What you need to know before understanding mining

If we want to understand the purpose of Bitcoin mining we need to alienate from it for a while.

>In fact we need to compare Bitcoin with government money.

Banks are in charge of your government money as they are the only ones with read and write access to your ledger.

This guarantees banks that we cannot ‘double spend’ our money.

Double spending is the name of the action of using the same money to buy more than once.

It could occur with remote payments without preventive actions in place.

The payment process in simple terms

Several banks take part in one online payment.

For the purpose of this article we only need to know what your bank does to your money when you buy something.

Your bank checks if you have the money in your account.

If you do, they will temporarily remove it from your balance.

This is to prevent you from spending it again until the payment occurs.

If the payment received confirmation you would no longer have that money.

If the payment doesn’t receive confirmation it would go back into your account.

Usually it takes a certain amount of days before you can spend that sum again.

This procedure occurs for every payment that you make, and has a name: “pre-authorization”.

Image that represents the process of online payment with credit card.

This is very effective to prevent you from double spending.

Because your bank is the only party with full read and write access to your ledger, this is a very easy process.

Verifying double spending with Bitcoin is more complex because the ledger is public.

A public ledger allows everyone to write it, that’s when mining comes into place.

How Mining Bitcoin Works

Finally we will see what Bitcoin mining is.

While doing so I would bust the myth that mining is the process of creating Bitcoins.

The famous BlockChain that you have heard about is nothing but a ledger, in fact we will call it so.

We also know that the BlockChain has this name because it is a chain of blocks.

We can relate to the ledger’s idea and each block can be a new page of the ledger.

The Bitcoin network is where the computers check Bitcoin transactions and mine it.

We can call it the office.

These computers are also called ‘nodes’.

There are different types of nodes, for instance a miner is a particular type of node.

Each node involved in the verification of transactions has a copy of the ledger.

Image that represents a Bitcoin Network's full node and a mining node.

These computers can tell straight away whether a transaction can be afforded.

If an account has less bitcoin than it tries to transfer, the transaction would be void.

Due to the need to prevent double spending and the absence of pre-authorization, a solution is necessary.

Here’s when the Miner comes to place.

We can state that Bitcoin Mining is the process to prevent people from double spending.

Behind the scenes of Bitcoin transfer

I will explain in practical words what happens when mining Bitcoin.

The first explanation is jargon free.

In the second explanation I replaced the practical names with the correct ones.

After these two I will go through some other names that you have heard and may have doubts about.

Bitcoin transactions explained without jargon

In this example Arrow is trying to send 1 Bitcoin to his buddy John.

  1. The Bitcoin office receives Arrow’s request.Image of Arrow handing money to an operator at the cashier.
  2. A sticky note gets hung to the validating board waiting to be examined by the operators.
  3. Because every Bitcoin wallet is public (but the owner is not), a group of operators will check if the account can afford the transaction.
    1. The transaction stops if the majority of them cannot confirm the availability.
    2. If the majority of the operators confirm the availability, the transaction would be written in a line of the current page of the ledger.Image that represents a group of Full nodes in the Bitcoin Network, validating a transaction
  4. Another sticky note goes to the miners board.
  5. A lucky miner would find the combination of the current page of the ledger. The page usually contains more than one transaction, this depends on the situation.
    1. If the page is full, they move to the next transaction changing page.
    2. If the page is not full, they draw a line, preventing the creation of further lines on that page and move to the next page.Image of a Miner in the Bitcoin Network, after finding the hash to create a block.

After the completion of a page, it is difficult to modify it, and to do so, it is necessary to verify everything from that page until the last again.

Bitcoin transactions explained with jargon

  1. The Bitcoin Network receives Arrow’s request.
  2. A task in the mempool is generated, waiting to be examined by the nodes (either a full node or a miner).
  3. Because every Bitcoin wallet is public (but the owner is not), a group of nodes check if the sender can afford the transaction.
    1. The transaction stops if the majority of them cannot confirm the availability.
    2. If the majority of the operators confirm the availability, the transaction would be written in a line of the current block of the BlockChain.
  4. The task goes back to the mempool, waiting for a miner to find the hash to create the block.
  5. A lucky miner would find the hash of to create a block to add to the BlockChain. The block usually contains more than one transaction, this depends on the situation.
    1. If the block is full (there is a maximum amount of transactions available per block), they move to the next transaction changing block.
    2. If the block is not full, they close it anyway, preventing the creation of further transactions on that block and move to the creation of the next block.

Once closed a block, it is very difficult to re-open and change it.

In order to modify a closed block, it is necessary to validate all transactions and mine the block or blocks again until the last one.

The video below explains Bitcoin mining by showing the technology in action.

Proof of work

The proof of work shows that miners have spent money and time to secure a particular block.

