the name, it’s a series of blocks which are added by the miners. When a transaction is sent from one address to another, it is broadcast across the network. The details of this transaction are then confirmed by a miner. However, if every time a transaction was confirmed a block was added to the blockchain, it would quickly become huge and too much for average users to download. The software was designed to adjust this to have blocks added at predictable rate (about one every ten minutes). It does this by requiring miners to solve a complicated cryptographic puzzle before the block is added, while the software adjusts the complexity of the puzzle based on the power in the network. Mining equipment is rated by how many guesses per second it makes, called hashes per second. This is abbreviated to Mh/s for millions of hashes per second, Gh/s for billions, and Th/s for trillions.

Knowing that a strong network of miners would be necessary for Bitcoin’s success, Satoshi designed the software to reward these individuals. When a miner solves a block, that computer is rewarded with the fees of the transactions that were verified in that block as well as the lucrative block reward. This block reward was designed for two things: First was to reward miners in the earliest days, considering there probably wouldn’t be transactions in significant enough numbers to properly provide incentive to mine. Next was to slowly release bitcoins into circulation up to the maximum of 21 million. This block reward started as 50 bitcoins for every block found. Every 220,000 blocks, this reward is halved and is currently at 25 bitcoins.

Can any computer do this? Or is it just special machines?

Technically, any computer can do it. It’s been done on machines as simple as an old school Nintendo. However, the only computers that can do it with any efficacy are specially designed machines. Being lucrative, the market for mining hardware is a technological race hardly seen in any other industry.

A Little History of BTC Mining:

In the beginning, mining with a CPU was the way to go. Having an Intel i7 devoted to mining was extremely profitable. At the high end, they could squeeze out over 60 Mh/s. However, mining power soon took an upward turn when GPU mining was developed. This involved using high end video cards to mine. At the low end, it was 3 or 4 times more efficient than the best CPU. The most efficient video cards would get over 800 Mh/s each. As time went on, this method too became obsolete by FPGA miners. While many FPGA miners hashed at about the same rate as high end video cards, they did so with much greater efficiency, using less electricity and producing less heat. Butterfly Labs produced the “Mini Rig” which hashed at 25 Gh/s, using about a tenth of the electricity per Mh/s that the most efficient video cards used. Then, around January of 2013, news came out about the ASICs.

ASIC stands for Application Specific Integrated Circuits. In other words, these chips were designed solely to mine bitcoins. The machines built around them would be the most powerful and efficient machines to hit the network. They would be useless for anything else, but would start a race that would advance so quickly, miners would clamber to be the first to receive their pre-ordered machines, as beating others to the mining meant a bigger piece of the pie. The most powerful ones currently available can get up to 7.5 Th/s. Although it’s been an exponential feat to make them more powerful and efficient, they’re approaching the physical limits for efficiency. Unless some other technology comes along, this could mean a leveling out of the mining power increase.

How can I start?

A lot has changed over the last few years. There used to be several farily simple options like physically mine by owning the machines. In order to do this profitably requires running the latest high end ASIC miners. You would then need to constantly upgrade to keep your head above water. The other way is virtual mining, which involves buying shares in someone else’s mining operations. The price per Mh/s is slightly higher than outright buying a machine, but you don’t have to worry about electricity, maintenance, or waiting for a miner to ship. Plus, you may be able to sell your shares later at a profit, something you won’t be able to do with an ASIC.

Mining Bitcoin now is much harder. Many have opted to mine alt coins instead.

What to consider

Cost – The cost to consider is not the absolute dollar amount, but rather the cost per unit of hashing power. A 1 Gh/s miner at $3 per Gh/s is a much better deal than a 1.5 Th/s miner at $7 per Gh/s. The ultimate goal is to make a profit from the miner by first paying off all your costs.

Power Consumption – Probably the most overlooked aspect of mining, but also the most expensive outside of the purchase of the machine. The Avalon minis, which hash at 60 Gh/s also use 600W of power. Per month, this can add about 50 dollars to the electric bill. In addition, the machines put off a lot of heat which can run your electric bill up even more.

Maintenance – If you don’t know about computers and networking, this is challenging and costly, as downtime costs money. Investing in someone else’s operations may be the way to go if you’re a novice. You’ll pay a little more than buying the equipment outright, but that premium goes to their electricity and the liability they incur for keeping the operation running.