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Bitcoin (BTC) is a new global innovative payment network and the first decentralized digital currency of its kind to be adopted globally. It is an open source peer-to-peer network where transactions are validated by network nodes based on cryptography. These transactions are recorded in a public distributed ledger called the Blockchain. It was initially introduced in the midst of the financial crisis in 2009 by the infamous Satoshi Nakamoto. Bitcoin, the digital cash, was essentially a by-product of the blockchain and was created as a reward for mining or verifying transaction on the network. Bitcoin is the top ranked cryptocurrency by market cap ($140+ billion) and is the pioneer of decentralized digital currencies.

Bitcoin is the first mainstream cryptocurrency to use a Proof-of-Work  consensus mechanism. In the early years, it could be mined using regular CPUs and GPUs but times have changed. Bitcoin can only be mined efficiently and profitably using custom specialized hardware called Application Specific Integrated Circuits (ASICs).

When it comes to mining, you want to first think about whether you are going to solo mine or pool mine. BTC is no longer profitable to solo mine, so if you are thinking of mining BTC, the best option would be to join a mining pool or alternatively focus on cloud mining. Pool mining has associated costs like pool fees but you will see quicker rewards and reduced reward variance in comparison to solo mining. Let’s break down the elements of mining Bitcoin so you get a complete understanding of the underlying technology and how the process works. 

Bitcoin Mining & Consensus Mechanism

Bitcoin  is based on the SHA-256 hash algorithm, which is a Proof-of Work (PoW) consensus Mechanism. SHA-256 stands for Secure Hash Algorithm which is 256 bits long. SHA-256 is a member of the SHA-2 family of cryptographic hash functions that were designed by the NSA. SHA-256 is used in the mining process as well as the process of creating bitcoin addresses to improve security and privacy.

Proof-of-Work is the original consensus mechanism used by cryptocurrencies. The mechanism is used to confirm or verify the validity of transactions and create new blocks of transactions to be added to the blockchain. Miners compete to solve complex mathematical puzzles to receive the right to add new transactions to the main blockchain and receive the blockchain reward. This is very energy intensive process that requires nodes to hash data through ASIC chips. The purpose of using PoW is to provide defense against DoS attacks but this still leaves some vulnerability against 51% attacks.

The mining reward started at 25 BTC per block when Bitcoin first launched. The current reward for miners is 12.5 BTC per block. The block reward is halved every 210,000 block (or roughly every 4 years). That means in 2020, the block reward will decrease to 6.25 BTC per block. The total max supply of BTC that will ever exist is 21,000,000.

ASIC miners are the only way to profitably mine BTC and receive block rewards. Let’s take a look at some of the top miners on the market.

Bitcoin Mining Hardware

Bitcoin miners keep the network secure by verifying transactions and creating new blocks to be added to the blockchain. Mining is competitive so its key to have the most profitable hardware if you choose to mine BTC. It’s not ideal for the average individual to mine Bitcoin as mining farms have taken advantage of cheap electricity in certain countries to mine on a large scale, so you are better off buying Bitcoin as opposed to the spending thousands on buying mining hardware that will constantly be replaced with better, faster, more efficient miners. You may want to mine alternative coins and sell them for BTC as this may be more profitable. In case you do want to mine, some of the top BTC ASIC miners for 2018 are compared below. Keep in mind you will also need to purchase a Power Supply Unit (PSU) separately as it is usually not included with the miner.

ASIC Miners

Antminer S9

DragonMint 16T

Antminer R4

Price (USD)

$1500 - $3000

$1500 - $3000

$1500 - $2500

Hashrate (TH/s)

14

16

8.6

Power Usage (W)

1375

1200-1480

845

Prices are current and depend on whether it is new, used, and place of purchase

Bitcoin Cloud Mining

If you want to avoid buying hardware and setting up your own Bitcoin mining operation, you can look into BTC cloud mining. Essentially, cloud mining uses shared processing power from a remote data centre. This means you don't have to manage and maintain hardware setups, but it comes with associated risks. The most popular form of cloud mining is called Hashpower Leasing. You essentially lease your desired amount of hashpower from a remote cloud mining firm, typically on a 1 or 2-year lease, in exchange for fiat currency. This gives you a claim over the BTC block reward proportional to your purchased hashpower. Cloud mining is also applicable to many other mineable coins, and below are some advantages and disadvantages of cloud mining.

