By now you’ve probably heard that bitcoins are created by “mining” and this involves running some software on a computer. Free money! But is it really as easy as that?
Answer: yes and no.
To explain: When the Bitcoin network first appeared in 2009, individual users simply ran a mining program on their desktops and laptops, and mined bitcoins. Thousands of them — which today are worth a lot of money. The network released 50 new bitcoins every ten minutes, and the digital money (which was worth almost nothing back then) flowed.
The problem is that as more users join the Bitcoin network, the amount of computing power required to mine a reasonable amount of bitcoin increases. By about 2011-12, people figured out that banks of computer graphics cards (or GPUs) were more efficient at performing the math functions mining required, and rigged up whole rooms full of them.
That increased the network’s total computing (or “hashing”) power, which in turn bumped up the power required to join in. That meant it was no longer feasible to mine bitcoins with your computer’s single CPU, no matter how good or new it was.
You’ll Need More Than a Desktop Computer
Eventually chip designers realized it was even more efficient to design chips specifically to run the bitcoin mining algorithm, and nothing else. These application-specific integrated circuits (or “ASICs”) have exponentially more power than even graphics card rigs, which… you guessed it, increased the overall computing power required to mine bitcoins.
ASIC-based machines are the only computers that can realistically mine bitcoins today. Mostly, they toil in factory-scale operations in places where electricity or cooling is easy to come by, such as China, near your own hydro or solar power plant, or above the Arctic Circle.
Technically, you can still run mining software on a desktop computer or graphics card rig — but you’ll be waiting a long time (as in centuries) before you make any money. And even then, your electricity bills will far surpass your earnings.
Did we mention that the number of new bitcoins mined every ten minutes has also dropped? Yes, every four years the mining reward drops by half. Until 2012 it was 50 BTC each time. Then it dropped to 25 BTC. In 2016 it dropped to 12.5. On the upside, 12.5 BTC today is worth a lot more than 50 BTC in 2010 (which is how it’s supposed to be).
Running Your Own Bitcoin Mining Machine: Pros and Cons
- This is the closest you’ll get to old-school bitcoin mining, as in printing your own digital money. There are still hundreds of individual miners out there, chugging away.
- The machines are not cheap or necessarily easy to run. Whether you’ll make a profit on the price you pay depends on a few things:
- Your technical knowledge. Can you get it running, make sure it’s working properly and fix it if something goes wrong? While interfaces have gotten simpler over the years, they’re not as simple as using Windows.
- Cost of electricity where you live. Do you have access to free/cheap electricity? Depending on where you live, the power may cost more than you receive in earnings.
- Race against obsolescence. New generations of ASICs hit the market regularly, which increase the network hashing power again. Your cutting-edge ASIC miner may be obsolete after six months as more powerful machines come online. And remember, you can’t use mining machines for much else*. Will you earn enough bitcoin to profit before that happens?
- Mining pools. You’ll need to join a bitcoin mining pool and understand how they work. Mining pools deploy the total hashing power of all the machines on their network and distribute the rewards accordingly. If you mine alone, it could be a long time before your individual machine strikes it lucky among the millions of others out there.
* It is possible to use bitcoin ASIC mining machines to mine other cryptocurrencies, as long as they’re based on the same SHA-256 algorithm. A list of those coins is here. That’s still no guarantee you’ll make a profit, but you could get lucky if the value of one of those coins suddenly soars.
‘Cloud Mining’ or Buying Shares in a Mining Operation
If you really want to mine bitcoins, but the cons of buying your own equipment are too great, “cloud mining” is another option. This is where you buy or rent part of a large-scale mining operation. You usually pay according to your desired amount of hashing power, from minimal to massive.
As of 2017, cloud mining operations that sell direct hashing power and have been around for a while include Genesis Mining and Hashnest. Bixin (formerly HaoBTC) pays “interest” on its bitcoin term deposit accounts, derived from the company’s mining operation.
Of course, there are pros and cons here too.
- It’s easy, with little or no technical knowledge required. You simply send your money to the mining operation, and then wait to see what comes back. You’re not stuck with an obsolete machine when new hardware comes out.
- Profits are not guaranteed, and again depend on several variables.
- Trust. How much do you know about the mining operation, and how trustworthy is its reputation? Do you know where it is located, or if it exists at all? Is it actually paying out according to the amount of hashing power you bought? Is it a ponzi? What happens if the company’s website simply disappears? Do you have any legal recourse if you’re unhappy?
- Bitcoin Value. This is a risk for any mining operation. If the price of bitcoin rises, you have a better chance at making a profit. However if it falls, you’re going to lose. Especially if it falls a lot relative to when you bought in, as happened in 2014-15.
Paying Someone to Host Mining Equipment
This is a relatively new mining model, offering a hybrid of the two methods above. You purchase a mining machine, but another company hosts and maintains it. You pay them a fee for electricity and physical hosting services.
- You have your very own mining machine, and as such you know exactly how much hashing power you own, and how much it should be earning.
- You don’t need any technical knowledge, and don’t have to maintain or restart it.
- These include all the trust, legal and bitcoin value risks described above.
- Note also that your machine will become obsolete, so it has the same limited lifespan as one you manage yourself. There’s also potential issues if you get unlucky and purchase faulty hardware.
In Any Case, Bitcoin Needs More Miners
Despite the caveats, many people choose to mine bitcoin (and other cryptocurrencies) as a hobby, or to support the network. By doing so you’re still providing an invaluable service to Bitcoin by keeping it secure and decentralized. It will also give you a deeper understanding of the technical and economic issues that steer Bitcoin’s future direction
Note: BitsOnline does not necessarily endorse any of the companies or services mentioned in this piece. You should do your own due diligence before investing in any company, or paying money for any service.
Do you make money mining bitcoins? Is it still an option for a bitcoin beginner? Let us know.
Now that you know more about bitcoin mining, you may have even more questions, such as:
Image via Pixabay, BitcoinTalk