One of the many topics about Bitcoin which piques the interest of outsiders is how these coins are being generated. Considering the fact that Bitcoin is not issued by a bank or government, these coins have to come into circulation somehow. Bitcoins are mined, or “minted” by people with very powerful computer hardware.
Note from the Author: The contents of this article focus on mining at home. In part two of this article, we will talk about cloud mining.
The Bitcoin Mining Process – Hardware Evolution
When people think of mining for money, they will see people swinging pickaxes in the dirt and rocks in order to extract precious metal. Or, to give it a more modern setting, heavy machinery in the form of bulldozers and rock trucks hauling dirt and bringing it up to a wash plant to separate gold from useless mud and ground. Bitcoin does not work like that exactly, although there are some similarities.
Just like regular mining, Bitcoin mining is done by finding a block. In the case of gold mining, miners have to look for a gold deposit, which is usually found in a rock. Bitcoin mining is not that different, albeit it uses different tools, and it requires far less human labour in order to complete. But the competition factor is there, and Bitcoin mining has been labelled as the ‘digital gold rush’ several times in the past.
The gold – and other precious metal & gem – mining process has gone through several iterations, all of which were caused by major technological breakthroughs. Whereas things have to be done by hand in the beginning, things gradually evolved, and dedicated machinery started playing a bigger role decade after decade.
Bitcoin mining has also evolved, but in a far shorter timespan and with far more drastic consequences. In the early days, all you needed was a CPU [central processing unit, also known as processor] in order to be a competitive Bitcoin miner. It didn’t take all that long until people started clustering CPU’s from different computers together in order to gain a competitive edge.
But over the years, CPU mining was replaced by GPU mining, and users started stockpiling graphic cards in order to keep up with other Bitcoin miners. The only downside is that graphics cards draw a lot of electricity while performing Bitcoin mining duties and as more and more people started competing to find the next Bitcoin block, it become power inefficient to keep on using graphics cards.
Bitcoin mining hardware evolved into FPGAs [field programmable gateway arrays and eventually ASICs [application-specific integrated circuit] machines. Not only are these devices capable of completing computational tasks a lot faster compared to graphics cards, but they are far more power efficient than previous mining hardware.
The Bitcoin Mining Process – Solo Mining vs. Pool Mining
As you can imagine, it used to be quite easy and profitable to mine on your own [also known as “solo mining”] in the early days of Bitcoin, as only a handful of people had taken notice of this digital currency. Furthermore, the less competition, the lower the mining difficulty, and the higher your chances of solving a Bitcoin block.
However, as the mining hardware started to evolve and more people joined in on this Bitcoin mining thing, it became harder for individual miners to solve a block. Granted, you could just invest in new and more expensive hardware in order to keep up with the rest of the pack, but there was an alternative solution as well.
Pool mining became a new trend in 2013 and beyond, as these mining pools combined the computational capacity of multiple Bitcoin miners into one “mega mining power” in order to solve a Bitcoin block. As a result, the individual miners connected to this mining pool would receive a part of the block reward, based on their computational power versus the pool’s total mining power.
By joining a mining pool, Bitcoin miners increased their chances of solving blocks through a group effort, while keeping their mining earnings on par with individual efforts. But one factor always remained the same, regardless of whether you mined solo or in a pool: the electricity costs associated with Bitcoin mining.
Electricity Costs – The Downfall of Bitcoin Mining
I have mentioned before how Bitcoin mining hardware has become more energy efficient over the past few years. However, that does not mean that these machines no longer require a ton of electricity when they are running 24/7. In most countries around the world , electricity prices are way too high and Bitcoin mining at home has become unprofitable.
In our next article, we will talk more about Bitcoin cloud mining.
All images courtesy of Pixabay