Cloud Mining

Advantages

Disadvantages

Quiet home - no sound of cooling fans and miners humming

Risk of fraud or not receiving payouts

No increase in electricity costs or ventilation problems due to overheating equipment

Risk of mining operation shutting down due to profitability concerns

Not left with expensive obsolete hardware when mining becomes unprofitable

Lack of control and flexibility, less fun, and lower profits due to operation fees charged by operators

Bitcoin Mining Software

The software used to mine BTC is just as important as the hardware. Different software has been created for different hardware. You want to get the most out of your hardware, so utilizing the correct mining software is key.

If you are solo mining, you need to ensure you are in consensus with the network so download the most updated Bitcoin Core software. If you are pool mining, you want to ensure that the pool adheres to the consensus and is not using your mining power to support a hard fork or some other forking software imposed by rogue developers.

Two of the most common Bitcoin mining software for ASIC miners are outlined in the table below. You will need to do your research to see which one is optimal for your hardware.

CGMiner

BFGMiner

Multi-threaded multi-pool ASIC miners with ATI GPU monitoring, overclocking and fan speed support

A modular ASIC miner written in C, cross platform for Windows, Mac, and Linux, including support for routers with OpenWrt capability

Bitcoin Mining Difficulty & Profitability

The total global hashrate for BTC  has been steadily rising over the past few months which indicates that there is an increase in total mining power (more ASIC miners are being used) to mine BTC. The hashrate is related to the price of the coin, and difficulty closely tracks the hashrate.

The difficulty level indicates the computational difficulty of solving the next block to maintain the ten-minute block interval for Bitcoin. The difficulty level has been increasing in a synchronized fashion with the total network hashrate. As the difficulty increases it requires greater computational power and energy to mine the next block and receive the block reward. This could also be used as a price indicator. If the total hashrate and difficulty level is increasing, it could mean the coin is becoming more popular and will increase in price. Many of the miners that focus on other coins may switch to start mining BTC as the price increases, as it makes it more profitable of a coin to mine. This is typical with mining farms, cloud mining firms, and in pooled mining. Based on a recent study by Morgan Stanley, they estimate a price of USD$ 8,600 to be the break-even point for BTC mining pools. Although some large pools may continue to mine below this price, most other pools would switch to mining other coins until BTC recovers in price. Mining BTC based on the potential long-term growth and shift to being more of a digital commodity rather than a currency will prove to be very profitable. Its relatively small finite supply increases its scarcity and will ultimately increase its value over time. 

 

Below is a chart from cryptocompare that shows the profit potential for mining Bitcoin. The link will allow you to enter different inputs and see relevant profit metrics so you can visualize your potential earnings. Please note that the figures used below are for illustrative purposes only and results can vary depending on your inputs and the market price of BTC. It is also based on a BTC price of USD $8,371.07

Bitcoin Profits (USD)

Hash Power

(TH/s)

Power Consumption (W)

Cost per KWh ($)

Pool Fee

Profit/ Month

Profit/Year

Profit Ratio Per Day

BTC

(2x AntMiner S9)

28

2750

0.12

1%

$218.33

$2656.35

91%

BTC

(2x DragonMint 16T)

32

2800

0.12

1%

$279.14

$3396.24

115%

BTC

(2x Antminer R4)

17.2

1690

0.12

1%

$134.06

$1631.01

91%

Do your research and use the calculator to estimate your total cost and profit potential.

If you have any questions about BTC mining hardware or software, please feel free to comment below and let us know.