One of the most unique aspects of Bitcoin is that you can generate it through the process of mining, which is something anyone with a computer can do. This is unlike fiat currency which can only be printed by the government. This makes Bitcoin somewhat similar to gold and other precious metals, since they can only be mined, not printed on demand. Bitcoin mining is far different than extracting resources out of the Earth however. Instead it involves your computer solving complex equations. The equations solved during Bitcoin mining are cryptographic hashing functions, which are usually referred to as hashes.
Why is Bitcoin Mining Important?
Mining is important because it confirms transactions and secures the blockchain. Without mining Bitcoin transactions would never be confirmed and Bitcoin would become unusable. The blockchain is a list of all the transactions in Bitcoin’s history, and it is composed of blocks which are groups of transactions from around the same time. There is on average a new Bitcoin block every 10 minutes, but this can vary wildly from a few seconds between blocks to several hours. When mining your computer turns all of the data from the most recent block of transactions into a hash, which is far shorter than the original transaction data and is comprised of a complex series of letters and numbers. It would be relatively easy to solve Bitcoin hashes if turning a list of transactions into a hash was the only requirement, but Bitcoin protocol makes this more difficult through requiring a string of zeroes in the hash. The ‘nonce’ variable is used to get the required string of zeroes, and it takes many iterations to get the correct hash format. Everytime the computer gets a wrongly formatted hash the nonce variable is changed and the computer tries again. In general it takes billions of iterations in order to find the correct Bitcoin block hash. Changing even 1 letter in the transaction data leads to a completely different hash, so as more transactions are added to a block the correct hash is constantly changing.
Eventually the computer will find the correct hash, and this is called finding a block. Once the correct hash is found the block can be added to the blockchain and all transactions in that block are confirmed. 25 Bitcoins are rewarded to the computer which solves the block, which is currently worth $15,500. This amounts to 3600 Bitcoins generated per day through mining, or $2.2 million. Clearly Bitcoin mining can be quite lucrative, and indeed many hundreds of millions of dollars have been invested into Bitcoin mining.
How Can I Start Mining Bitcoins?
It is possible to mine Bitcoin on any computer using the central processing unit (CPU). However your hash rate will be on the order of MH/s (millions of hashes per second), which is an infinitesimally small hash rate in the Bitcoin world. It would take millions of years to find a block with a hashrate in the MH/s range. The next step up from using a CPU is using your computer’s graphics processing unit (GPU). The fastest GPUs in existence can mine Bitcoin around 1 GH/s (billions of hashes per second). It would take thousands of years to find a Bitcoin block however when mining at 1 GH/s. Even if you have a powerful 1 TH/s (trillions of hashes per second) mining rig, which costs at least $1000, it would take several years to find a block. The solution to this is joining a mining pool, which is a network of miners that combine their mining power in order to find blocks. The biggest Bitcoin mining pools are Ghash.io and Slush’s pool. When you mine on a pool you earn a share of the block reward proportional to the amount of hashes you solved, and on big pools like ghash.io you can earn a piece of a block every hour or less. Mining Bitcoin by yourself only becomes feasible when you have 1 PH/s (1 quadrillion hashes per second) or more, at 1 PH/s it takes on average 20 hours to find a block.
Even though mining Bitcoin with your computer’s CPU/GPU is possible, and you’d earn some Bitcoin, it became an obsolete method of mining years ago. When mining at 1 GH/s in a pool you earn somewhere between 0.00001-0.00005 Bitcoin per day, worth approximately 1 cent. The cost of electricity far exceeds 1 cent per day when mining Bitcoin with a GPU, so it’s simply not worthwhile to mine Bitcoin with a CPU or GPU. Currently the only way to profitably mine Bitcoin is to use an application-specific integrated circuit (ASIC), which is a machine built specifically for mining Bitcoin. The weakest ASICs have hashrates from 1-3 GH/s, they are the size of your thumb and can be plugged into a USB port. Generally these cost around $20, making it affordable for anyone who wants to get into Bitcoin mining. These small ASICS are unprofitable however, it would take well over a year to earn the $20 you initially spent on the ASIC, and this estimate doesn’t even account for electricity costs.
