For those of you that are active in the cryptocurrency world, you have probably heard a lot about Bitcoin Mining. We have all heard the stories about how you can turn your average desktop into a money making machine. However, is this the tale of triumph for entrepreneurs or is it another investment going belly up. In this article we are going to be covering Bitcoin Mining. What it is, How it works, and should you start your own Mining Rig to turn computational power into dollar signs?
The Basics of Bitcoin Mining
When it comes to Bitcoin Mining there is a lot of technical jargon that many people, who are not computer engineers, don’t understand. For example ” hash rate “, ” ASICs “, ” Genesis Block ” and ” Orphan Chain “. This vocabulary to the average person is like a NASA scientist trying to explain astrophysics to a child. This gap of knowledge between the average person and the crypto world is what drives a lot of people away from the idea of cryptos. Due to it’s high latency period for understanding, most people would rather not bother than take the time to learn. But just below we are going to be breaking down high level concepts into understandable bite size chunks.
Bitcoin mining at its core is a network of nodes (computers) that complete algorithms in order to support the Bitcoin Network as a whole. What does that mean exactly? Well to break it down even further in more basic terms. Bitcoin Mining is essentially computers that dedicate computational power to solve algorithms, in order to facilitate the transactions of Bitcoin and to extend the Blockchain. After all, the blockchain is really just an immutable public collection of transactional history of all Bitcoins to date.
What Algorithms do Miners Solve?
The reason Miners must dedicate computational power is because they must solve a rigorous algorithm. What exactly is this algorithm? The SHA-256 cryptographic hash function is the algorithm miners must complete in order to find the next valid block and add it to the block chain. The SHA-256 is a 256 bit hash that computes 32 bit words. This algorithm is used to create hashes and “nonce’s” for blocks in the bitcoin network. A “nonce” is an arbitrary number that can only be used once. This is where miners dedicate a large percentage of computational power to guess thousands of hashes per second to find a specific “nonce” that correlates to a valid block. A valid block must contain 64 leading zeros in the 256 bit hash and the rest of the hash is randomized. When miners find a valid block they must publicize it to the network in order to have it validated. If they are the first miner to find a valid block then they receive financial reward (currently 12.5 BTC or roughly €131,000) for every valid block. But you will come to find out that finding a valid block is not as easy as it seems.
When Bitcoin was first conceived the mysterious individual, Satoshi Nakamoto, the creator of Bitcoin was the first miner to support the network. It is believed that he/she was the only miner on the network facilitating all the Bitcoin transactions. Satoshi did not have some fancy Mining Rig like many people see today, all the mining was originally done on your basic desktop computer or laptop. This was the original vision that Satoshi had, for all the nodes to exists and operate on computers. However, as Bitcoin became more public and individuals saw the financial opportunity in Mining the evolution for faster and more efficient devices began.
GPU (Graphics Processing Unit)
The first advancement in Bitcoin mining was the addition of GPU’s or Graphics Processing Units. These cards are designed for high performance graphics and used by many in the computer gaming realm. The addition of these units gave miners a serious advantage. GPU’s are easily available, perform arithmetic functions, and can be overclocked. The arithmetic functions is perfect for computing the SHA-256 algorithm. In addition, overclocking is the process of running chips faster than they were specifically designed for. This allows for more guess work to be done in a shorter amount of time, however errors will occur more frequently during the process. But the advantage of overclocking and performing more guess work out weigh the possible errors. When miners first discovered the power of GPU’s they didn’t stop at just one. After all, what’s better than one GPU, multiple GPU’s.
Due to the lack of mother boards that will support multiple GPU’s, miners got creative and started to produce their own. As seen above miners got hundreds of GPU’s and ran them in unison to increase the amount of hashes per second to astronomical measures. However, GPU’s had some disadvantages when they were taken to the extremes like this. GPU’s had poor cooling systems and over heating was a serious problem, they draw a lot of electricity to run and it was a poor utilization of the hardware. GPU’s have a vast amount of functions, to only use them for arithmetic functions was simply a waste.
