Bitcoin mining

Bitcoin mining: Can I make money doing it?

Bitcoin mining is an interesting way of trying to make a few bitcoin tokens on the side, but it also serves a very important purpose in maintaining and keeping the bitcoin blockchain secure.

Unlike regular fiat currencies (such as US dollars or euros), bitcoin assets are not controlled by a central government or bank and new bitcoin (BTC) cannot be printed and issued like paper money. Instead, bitcoin tokens are introduced into the market via a process known as “mining”. BTC are awarded to the miners who have solved the math problems necessary to verify bitcoin transactions.

In this guide we’ll look at how mining works, why it’s a necessary component of bitcoin infrastructure and whether it’s a good way of making a buck.

What is mining?

Whenever a transaction is made in bitcoin, a record of it is made on a block containing other recent transactions, like a page in a ledger. Once the block is full, bitcoin miners compete against each other to verify and validate the block and all its transactions by solving a complex cryptographic problem.

The first miner to accomplish this is awarded a set amount of bitcoin, based on the mining difficulty at the time. The verified block is then added to the blockchain, a history of all blocks verified since the beginning of bitcoin, and transmitted to all users of bitcoin so that they can have the latest blockchain.

For a more detailed explanation of the blockchain, check out our guide here.

Proof-of-work

At the heart of bitcoin mining lies a hard, mathematical problem. The goal is to ensure that the process of adding a new block to the blockchain requires a lot of work. That helps to ensure that any hacker tampering with the transactions needs not only to mess with the transactions but also win the “race” of bitcoin mining.

So how does it work?

Basics of cryptography

SHA-256, the mining algorithm used by bitcoin, is a one-way cryptographic algorithm. When you pass a word through SHA-256, you will be given back an unrecognisable string of letters and numbers called a “HASH”.

For example, the SHA-256 of the word “BUTTERFLY” (source) is “8c62ace4f9ef8ccd08ca6fb992a8524bb7dbdc0530654bd254c9da07a660949a” (HASH). This seemingly random string of letters and numbers has three important properties:

  1. Only the word “BUTTERFLY” will ever give that specific HASH.
  2. The word “BUTTERFLY” will always give back that exact HASH.
  3. There is no way of figuring out the word “BUTTERFLY” if you only know the HASH.

With this information, we can now start piecing together the mining process.

The mining process

Bitcoin mining involves three variables: the block, the mining difficulty and a random number. Here’s how it all comes together:

Imagine our block consists of the word “BUTTERFLY” discussed earlier. In reality, the block would contain a list of recent, unverified transactions, but let’s keep it simple. In order for the block to be solved, bitcoin uses a deceptively simple test: If the HASH result of the block starts with a certain number of zeros, the block is considered verified. This number of zeros is the “mining difficulty” and is increased as more miners join the bitcoin network. For our example, let’s say that we have a mining difficulty of just two, ie, our HASH must start with two zeros.

The problem: “BUTTERFLY” will always return the same HASH, and it doesn’t start with two zeros. So what we need is the third variable, a random number (called a NONCE). We take this number, combine it with “BUTTERFLY”, and HASH again. If it doesn’t start with two zeros, we change the number and try again, and because changing one small number changes the whole HASH result, there is no way to predict the number we’ll need to solve this!

We repeat this process over and over until we find a number that, when combined with “BUTTERFLY”, gives us a HASH that starts with two zeros. That number is the solution to the block. Here are some tries:

SourceHash
BUTTERFLY0d5323edd7edbefa4eaf479576dbec336329c9b3ee2733a961c36827013a93fd6
BUTTERFLY1f9c569a7f73712fcbacf2eb3c9a52104af523b8ebcbf3a08480be1213016f5e3
BUTTERFLY2880207ac39840e8575515f31d9a748dc2130d678dbc51d43059f70421099e4e1
BUTTERFLY3d99f664274ca90f08ab9ce9e44db06822b8acc49f652dd46213a2bb0deef8b58
BUTTERFLY442a166008dd1f2c4312eff11b707bae61d87738d1d568e66a95fa2fcd53d45c0
BUTTERFLY5f212c60594fe43cb9cdae6f7e4b44bb870ce1784ecd77d76d6074c07cd895f84
BUTTERFLY6a4aef6d35da553583ff4a6ce6e772eb4683d8fbdc6e7eda75cf1a26b44f63135

This arduous process of randomly trying to find a number that gives the solution is what makes bitcoin mining such a computationally expensive process, and as more miners join the network, the harder it gets. As of November 2017, a regular home computer working alone, ie, not an application-specific integrated circuit (ASIC) and not part of a cloud mining network, would take 2.7 million years to mine one block.

This has led to the rise of ASIC computers built specifically for mining and to an increase in cloud mining.