Serious Bitcoin miners need much stronger ASICs in order to run a profitable mining operation. These ASICs are typically called mining rigs, and are comprised of ASIC chips, a power supply system, and a cooling system. The smallest ASIC mining rigs run at 10 GH/s and cost about $50. A 10 GH/s miner generates about 0.0003 Bitcoin per day, roughly 20 cents, so it would take about a year to break even with a 10 GH/s rig. In order to make real profits when mining Bitcoin you need to buy a much larger rig, since the price per hashrate drops the larger the rig is. A 1 TH/s Bitcoin mining rig costs between $1000 and $3000, and will generate 0.029 Bitcoin ($18) per day. This means a 1 TH/s mining rig will break even in 2-6 months, even when accounting for the hefty electricity costs. After the break even point you would make several thousand dollars of profit with a 1 TH/s mining rig.
Unfortunately mining rigs don’t remain profitable forever. The difficulty of mining Bitcoin is rapidly increasing. Since October 2013 Bitcoin mining difficulty has increased from 150 million to 18 billion, which is a 12,000% increase. This rise in difficulty means you earn less Bitcoin per GH/s with each passing month. 1-2 years from now a 1 TH/s mining rig will no longer be profitable, and the electricity costs will likely exceed the revenue earned from mining Bitcoin. Thus, in order to run a profitable Bitcoin mining operation you need to continuously buy new and more advanced mining rigs with your profits. Many serious Bitcoin miners buy new mining rigs each month. Theoretically you can turn a 1 rig mining operation into a full-fledged Bitcoin mining farm within a few years if you start with a powerful rig and re-invest profits into new machinery.
Is There A Simpler Way to Start Mining Bitcoins?
Another way to mine Bitcoin is through buying mining contracts on a cloud mining website. The most popular Bitcoin cloud mining site is cex.io, and currently you can buy 1 GH/s of mining power for 0.005 Bitcoin ($3.10). This is far cheaper than buying a 1 GH/s USB miner for $20, and is a great way for someone to start mining Bitcoin without spending much. When you buy mining contracts on cex.io you start receiving Bitcoin payouts immediately, and the mining contract lasts forever. One of the caveats of cex.io is they charge you electricity and hardware maintenance fees, and these fees absorb about 30% of your mining profits initially. Due to the decrease in mining profitability over time, these fees will take up a larger percentage of your mining profits as time goes on, until eventually the fees outpace the profits and you start losing money. For example, at the current rate that the Bitcoin mining difficulty is increasing, if you buy 1 TH/s of mining contracts on cex.io right now you will reach a peak revenue of 2.05 Bitcoin by January 2015. After January 2015 you will start losing money to maintenance fees, so it would be better to sell off your 1 TH/s contract than keep it at that point. In June 2015 (less than 1 year from now) a 1 TH/s contract would earn 0.01 Bitcoin per month, while electricity/maintenance fees cost 0.04 Bitcoin per month. This is a shocking illustration of how quickly mining equipment can become obsolete in the Bitcoin world. It costs 5 Bitcoin to buy 1 TH/s of mining contracts on cex.io, which will yield 2.05 Bitcoin of revenue in 6 months, so clearly cloud mining on cex.io is unprofitable no matter how much mining power you buy. The only way to make money on cex.io is to buy mining contracts and then sell them at a higher price, you will get both the profits from selling the contracts as well as the mining profits from when you were holding the contracts. Mining contracts are inexorably losing value on cex.io however, so you can only make money on short term trades. Holding mining contracts for the long term is guaranteed to lose money.
What is the Most Profitable Way to Mine Bitcoins?
In order to profitably mine Bitcoin you need to buy your own ASIC mining rig. Mining Bitcoin with your GPU/CPU will cost more in electricity than it will generate in Bitcoin. Also, buying mining contracts on a cloud mining site is guaranteed to lose money in the long term. In order to make significant profits you need to buy a mining rig with a hash rate greater than 100 GH/s. Smaller mining rigs will eventually make profit, but it might take a year to break even and the profits wouldn’t be worthwhile. A 1 TH/s mining rig will make several thousand dollars of profit, and a 1 PH/s mining rig will yield millions of dollars of profit. Bitcoin mining difficulty is rapidly increasing, meaning you get less Bitcoin per hash rate with each passing month while electricity and maintenance costs stay the same. Generally Bitcoin mining rigs become obsolete 1-2 years after you purchase them. It is crucial to re-invest profits into new mining equipment if you want your Bitcoin mining operation to run long term, and it is common for miners to buy new equipment every month. Bitcoin mining is extremely lucrative, with $2.2 million of new Bitcoin up for grabs everyday. In the fast-paced world of Bitcoin mining the only way to get a share of those profits is to buy the newest and most powerful Bitcoin mining technology.