Bitcoin Mining for Beginners
If you are new in the bitcoin world, one word that you are likely to encounter a lot is “bitcoin mining”. On the surface of it, it sounds simple enough but few people understand the complex background cryptographic processes involved in “mining” or minting new bitcoins. A simple definition of bitcoin mining is that it is the process through which new bitcoins are discovered or unlocked from the cryptocurrency system with the help of powerful computing machines.
What is the rationale of mining bitcoins in the first place?
There are three main ways of acquiring new bitcoins. You can purchase them in a cryptocurrency marketplace or exchange, exchange them for goods and services or mine them. The first two are easy enough but you will need money, an item or a skill that you can exchange for the cryptocurrency. The third method is the most complex but also the most rewarding for those that master it and succeed. This is because in the third instance, you can actually amass crypto-wealth if you have the right kind of mining hardware.
Where are Bitcoins Mined From?
Bitcoins are minted from thin air after certain cryptographic puzzles have been solved with the help of powerful specialized computers, commonly called ASICs. The bitcoin system was designed to have a finite number of 21 million coins. As at the time of writing, some 16.946 million bitcoins had been mined. That means that there are still 4.054 million Bitcoin yet to be mined in the (blockchain) system. At the current exchange rate, that is more than $30 billion worth of bitcoins yet to be mined! There is great wealth stored in bitcoins and only the most technically adept at “bitcoin mining” will succeed in unlocking this wealth over the next 100 years.
What Does Bitcoin Mining Entail?
Bitcoin mining is based on a methodology or a system of verifying transactions on a public ledger that is called proof of work system. The process has been made deliberately complex and resource-intensive to produce but it is fairly easy to verify on a public ledger. During the mining, the mining nodes will be verifying and validating bitcoin transactions in order to create a secure and tamper-proof consensus for the bitcoin public ledger called the blockchain.
The mining uses a hashcash, a proof-of-work algorithm invented in the mid 1990s which has been used for two decades to minimize email spam and the DDoS (denial of service attacks). During bitcoin mining, the rate of mining is determined by the number of problems per second that your machine will solve or the hash rate. The bitcoin network will then reward the miner by releasing bitcoin in exchange for the computational power that they have provided.
Getting Started with Bitcoin Mining
Contrary to popular perception, bitcoin mining does not require a lot of technical expertise. You don’t have to be a badass coder to get started on mining bitcoins. You just need some money for good mining hardware, the best of which cost thousands of dollars. If you are reading this article and are just armed with your laptop and an eagerness to learn, here is a step-by-step guide on how you can get started today on mining bitcoins:-
Step 1: Buy the Bitcoin Mining Hardware
To get started on bitcoin mining, you have to begin by buying the right bitcoin mining hardware with a good hash rate. During the early days, between 2009 and 2011, you could still mine bitcoins using your average ordinary computer or with the help of a graphics card. However, the niche has gotten so competitive and the difficulty level has increased so much that this is no longer tenable.
There are special computers that are designed for bitcoin mining. These are called ASIC miners and they will cost you anywhere from $800 to $2,000 depending on the machine specifications. At the current rate of return, you won’t make lots of money mining bitcoins unless you can get a cheap source of electricity and purchase more heavy duty bitcoin mining rig that will earn you thousands of dollars.
Some of the most popular bitcoin mining rigs used by advanced bitcoin miners include the following:-
- The Antminer S9: The Antminer S9 is the latest bitcoin mining rig. It is currently the most advanced and most efficient bitcoin miner in the market. Many serious bitcoin miners are now acquiring this machine to get a competitive edge. It has a mining rate of 14 TH/s and consumes 1300 watts of power. The machine costs $2000. If you will be importing it into your country, you also have to factor in the import duty. Earnings depend on variables such as electricity costs, the hardware costs and pool fees. At the current difficulty level and with a purchase price $2000 or more, you will break even in just one year. Users are reporting net earnings of $180 to $400 per month with the Antminer S9. With a power consumption of $0.12 per kW, the machine could earn you anywhere from $2000 to $5000 annually.