Evolution of the mining computer

  • CPU mining. In the early days of bitcoin, mining difficulty was low and not a lot of miners were competing for blocks and rewards. This made it worthwhile to use your computer’s own central processing unit (CPU) to mine bitcoin. However, that approach was soon replaced by GPU mining.
  • GPU mining. A graphics processing unit (GPU) is a powerful processor whose sole purpose is to assist your computer’s graphics card in rendering 3D graphics. GPUs are not built for executive decisions (like CPUs) but to be very good labourers, hence GPUs are able to execute over 800 times more instructions in the same amount of time as a CPU. Mining is a repetitive process that does not require any intelligent decisions, leading to GPUs replacing CPUs in the mining world.
  • FPGA mining. Next came mining with field-programmable gate arrays (FPGAs). These greatly outperformed GPUs and CPUs in the mining process as FPGAs are processors that can be programmed to execute specific instructions and only those instructions (instead of being repurposed for mining, like GPUs were).
  • ASIC mining. Similar to FPGAs, application-specific integrated circuits are chips designed for a specific purpose, in our case mining bitcoin, and nothing else. ASICs for bitcoin were introduced in 2013 and, as of November 2017, they are the best processors available for mining bitcoin and they outperform FPGAs in power consumption.
  • Mining pools. To offset the difficulty of mining a block, miners started organising in pools or cloud mining networks. Whenever a miner in one of these pools solves a block, the reward is shared with everyone in the pool in a ratio representative of how much work you put into the pool (even though you personally never solved the puzzle).
  • Cloud mining. Clouds offer prospective miners the ability to purchase mining rigs in a remote data centre location. There are many obvious advantages, the most obvious being: no electricity costs, no excess heat and nothing to sell when you decide to hang up your virtual pickaxe.

Bitcoin computer mining

Where do I store my mined bitcoin?

Once miners receive bitcoin, they are given a digital key to the bitcoin addresses. You can use this digital key to access and validate or approve transactions.

You can keep these digital keys safe with a number of wallet options:

  • Desktop wallets. Software like Bitcoin Core allows you to send and store bitcoin addresses and also connects to the network to track transactions.
  • Online wallets. Bitcoin keys are stored online by exchange platforms like Coinbase or Circle and can be accessed from anywhere.
  • Mobile wallets. Apps like Blockchain store and encrypt your bitcoin keys so that you can make payments using your mobile device.
  • Paper wallets. Some websites offer paper wallet services, generating a piece of paper with two QR codes on it. One code is the public address at which you receive bitcoin and the other is your private address you can use for spending.
  • Hardware wallets. You can use a USB device created specifically to store bitcoin electronically and your private address keys.

Are people still making money mining bitcoin?

Making money mining bitcoin is much more difficult today. The following are some of the issues contributing to this difficulty:

  • Hardware prices. The days of mining using a standard CPU or graphic card are gone. As more people have begun mining, the difficulty of solving the puzzles has increased. ASIC microchips were developed to process the computations faster and have become necessary to succeed at mining today. These chips can cost $3,000 or more and are guaranteed to further increase in cost with each improvement and update.
  • Rise in corporate miners. Hobby miners must now compete with for-profits — and their bigger, better machines — when mining to make a buck.
  • Puzzle difficulty. Bitcoin’s protocol adjusts the computational difficulty of the puzzles to finish a block every 2,016 blocks. The more computational power put toward mining, the more difficult the puzzle.
  • Power costs. Power in Australia is more expensive than it is in other parts of the world, making it further difficult to compete with big-miner money.

When discussing the feasibility of bitcoin mining, an unexpected variable rears its head: power consumption. This catches a lot of prospective miners off-guard. After all, we rarely consider how much power our electric appliances are consuming. But computing hashes is a very intensive process, pushing whatever processor you’re using to the limit and to its maximum power consumption. So the question we have to answer is this: will the small reward you earn from bitcoin mining be enough to offset the cost of power consumed?

If you’re using CPU/GPU/FPGA to mine, the answer is a definite no. As of November 2017, the BTC reward is so small that it doesn’t pay for the energy your computer will consume to verify a block.

This leaves us with pools, ASICs and cloud mining. If you’re not willing to invest heavily in mining, your best bet could be to get a cloud mining rig. These are relatively low cost, require no hardware knowledge to get started, no extra electricity bills, and you won’t end up with a machine you can’t sell when bitcoin mining is no longer profitable.