FPGA (Field Programmable Gate Array)
As the evolution of mining continued, miners began to look to alternatives to replace the GPU’s in order to make their machines faster and more efficient. This is where the FPGA had its short moment of glory. In theory FPGA’s should have taken over the market, they were faster processors, extremely customizable, and had a better cooling system. However, as many miners came to find out. FPGA’s are hard to get a hold of, they take extensive understanding of software coding in order to set up, and they have poor optimization of 32-bit words which is essential for the SHA-256 algorithm. The benefits of FPGA over GPU’s was minimal at best. Thus the life span of FPGA’s was very short lived and miners quickly went back to GPU’s.
Final Evolution – ASICs
ASIC’s stands for Application Specific Integrated Circuit. This chip was specifically designed for Bitcoin Mining. ASICs run constantly for life, which is a necessity when it comes to Bitcoin Mining. The development of this computer hardware was the fastest turnaround time in history. Most mining rigs today use ASIC’s. ASIC’s are smaller, faster, more efficient and nowadays just as readily available as a GPU. The ASICs card is unmatched by any other chip on the market when it comes to Bitcoin Mining.
Bitcoin Mining is not a get rich quick investment. The amount of financial stake that you have to put up initially causes many miners to not become profitable for over a year! Many manufactures and individuals sell fully equipped mining rigs, but the ball park price range for a decent machine is around €3,000-€6,000. In addition, the only way a mining rig is profitable is if it finds a valid block, the average standalone mining rig will take well over 2 years to find a valid block! If your lucky you may find one sooner, if your not lucky you may never find one. Purchasing a mining rig is an investment in a hobby and should be seen that way. So what’s the point of buying a mining rig if a large percentage of the community won’t become profitable?
The above statement was specifically oriented for a stand alone machine. But what many miners nowadays do is join mining pools. Mining pools is a collection of miners that mine the same block in unison. When a valid block is found by a participant, the miner will send the block to the pool manger. The Pool Manager will publish it to the block chain. All of the miners will receive financial reward for their work. Notice I said “all” of the miners get paid. Even if they did not find a valid block they still receive financial compensation for dedicating computational power. The way financial reward is broken down is based off “shares”. Shares are “near valid blocks” meaning that miners that got close to the actual valid block hash can send in all of their shares for financial compensation. The breakdown of payment processes is below.
In this scenario the Mining Pool Manager takes on all the risk, paying a flat fee for every share a miner finds. The pool manager has more risk because miners could find a valid block and not tell anyone. The miner will still earn financial reward for the shares in addition to the valid block they found. This reduces the profitability and sustainability of the entire pool, but miners are looking to find the most profitable method so this is an issue in this type of payment setup.
In this payment system the risk is split evenly between the Pool Manager and the miners. The miners will only be payed out proportional to amount of shares they send in. In addition, the only way for them to get paid out is if the mining pool finds a block. If they pool does not find a valid block then no one gets paid. This reduces the chances of having mischievous miners that keep the entire financial reward for themselves.
With the implementation of mining pools this has encouraged more people to purchase mining rigs. The amount of financial reward they receive for their computational work will be more consistent than if they were working alone. Thus for those that are hobby miners seeking to break even and even make some small extra income on the side Mining Pools have allowed more small time miners to benefit.
When it comes to Bitcoin Mining the concept and ideas behind it are fascinating to me. However, as an investor and entrepreneur I do not believe it to be a good investment. The profitability of such a set-up is minimal at best. This is not to say that I would never purchase one. To be a participating node in the Bitcoin Network and to help facilitate the trade would be interesting. I would not purchase a Bitcoin Mining rig in order to make huge financial gains. I would purchase one for a hobby. In addition, if you were to simply put the money you would invest in a Bitcoin Mining rig into Bitcoin, your chances of making profit would be significantly higher.