- The Antminer S7: This was the best bitcoin mining rig until the launch of the Antminer S9. It has a mining rate (Hash rate) of 4.73 TH/s and costs roughly $400 to $500. If you will be importing this, you also have to factor in the cost of import duty. The machine can earn you 0.1645 BTC per month that is equivalent to more than $1000 monthly. However, you have to factor in the cost of electricity among others that will dent your earnings. It has a very high power consumption of 1350 watts. The Antminer s7 has been the industry workhorse since 2015 and is quite popular with many hobbyist bitcoin miners. As a beginner with a small budget, this can make a great starting point.
- Avalon 7 Bitcoin Miner: The Avalon 7 Bitcoin Miner has been around since November 2017. It is a great contender with many of the midrange bitcoin miners such as the Antminer S7. It has a hash rate of 6 TH/s and power consumption of 850 to 1000 watts. The bitcoin miner costs $880 and can earn 0.14BTC per month before you factor in the costs of electricity and pool fees. The Avalon 7 Bitcoin Miner will pay for itself in the first year and can also be a great option for beginners.
One more thing that should be noted when shopping for bitcoin hardware is that you need to establish the viability of bitcoin mining and determine if it will be profitable for you, taking into account the cost of power in your country.
Bitcoin mining rigs consume lots of power and if the power costs in your locale are high, they are going to eat into your margins. The best way to estimate potential ROI from your bitcoin mining rig investment is to get the power costs in KW/h in your country. Based on this, you will be able to calculate your potential monthly income with some accuracy. There are bitcoin mining calculators that you can use to calculate the break-even point from a bitcoin hardware investment.
Step 2: Get Your Bitcoin Mining Wallet
Bitcoin is a digital currency so you will need a digital “wallet” where you will receive and store the bitcoins that you have mined. You also need a bitcoin wallet to send and receive bitcoins.
When signing up for a bitcoin wallet, ensure that you have gotten the unique wallet address. It consists of a long sequence of numbers and letters and it is not easy to remember. You can store it in a document somewhere or even save it in your email. When signing up for a bitcoin wallet, you will get two long alphanumeric codes namely, the PUBLIC bitcoin address and the PRIVATE KEY. The PUBLIC bitcoin address will designate the destination of your payment. It’s the crypto equivalent of your PayPal address while the PRIVATE KEY refers to the unique password for your bitcoin wallet.
The two popular types of bitcoin wallets are the self-hosted desktop wallets and cloud-based bitcoin wallets. The self-hosted wallet is simply a program that you download and install on your desktop computer or mobile phone. It is standalone and does not utilize any internet-based service (it is not Software as a Service).
When installing your self-hosted bitcoin wallet, it is critical that you have a copy of the wallet.dat file stored on a thumb drive somewhere or in a safe cloud location as a precaution. The importance of backing up your bitcoin wallet is that your computer might crash and you might end up losing all your accumulated bitcoins and months of work. If you don’t withdraw your bitcoins often, that could amount to thousands of dollars in losses. You can further secure your bitcoin wallet by enforcing a two-factor authentication.
The best desktop bitcoin wallets include the following:-
- Bitcoin Core: This was the first bitcoin wallet. The main drawback is that it needs lot of storage space as it stores data on each and every bitcoin transaction. Given its robustness, it is perfect for hardcore Bitcoiners.
- Armory: This is another popular bitcoin desktop wallet option. The private keys for this wallet are stored in an offline computer so for someone to access them, they have to have physical access of your computer. This assures users of a high level of security.
- Electrum: This is one of the most robust desktop bitcoin wallets out there. The main drawback is that it will require getting used to. It has a 90s interface and if you are not familiar with bitcoin wallets, you might have to contend with a steep learning curve in familiarizing yourself with this wallet. It has lots of nice features and excellent security.
- Exodus: This is a perfect wallet for beginners because it is stripped down and easy to master. Another advantage of Exodus is that you can use it for other altcoins such as Dash, Ethereum and Litecoin among others.
- Copay: This is a versatile bitcoin wallet that is compatible with multiple operating systems. It is also a multisig desktop bitcoin wallet, a functionality which gives you extra layers of security from bitcoin theft. If you are unable to afford a hardware bitcoin wallet and are looking for a wallet with top-of-the-line security features, you can go with Copay. It’s also an open source wallet.