This is necessary because if it takes money to validate information, it is also needed to inject false information in the BlockChain.

The system relies on the majority of the nodes confirming the same information.

This deters malicious individuals from trying to manipulate it because it makes it more expensive than what they can get in return.

For example:

  1. There are 50 computers confirming the validity of a transaction. The hacker needs to have at least 51 computers confirming a false transaction.
  2. If the hacker is one, it needs to cover the costs of 51 devices, which is expensive for him.
  3. If there are 51 hackers, the reward sliced in parts would be less than what they have spent.

Why mining Bitcoin?

Bitcoin miners receive a reward whenever they ‘find the combination’ (called ‘hash’) of a block.

The reward diminishes over time.

Once the maximum amount of Bitcoin will exist, miners will only take the commission for validating transactions.

Is Mining Bitcoin Legal?

Image that represents a criminal mining node in the Bitcoin Network. Worry not my reader friend. Mining Bitcoin is legal in all the countries where Bitcoin is not illegal. You can see the list below and you can find more detailed information in this article here:

Findings Show Bitcoin is Completely Legal in at Least 111 Countries.

If you don’t want to check the list, here’s where Bitcoin is completely illegal:

  • Afghanistan
  • Algeria
  • Bangladesh
  • Bolivia
  • Pakistan
  • Qatar
  • Republic of Macedonia
  • Saudi Arabia
  • Vanuatu
  • Vietnam

What do you need to mine Bitcoin?

Mining Bitcoin may not be difficult, but it can be expensive. It is necessary to make an upfront investment before seeing any profits. In this chapter we will see all that you need and all the possibilities offered to mine Bitcoin.

Bitcoin Mining Hardware

Due to the fierce competition, it is important to have very powerful hardware. Mining with your CPU nowadays would be like playing a MotoGP race with your mountain bike. Anyway, let’s have a look at all the options.

CPU Mining

This was applicable at the dawn of Bitcoin. Back in 2009 any calculator had the chance to find a match for the encrypted transaction. Due to the increase of competition, the network has plenty of calculation power. Today it would be foolish to even think to be mining Bitcoin with your CPU.

GPU Mining

I assume that the majority of miners were gamers. Through time they found out that their graphic cards were faster than their CPUs. The time to brute forcing their way into the correct encrypted code was shorter with their GPUs. The reason behind this fact is very simple:

The CPU is like a manager while the GPU is the laborer. While the manager may know how to do the laborer’s tasks, it lacks in experience and thus much slower.

If you are interested in GPU mining, find out why it is still profitable, and possibly the best mining solution for you, you can read this article where I go in great details on prices and hardware

FPGA Mining

If you are a gamer you know the problem with graphic cards and the power needed. They are great laborers, but have expensive “wages”, the solution seems to be in this technology. FPGA units are processors that can be programmed to behave in a certain way. For instance they can be optimized for mining. You can find more about them in this article.

ASIC Mining

The apex tool in the “Gold Rush”.

If the CPU was like a mountain bike against motorcycles in a MotoGP race, ASIC are the top competitors. They have one single purpose: Mining. They are so optimized that you can find units designed for one specific currency only. ASIC don’t need as much power to work either.

The beauty of them is that they are available online and can be affordable.

Bitcoin Mining Software

As you can imagine, a computer with no software would not be able to mine anything.

Mining software is free and it is available in many shapes. From command line only to graphic user interface software you can find your tool. When moving into ASIC of FPGA, it is necessary to have some knowledge. One important thing is being aware of viruses that can try to steal your Bitcoins! Always try to find the official websites before downloading any of these tools. Before installing software, always read reviews on more than one website. Here’s a list of free mining software that you may want to explore:

NameWinMacLinuxNotes
Bitcoin MinerXX Works on Windows 10 and Windows 8.1.
Easy to use interface, power saving mode, mining pool support.
Helps to find out whether you are profitable.
BTCMinerXX Open SourceWorks on ZTEX USB-FPGA modules 1.5.FPGA boards with a USB interface should already come with this software.
CGMinerXXXFan speed controlRemote interface capabilitiesMulti GPU supportCPU mining support
BFGMinerXXXLike CGMiner but it is designed for ASICs. Do your own research before using this website.
RPC Miner X From Mac OS 10.6 or higher.Integrates with Mac OS APIs.

Mining Opportunities

Mining Bitcoin is very competitive and the rewards half roughly every four years. To keep it profitable, people have come with different solutions. In this chapter we will explore them.

Home Mining Hardware

This consists in going solo, meaning that the miner should buy his own rig. It must be ASIC or FPGA because GPUs consume too much electricity and may not be profitable anymore. Their prices vary from $400 to $12,000.

Cloud Mining

Image that represents a mining node mining in the clouds.

