Bitcoin Mining - Everything you need to know!

Bitcoin mining is a process which helps in adding transactions to the public ledger, or the blockchain. It also refers to the means through which new bitcoins are released. The beauty of bitcoin mining is that anybody with an average internet connection and a computer can participate in it. In the lack of a central authority, the blocks are appended to the blockchain via network nodes, who are the miners. The incentive is that each time a miner appends a transaction to the blockchain, he gets rewarded with some of the cryptocurrency. In such a situation, it was seen that miners who end up appending a large number of transactions could lead to the devaluation of the currency over a period of time, which is avoided by making them solve complicated mathematical problems that are referred to as ‘proof of work’. Bitcoin uses hascash proof-of-work.

Read 10 things you should know about Blockchain.
Read Beginners guide to blockchain platforms

In this article, we explore the various means by which a miner can maximize his profits without putting in a lot of efforts.

Nodes

A node is a computer with enough processing power to run a mining software and participating in the relay of information in order to keep the bitcoin network running. A bitcoin network will not be able to function without them. They spread the bitcoin transactions around the world and their collective functioning leads to the overall addition of new bitcoins to the network. Their basic function is to send transaction information to the few nodes that they know so that the information spreads across the entire network quickly. They do this by solving a complex mathematical puzzle that is a part of the program and including the answer in the block.

Hash rate

The hash rate refers to the rate at which the mathematical problems are being solved by miners. With growing popularity of the bitcoin and the increasing number of miners involved, the hash rate has kept a steady rate of increase over the past few years. Miners get increasingly competitive in order to generate maximum rewards.


Refer to https://blockchain.info/stats for more information on this.

How is the puzzle solved?

As it is impossible to predict the correct output due to the hash function, the miners guess the mystery number and apply the hash function to the combination of the guessed number and the data in the block. It is impossible to predict the output as two consecutive integers end up giving wildly different outcomes. The first miner who gets the correct answer informs the rest of the network so that it stops work on that particular block and moves on to the next one.

Proof of work

Each individual block must include a proof of work to be considered valid. Every time a block is received by a bitcoin node, the POW is verified, thereby generating a method to control monetary supply and to also avoid the problem of double spending, making the bitcoin ledger immutable. To generate the revenue, the POW is verified and the miner who came up with it is then rewarded by the newly minted currency. This is the mechanism that is used to introduce new coins in the market, in the form of block rewards given to the miners.

Requirements

Earlier, it was possible for individuals to mine bitcoins using their home computers. Now, with the number of transactions being at an all-time high, the hardware required has also increased. The first requirement is a proper mining hardware, with the processing speeds of modern mining equipment being almost a hundred times quicker and more efficient than the older systems. Several companies offer exclusive mining equipment. It is important to get proper hardware due to the costs associated with bitcoin mining. Home computers are no longer used not just because of their processor speeds, but also because the cost of electricity in such a scenario to mine bitcoins often ends up being substantially higher than the profits that can be accrued. Furthermore, it is also of paramount importance to have a mining software installed, with various alternatives such as CGminer and BFGminer available on the internet. This software delivers work to the miners with live updates as to the status of that particular blockchain and delivers the completed work back to the blockchain and the mining pool that the said individual is a part of. A good mining software is important as it provides all the necessary statistics that the particular blockchain entails.

The Pool mining

In the past few years, the number of miners online has grown tremendously, making it difficult for new miners to single-handedly solve a block, with other established miners beating them to it due to the higher hash rate. To compensate for this, pool mining was introduced. It is a method by which groups of individual miners come together to contribute to the generation of a block, thereby dividing the block rewards according to the processing power contributed by each user. There are various software and websites offering pool mining services, thus making it easier for individual users to participate in cryptocurrency mining.

The Cloud Mining

Cloud mining enables everyone to start mining without investing in hardware, software, electricity, bandwidth and subsequent upgrades. However, it is important to perform in-depth due diligence while selecting cloud vendors. Go through our checklist for selecting a cloud service provider. It is equally applicable to your cloud mining contract. Cloud service is a pay-per-use model, but you will end up in spending the money at the end of the day. Also, it is necessary to not to get locked-in with single cloud vendor to protect your investments. So, diversify your contracts among different cloud mining vendors.

Learn more about what is cloud computing?
Checklist: How do I choose Cloud Service Provider?

Genesis-mining and hash-flare are two of the many cloud mining providers.

Bitcoin wallet

The next step in bitcoin mining is to set up a bitcoin wallet. A bitcoin wallet is necessary to be set up if you are a miner because that is how the rewards that he earns through mining can be received by him. The most important task in setting up a bitcoin wallet is to make sure that it is protected from security threats by enabling the two-step authentication process, or by having it set up on an offline computer that does not have access to the internet. A safe and secure bitcoin wallet sees to it that the profits accrued by the mining activities are safely delivered without the risk of online fraud or other malicious activities.

Staying up to date

Perhaps the most important step that a successful miner needs to undertake is to be constantly up to date with the latest bitcoin news and developments. A good crypto miner must know which currency to mine at what time and be prepared for ant major market fluctuations that might occur. There is various news related blogs about cryptocurrencies on the internet that can serve this purpose. Bitcoin mining is like any other market-related business activity that is susceptible to risks and losses, so a miner needs to be prepared for such developments and know when to tap out of the market.

What do you think? Is bitcoin mining a good side business for an individual? Are there too many risks involved? Do let us know in the comments.

By Rishabh Bhatnagar:
Rishabh is a law student with a passion for Blockchain / Cryptocurrency, Internet of Things (IoT), Cloud Computing, Artificial Intelligence, and Startups. He is an avid reader with a taste for writing. He likes learning about new things and is a writer at TechSutram.Opinions expressed by techsutram contributors are their own.