You can also sign up for online wallets that are easily accessible via a web interface as long as you have access to the internet. They are advantageous because they are easy to use and they facilitate fast transactions. The main drawback is that they are vulnerable to various online security threats such as phishing, hacking, or malware attacks. Some of the best online wallets include:-
- Blockchain.info: Blockchain.info has been around since 2011 and is the most popular bitcoin wallet with more than 8 million wallets on the platform. You can use blockchain.info to perform bitcoin transactions and store your bitcoins. They are easy to use and offer support for multiple countries. Although it is an online wallet, it also has a desktop and mobile wallet variant. Sign up for a blockchain.info bitcoin wallet.
- BitGo: This is another popular online bitcoin wallet. It has excellent security features and is ideally suited for users that prefer instant cryptocurrency transactions. You can sign up for BitGo here.
Apart from these, you can also use hardware bitcoin wallets such as KeepKey and Trezor. These are portable, plug and play hardware options that are PIN-protected and can be used to safely store bitcoins. There are also paper wallets that can be stored offline for maximum security. However, the main drawback with paper wallets is they that they can be torn, fade or be destroyed and there will be no means for recovering your bitcoins.
Step 3: Find and Join a Mining Pool
Once you have the bitcoin mining hardware and a bitcoin wallet, you are now good to go. The best way to make money quickly using your ASIC miner is by joining a mining pool. Mining pools are bitcoin mining “conglomerates” that pool together their computing power in order to maximize their bitcoin earnings.
While you could go it alone, it would probably take you years to earn a block of bitcoins or fail to earn at all. Bitcoins are awarded in blocks of 12.5 every time and you will have to be really lucky to earn a block with your single bitcoin mining machine. Since you don’t want to gamble after spending thousands of dollars on a mining rig and probably hundreds of dollars on electricity bills, it is more prudent to join a mining pool and be guaranteed of a share of monthly bitcoin earnings awarded to the pool.
When you join a bitcoin mining pool, you will get smaller and easier algorithms to compute. In the end, all of your cumulative effort will lead to bigger algorithm problems to solve and you will earn bitcoins that are shared in the pool based on individual member contributions. The main benefit of joining a bitcoin mining pool is that you are able to earn a consistent amount of bitcoins everyday and every month and you are likely to recoup your investments in hardware and electricity costs.
Ideally, you should look for a credible and potentially profitable mining pool. Before signing up to any pool, you should look at factors such as the reward method of the pool, the mining pool fee, fees charged on the withdrawal of funds, how successful the pool is at finding bitcoins, the ease of withdrawing funds and the stability of the pool. Ask yourself whether the pool will help you meet your bitcoin mining (financial) goals and recoup your investments over the long term. If the bitcoin mining pool is stable, you can look forward to working in the pool for a longer duration of time which is both convenient and profitable.
Some of the best bitcoin mining pools that you can join include:-
- Slush Pool: This was the first ever bitcoin mining pool and is based in the Czech Republic. The Slush Pool is managed by Satoshi Labs. The mining pool uses a score-based bitcoin reward system that discourages members from switching from one pool to another. The dashboard is extremely user-friendly and it charges a fixed fee of 2% per transaction. Users can set up a withdrawal threshold and the balance will be sent to the miners once this threshold has been met. With just 7% of the network hash rate, it is not the largest bitcoin mining pool although it is one of the best and most trusted.
- Antpool: With 22% of the network hash rate, this is the largest bitcoin mining pool. Antpool is a Chinese bitcoin mining conglomerate and it is operated by Bitmain Technologies. Users on Antpool can also choose between Pay Per Last N Shares (PPLNS) or Pay Per Share reward option. The PPLNS does not carry any fees while the PPS has a 2.5% fee. Payments on Antpool are made once every day if the bitcoin amount exceeds 0.001 Bitcoin ($6.89 at the time of writing). Antpool is very popular with many beginners because it has a clean and easy to use interface. It also contains lots of excellent security features such as two-factor authentication, wallet locks and email alerts for users. If you are new to bitcoin mining, we’d certainly recommend this pool for you.
- Kano CKPool: This is a medium-level bitcoin mining pool that maintains about 3% of the network hash rate. At this rate, it mines between 2 and 3 blocks every day. It offers a PPLNS reward option and charges a fee of 0.9% together with the transaction fee rewards. Kano Pool offers enhanced security with two-factor authentication but there is no merged mining option so you can only mine your bitcoins using this pool. An advantage with this bitcoin mining pool is that there is no payment threshold and you can receive micropayments frequently for your mining effort.