Compare bitcoin marketplaces

Details Features
CoinSpot Cryptocurrency Marketplace
CoinSpot Cryptocurrency Marketplace
CoinSpot is an Australian marketplace that allows you to easily buy, sell or exchange multiple cryptocurrencies using AUD.
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Bitfinex Multi-coin Exchange
Bitfinex Multi-coin Exchange
Spot trade all of the major cryptos on this full-featured exchange and margin trading platform. View a demo before you get started.
  • Trade Bitcoin Cash & Bitcoin Gold
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CEX.IO Cryptocurrency Exchange
CEX.IO Cryptocurrency Exchange
Use your dollars, euros or rubles to buy and sell bitcoin at competitive exchange rates and with high maximums for verified accounts.
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  • Fees: Varies by transaction
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HitBTC Multi-currency Exchange
HitBTC Multi-currency Exchange
Buy crypto with fiat (USD/EUR) and trade over 150 other digital assets on this Europe-based exchange platform.
  • Buy/sell Bitcoin Cash & Bitcoin Gold
  • Fees: Varies by transaction type
  • Supported countries: Global, with exceptions
  • Deposit methods: USD/EUR/Crypto
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Binance Cryptocurrency Exchange
Binance Cryptocurrency Exchange
Trade 60+ cryptocurrency pairs on this up-and-coming exchange based in China. Multi-language support.
  • Trade Bitcoin Cash & Bitcoin Gold
  • Fees: 0.1% trading fee
  • Supported countries: Worldwide
  • Deposit methods: BTC, ETH, LTC, NEO & BNB
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Changelly Crypto-to-Crypto Exchange
Changelly Crypto-to-Crypto Exchange
Access competitive crypto-to-crypto exchange rates for more than 35 cryptocurrencies on this global exchange.
  • Exchange Bitcoin Cash & Bitcoin Gold
  • Fees: 0.5% + networking fees
  • Supported countries: Worldwide
  • Payment methods: USD, EUR, 35+ cryptos
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Coinbase Digital Currency Exchange
Coinbase Digital Currency Exchange
Buy and sell bitcoin, Ethereum and Litecoin on one of the world's most renowned cryptocurrency exchanges.
  • Fees: Varies by transaction
  • Supported countries: 190 countries
  • Payment methods: Bank transfer, Credit/debit card, Wire
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LocalBitcoins P2P Exchange
LocalBitcoins P2P Exchange
Trade fiat currency for bitcoin in person or online with this peer-to-peer exchange offering competitive fees and wide delivery options.
  • Fees: 1% commission for each completed operation
  • Supported countries: Exchangers in 248 countries
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Indacoin Cryptocurrency Exchange
Indacoin Cryptocurrency Exchange
Use your credit or debit card to buy bitcoin and other cryptocurrency without having to verify your identity.
  • Fees: Varies by transaction
  • Supported countries: More than 100 countries
  • Payment methods: Payza, Credit/Debit cards (USD) and more
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Paxful Bitcoin Marketplace
Paxful Bitcoin Marketplace
Connect with bitcoin buyers and sellers through this peer-to-peer marketplace that accepts cash, credit and more than 300 other payment methods.
  • Fees: Varies by transaction, and PayPal no fees
  • Supported countries: Worldwide
  • Payment methods: Western Union, PayPal and many more
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BitMEX Bitcoin Trading Exchange
BitMEX Bitcoin Trading Exchange
Trade cryptocurrency derivatives with high liquidity for bitcoin spot and futures, and up to 100% leverage on margin trading.
  • Fees: Varies by trading type
  • Supported countries: Worldwide with exceptions
  • Deposit methods: BTC only
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Bitbond P2P Bitcoin Lending
Bitbond P2P Bitcoin Lending
This global P2P bitcoin lending platform offers competitive interest rates for lenders and flexible financing for bitcoin borrowers.
  • Fees: Varies for lender/borrower
  • Supported countries: 50+ countries
  • Payment methods: Bitcoin, US dollars, euros, Kenyan shillings
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VirWox Virtual Currency Exchange
VirWox Virtual Currency Exchange
Buy bitcoin through PayPal on one of the oldest virtual currency exchanges in the business.
  • Fees: Varies by transaction
  • Supported countries: Worldwide
  • Payment methods: PayPal, Skrill, paysafecard, uKash
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eToro Social Crypto Trading
eToro Social Crypto Trading
Copy the trades of leading cryptocurrency investors on this unique social investment platform.
  • Fees: Spreads
  • Supported countries: Worldwide (some exceptions)
  • Payment methods: Credit card, PayPal, bank transfer
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Coinmama Bitcoin Marketplace
Coinmama Bitcoin Marketplace
Use USD/EUR to buy bitcoin and Ether with credit card or cash on the Coinmama cryptocurrency exchange.
  • Fees: 5.5% + 5% for credit card
  • Supported countries: 226 countries worldwide
  • Payment methods: Credit/debit card, cash
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xCoins P2P Bitcoin Lending
xCoins P2P Bitcoin Lending
Buy bitcoin instantly with credit card, PayPal or bank account on this peer-to-peer lending platform.
  • Fees: Varies by transaction
  • Supported countries: 40+ countries
  • Payment methods: Credit card, PayPal, bank transfer
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Cryptex24 Exchange
Cryptex24 Exchange
Buy and sell crypto and other digital currencies on this global fixed-rate exchange.
  • Fees: Varies by transaction
  • Supported countries: Worldwide
  • Payment methods: Western Union, MoneyGram, Perfect Money & more
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24/7 Cryptocurrency Exchange
24/7 Cryptocurrency Exchange
Easy, safe and instant way to buy, sell or exchange bitcoin and other popular altcoins like Litecoin and Namecoin.
  • Fees: Varies by transaction
  • Supported countries:Local payment options in 110+ countries
  • Payment methods:Credit/debit card, money transfer and more
Go to site

Bottom line

The rising costs of mining effectively and competing against large mining pools have made it harder for the hobbyist to profit on mining bitcoin.

It's virtually impossible to mine enough bitcoin to recoup your initial investment in equipment and electricity. But if you’re not so concerned about making a buck, you could have fun panning for this cool currency.

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