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How to mine Bitcoin (BTC)

A simple explainer of how Bitcoin mining works, how new Bitcoins are introduced into circulation, and whether it's profitable to mine Bitcoin.

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Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade.

Bitcoin: A summary

To start, the term "Bitcoin" can be used to refer to 3 things:

  1. The Bitcoin currency (BTC)
  2. The Bitcoin network
  3. The Bitcoin blockchain

These 3 are fundamentally different and it's important to distinguish these differences to understand mining.

The best way to think of each of them is the following:

Thousands of people running computers make up the Bitcoin network. Each of these computers store the entire history of transactions that have taken place on the network in a special database. This is called the Bitcoin blockchain, and the 2 names for these computers are Bitcoin miners or Bitcoin nodes. They are rewarded for their participation in securing the Bitcoin network and validating Bitcoin transactions. Rewards are in Bitcoin (BTC).

So, how does Bitcoin mining work?

The blockchain is a chain of blocks. Each block contains the latest set of transactions.

New blocks are created by Bitcoin miners, but only 1 miner can create each new block. To ensure that only 1 miner creates a block, all miners must compete to solve a difficult mathematical problem.

The difficulty of this problem is dynamically adjusted so that a block is created roughly (but reliably) about every 10 minutes. The miner that achieves a solution first gets to validate all transactions and create the new block. This is called proof-of-work (PoW).

In return for their efforts, they are rewarded with brand new Bitcoin (BTC), plus the transaction fees from all transactions within the block. The reward is currently 6.25 Bitcoin per block.

How to mine Bitcoin in 5 steps

Step 1: Determine profits and viability

  • The hardware. Getting a hold of Bitcoin mining hardware can be tricky as there is tons of demand for these machines. The computers that mine Bitcoin are called ASICs or "Application Specific Integrated Circuits". You can buy them through many online retailers or order them straight from a manufacturer.
  • The electricity. The profitability of your mining operation entirely depends on how much you are paying to run your miners. Even older-generation Bitcoin mining rigs can be profitable as long as you're getting electricity for cheap enough. Before setting up your operation, use a mining profitability calculator to determine whether or not your set-up will be profitable.

Step 2: Get your Bitcoin mining hardware.

  • Locality. Where are the mining rigs going to be shipped from? You might get a good price on the machines, but then pay a lot of money to have them shipped to you. Explore your options and find the right balance.
  • Condition of the miners. Used miners are a totally viable option, and are often good for individuals or businesses just getting started. Rather than paying top dollar for a new miner, a used miner can provide you with a similar experience. If you're buying used, make sure you're getting the rigs from a reputable source.

Step 3: Download Bitcoin mining software

Once you have a Bitcoin mining rig in place, your next step is to download the necessary software that will connect you to the Bitcoin blockchain. The software distributes work to miners and attempts to find blocks for the blockchain. There are several free software programs that can be used to mine Bitcoin, such as NiceHash Miner.

Step 4: Join a Bitcoin mining pool

It's difficult for individual miners to compete with large mining farms backed by mining companies. Luckily, there is a solution – Bitcoin mining pools. Individual miners can combine their computing power with a group to collectively compete. Fees must be paid to the operator of the pool and rewards are slightly lower, but using a mining pool will ensure rewards are more consistent.

Step 5: Start mining

Once you choose a pool, you are now ready to start mining Bitcoin. Connect your mining hardware to a power outlet, complete the connection to the Bitcoin blockchain with your chosen software, fill in your Bitcoin address for your rewards to be deposited to and you're good to go.

How much can a Bitcoin miner earn?

There are a few factors that influence how much you can earn as a miner, including:

  • Solo miners or part of a pool. While solo Bitcoin miners may find it difficult to profit from the venture, those who join Bitcoin mining pools are far more likely to bring in a return.
  • Equipment and ongoing costs. To make a profit with Bitcoin mining, returns must be enough to cover the cost of electricity power, plus the initial investment for the mining equipment. To give themselves the best chance of success, Bitcoin miners focus on cheap electricity and high-efficiency hardware.
  • Tax. Another aspect to consider is the tax on the Bitcoin mined. It may not be guaranteed that a miner makes a profit, but depending on the jurisdiction, you may need to pay tax.
  • Price of Bitcoin. As mining equipment and electricity will be purchased in fiat currency, Bitcoin must maintain a high enough price for rewards to outweigh the costs.

The costs of mining Bitcoin

With increasing competition, the price of profitable Bitcoin mining equipment has increased considerably. Large mining farms are driving up demand and dominating the Bitcoin mining space, mining rigs are having to become more powerful, and this in turn increases the price. While some ASIC miners can start from $500, a professionally built mining rig can cost as much as $15,000. It is likely to take more than a year to recoup your initial investment.

Once a Bitcoin mining rig is in place, it then has to be powered. Ideally, the cost of electricity is low but if a Bitcoin mining rig is running every single day, costs can soon start to pile up. The cost of electricity will also vary from region to region within your respective country.

To stand a chance of a return, every miner needs to mine Bitcoin through a Bitcoin mining pool. However, there is a cost to join a Bitcoin mining pool. The operator of each pool will charge a percentage for the use of the network. These pool fees typically range from 0.1–2.5% and are removed from the mined Bitcoin.

The final cost to consider is the fee required when selling any Bitcoin. If a user's intention is to sell all Bitcoin that is mined, a fee will need to be paid to the cryptocurrency exchange or broker used to facilitate the transaction. These fees will vary between exchanges, and can sometimes be minimal, but should still be factored into the overall cost.

Is Bitcoin cloud mining safe?

Cloud mining comes with its risks due to the propensity for cloud mining operations to be scams. There have been cloud mining operations set up that accept Bitcoin as payment, and pay out investors in Bitcoin. However, some of these operations are Ponzi schemes, paying out early investors with the deposits of present investors.

Be sceptical about the authenticity of the cloud mining operation if they are offering returns that seem unreasonable. It is useful to ask the following questions about the operation in the event that they are promising high returns: If they're getting such high returns, why do they need my money? Why don't they just mine the Bitcoin and keep it, rather than paying me a return for my investment?

That being said, there are safe Bitcoin cloud mining investment opportunities. Keep an eye on the returns that they are promising, as this is the best indication as to whether or not the opportunity is a scam.

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Frequently asked questions about mining Bitcoin

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