- F2Pool: This is another mega Chinese bitcoin mining pool with 14% of the network hash rate. It utilizes a Pay Per Share (PPS) reward system and charges a fee of 4% per transaction. F2Pool can also be used to mine altcoins such as Ethereum and LiteCoin. The pool has a withdrawal threshold of 0.001 Bitcoin ($6.89 at the time of writing) with automatic daily payout. It also has a simple English and Chinese interface that makes it ideal for many bitcoin mining beginners.
- Eligius: This bitcoin mining pool is based in the US and does not require any registration so it is fairly easy and straightforward for many beginners. Eligius manages up to 1% of the hash rate and was one of the first bitcoin mining pools to come into existence. The biggest plus for Eligius is that you don’t have to grapple with any mining fees and will earn 100% of the rewards. The rewards are based on a Pay-Per-Share (PPS) and the minimum withdrawal threshold is 0.04BTC which is relatively on the higher side considering that the other bitcoin mining pools have a minimum threshold of 0.01 Bitcoin. Given this higher withdrawal threshold, you will need a higher hashing power to begin seeing quick returns.
Step 4: Install a Suitable Bitcoin Mining Software on Your ASIC Machine
After clearing off all the basic steps, you now need to install a suitable client that will run on your machine and mine the bitcoins. This is a fairly easy process because many mining pools already have their software. However, some mining pools may not have in-house software and you may need to install a third party bitcoin client software tool that will monitor and control the bitcoin mining rig.
Popular bitcoin mining client software tools include the following:-
- CGMiner: This is one of the most popular ASIC mining software tools. It is also compatible with FPGA and GPU mining rig. CGMiner is an open source bitcoin mining software tool that is compatible with various platforms including Linux, Windows and OS X. The software tool is written in C and is modeled on the original CPU Miner. CGMiner features overclocking functionality, remote interface design and bitcoin hardware fan speed control.
- BFGMiner: Derived from the CGMiner, the BFGMiner has been designed specifically for ASICs and FPGA bitcoin mining rig. It is a highly versatile bitcoin client with features such as dynamic clocking, ADL device reordering, overclocking and fan control, remote interfacing and monitoring functionalities.
- BTCMiner: This is a Java-based bitcoin mining software designed for the XTEX-FPGA boards and it is compatible with both Windows and Linux systems.
Step 5: The Bitcoin Mining Process
Finally, you are fully kitted with both hardware and software tools and are rearing to go and start the actual bitcoin mining process. If you have done everything right as outlined in the steps above, you should be able to launch your mining rig and start making money from bitcoin mining right away.
The first step is to connect your mining rig to a power outlet and power up the machine. The mining rig is separate from your computer so you should connect it to your computer via a USB interface and start running the mining software that you had installed earlier.
When you open the mining software, it will bring you a user interface where you can enter your details such as the mining pool, the username and the password for the mining pool. A typical mining software interface looks like this when opened:-
After you have configured this section, it basically starts the mining. The hardware will start collecting your share of bitcoins that represents the amount of computing power (proof of work) that you have contributed to the mining pool in finding a new bitcoin block. The pool will send your share of bitcoins to your bitcoin address which you should have been added when you were signing up to the pool.
The biggest trick for profitable bitcoin mining is to maintain a technological edge in bitcoin hardware. Acquire the latest and most powerful mining rigs and you stand a good chance of breaking even and even making a profit within a short duration of time. The power costs will also be a huge consideration. If power costs are high in your country, you are unlikely to turn up a decent profit.
To be profitable, it is recommended that you keep electricity costs low at below $0.11 per kilowatt. The profits are generally good and guaranteed if you are willing to put a significant investment of between $3000 to $5000 in bitcoin mining hardware. With this level of investment, you can look forward to earnings of up to $50 per day. With a standard bitcoin mining rig costing you $800 to $2000, earnings per day can range from $6 to $10 depending on the cryptocurrency chosen. What you should do when venturing into bitcoin mining is to have reasonable expectations. You are definitely not going to be a millionaire from bitcoin mining but it can provide a steady and largely passive source of income.