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CoinFrenzy's Guide to Bitcoin Mining

15 min read

Bitcoin has the potential to be the next big thing in finance. It operates as a peer to peer network, which means – everyone who uses Bitcoin has a tiny fraction of the bank of Bitcoin. But where do Bitcoins come from?

It can be troublesome for most people to understand how it functions. In the case of paper money, a government decides when to print and distribute money, but Bitcoin doesn’t have a central government. There is a ton of math and numbers involved, things which usually make people run on their toes. All things considered, it is still one of the most complex parts of Bitcoin and critical to its success.

There are three main ways of obtaining Bitcoins: Accepting them for goods and services, purchasing them on an exchange, and mining new ones. This article is all about mining, so let’s get started.

What is Mining?

Mining is a way of adding transaction data to Bitcoin’s public ledger called the Blockchain. This guarantees the verification of every transaction and that every user on the network has access to this ledger. It is also used to identify legitimate Bitcoin transactions from the attempts of re-spending money that was being spent elsewhere. There are a limited number of Bitcoins, as such the value of the coin increases after mining.  Bitcoin is ‘mined’ because the rate of mining new coins is equal to the rate of mining gold.


On every successful sealing of a block, a miner gets a reward. The reward is set at 12.5 Bitcoins per block from October 2017. Even though the number of Bitcoins per block will decrease, the value that the miner will receive will remain the same or even increase.

Computers use a collection of data to generate hash. A hash function involves mathematical procedure which takes input data of any size, performs an operation on it, and returns the output data of a particular size.  In Bitcoin protocol, hash function is a part of the block hashing algorithm which is utilized to write new transactions into the Bitcoin blockchain through the mining procedure. In order to prevent users from hashing many blocks each second and mining them within minutes, Bitcoin network has to make the process tougher.

Difficulty and Complications

The mining process involves ‘Proof-of-Work’. It is a framework that requires miners to solve complex mathematical problems to create a block on a blockchain.  Whoever comes first in solving the calculation, gets a reward. Producing a proof-of-work is a random procedure with low chances, so there is a need for a lot of trial and error to produce a valid proof-of-work. In the case of Bitcoin, hash is what works as a proof-of-work.

The execution of Bitcoin Difficulty in the process makes mining tougher. It is a method to identify how difficult it is to search a new block compared to the easiest it can ever be.

Hash (Rate) – A hash is the yield of a hash function. With Bitcoin, the Hash Rate is the speed at which a computer is finishing an operation in the Bitcoin code. The higher the hash rate, the better it is for the miner as it escalates the chance of finding the next block and getting the reward. In a hash function, a similar input will always produce a similar output, but they are intended to be unpredictable. Therefore, the most ideal approach to locate a specific output is to attempt as many random inputs as possible.  Besides, mining is competitive, to get a reward, one should have the capacity to go through those random inputs very fast. Hence, picking hardware with higher hash rate is critical for successful mining.

hashes per bitcoin 
= (network hash rate) / (25 BTC per 10 minutes)
= (180 * Th / s) / (25 * BTC / (600 * s) )
= 180 * 600 / 25 * Th / s / BTC * s
= 2,700 Th / BTC
= 2,700,000,000,000,000 h/BTC

Blocks are mined on average every 10 minutes, 144 blocks are mined per day on average.

A re-calculation of this measure is done after every 2016 squares. The designing is in a manner where mining one block takes approximately 10 minutes. With the addition of more miners, the rate of block generation rises. After the recalculation of the difficulty level, it increases to remunerate and bring the rate of block formation back down. If a false miner releases a block which does not fulfil the needed difficulty level, everybody on the system dismisses it. This procedure increases the availability of new currency increases.

Transaction Fee:

Also known as ‘miner‘ fee is a bitcoin transaction fee that is charged to someone who is executing bitcoin transactions. This fee is taken in order to reward miners for preserving the Bitcoin network.

It is important to pay the blockchain fee to guarantee the arrival of bitcoin transfers on time. Bitcoin transactions are often slow because of the heavy traffic on the Bitcoin network. The miner fee is one of the vital tools used to speed up Bitcoin transactions. The lesser the miner free, the lesser priority the transaction will have in the Bitcoin network.

Energy consumption

The equipment used for Bitcoin mining is no less than an investment due to which it has some additional costs. The energy consumption increases with the increase in the power of the hardware. Before buying, it is important to consider the desired equipment’s power consumption in watts and work out the expense of the next electricity bill. Nobody has the desire to spend all their money on power to mine coins that won’t be worth it.

For every watt of electricity used by the hardware, the number of hashes that are received can be calculated using the hash rate and power consumption figures. All that is needed is to divide the hash count by the number of watts used.

There are times when a computer is used to operate the mining hardware. A computer has its own power draw on top of what mining equipment bites up. Therefore, it is important to add that to your count.

What is a mining pool?

Nowadays, everybody entering the universe of mining cryptocurrencies has to fight with huge organizations and their mining ranches. One of the primary choices that each seeking miner needs to make is whether to go solo or join a ‘pool’.

Pooled mining is a mining opportunity where numerous users contribute their computing power to create a block. A pool has a greater shot at solving a block and getting a reward. The members further divide the reward according to the contributed processing power. Hence, being a part of a pool helps in the creation of a constant flow of income. Although, each payment is quite modest as compared to the reward of a full block.

Joining a pool is like joining any other web service. All one has to do is make an account on the pool’s website. There is a need to create a ‘worker’ on the completion of the account. There is an option of creating many workers by assigning them to each individual piece of hardware that one utilizes. Additionally, one must remember to consider the deduction amount from one’s mining payments that the pool will require. Usually, the amount ranges from 1 percent to 10 percent, whereas some pools don’t charge at all.

What is cloud mining?

On the off chance that one needs to invest in Bitcoin mining without buying and managing the hardware, cloud mining could be a practical choice. Obtaining mining contracts allows miners to utilize a shared processing power which is run from remote data centers. It makes mining simpler from multiple points of view. There is no need to manage the hardware, software, added electricity costs, bandwidth and other offline issues. Hence, the only thing required is a computer for communications and an optional local Bitcoin wallet.

There are risks attached to cloud mining that investors should be careful of before paying for contracts. It does not grant one the authority to control the actual physical hardware, thus, there have been numerous cases of Bitcoin cloud mining scams. The operator has the control when it comes to cloud mining. If at any given point, the operators regard Bitcoin’s value to be too unstable, the operators can stop the mining task. Furthermore, the profits go down by a lot as the operators charge a commission to cover their costs.

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