If you have bought tens or hundreds of powerful mining rigs through which you mine Bitcoin.

Why not selling a part of your mining power? Some people don’t want to spend money and time in learning how to make, setup, and maintain their own home rigs. If you want to mine but you don’t want to have your own hardware, you can refer to these services. I am not feeling to recommend any in particular as these are subject to contractual changes. I have found a list of MaaS (Mining as a Service) in this page:

Mining contractors

You can have a look at them, they should be legit, but do your own due diligence before paying anyone.

Buying vs Renting

If you are not sure whether to buy or to rent, but want to mine Bitcoin I have prepared a list of benefits of both:

Owning A Mining Rig

  • No risk of fraud. You never know what the mining contractor would do in the future.
  • No risk of unclear mining operations. Mining contractors may have dodgy rules that may only favor them.
  • It’s funnier if you like to play with hardware (it may turn into a hobby).
  • Possible greater profits. You don’t have to pay a third party to do what you may do yourself.
  • There is no risk that the cloud would shut down.
  • Absolute control of the operation.

Renting Mining hardware

  • A silent and cool home – no fans or heat (which in winter could be good after all).
  • No electricity costs.
  • No equipment to sell once no longer profitable. Particularly good because selling an obsolete piece of hardware is not easy/profitable.
  • More time to spend on something else rather than tweaking your device.
  • No extra maintenance costs.

Mining Pools

If your mining card costs about $2,000, it would represent the 0.001% of the total mining power. In other words your card would confirm a transaction once in 1,000 times.

Mining pools are the solution to this problem. A pool combines the power of all the computers connected to it and works as one single unit. Let’s say that there are 100 cards worth $2,000. In this case they would validate a transaction every 10 times. The provider of the pool service would manage the payout. They divide the rewards based on each member’s contribution to each validated transaction. You can find pools in this page:

Comparison of mining pools.

How to get paid

Finally we are at the money part of this process. Being paid is very easy. Usually your mining software requires you to add your Bitcoin wallet address. Every time that a payment is due, the software would transfer your Satoshis to your wallet.

Types of wallets

Image of Arrow holding a wallet.

Below a list of the available wallets for your Bitcoin, you will see that none of them is 100% secure. This is the price of having a decentralized currency. Banks are not involved and won’t ask for fees, but on the other hand, they would not protect you from frauds, thefts etc…  

Paper Wallet

This is the absolute most secure way to keep your Bitcoin. You need to store your address and your passwords in a place that is not accessible by anyone else than you. The support where you print/write these details must not fade over time. The good news is that they are free to generate. For instance bitaddress.org and  walletgenerator.net are free and open source.

Hardware Wallet

These are usually the most popular for those who buy and hold. They are less secure than paper wallets, but are handier and not too expensive. These are USB devices that allow you to access your address and your secret key. You don’t need to store these into a safe as they are password protected. The two most popular brands are Trezor and Ledger.

Software Wallet

These are usually apps or software that you can install on your device. They are less secure because if your device is hacked, then also your wallet could be. If your device gets a virus there is a chance that your wallet’s recovery password is no longer safe. Some desktop wallets are Copay, or Electrum. The most popular Android and iPhone wallet is Mycelium.

Web Based Wallet

Image that represents a web wallet.

Web based wallets are another solution. They are not the most secure system as they may be subject to hacking like your computer. Sometimes it is necessary to use these. If you trade, them you have no choice because it is the only way to trade cryptocurrency online.

Two of the most popular (and reliable) are Binance, and Coinbase. Binance is a platform where you can buy, sell, and trade Bitcoin.  Coinbase is where you can buy and sell Bitcoin.

Is mining the only way to acquire Bitcoin?

This is a trading website, so the answer is no!

You can get Bitcoin in different ways, one could be playing video games, another one is with Faucets.

Considering the amount of Bitcoin that they would provide you I am not fond of using these.

I rather buy Bitcoin with my money so that I can trade them in the exchange.

This allows me to be in charge of my money by performing technical analysis.

If you want to learn about trading you can read my Successful Trader Survival Kit guide, otherwise here’s something that you can easily pick from the trading world.

Summary

Once something becomes a trend, it is too late to make huge profits. Exactly like in the Gold Rush in America. The good news is that Cryptocurrency and Bitcoin still have much more to give. People are becoming ingenious to keep mining profitably and energy wise. An alternative could be to mining Bitcoin to build your own lending account on Binance. Bear in mind that if you follow this advice you need to have a lot of Bitcoins to generate a decent profit. This would still generate money and won’t cost you electricity.

Alex Promising Trader

Share this content

Share on linkedin
Share on facebook
Share on twitter
Share on telegram
Share on pinterest
Share on email

Leave a Comment

Your email address will not be published. Required fields are marked *