Home » How To Start Bitcoin Mining In 2021: All You Need To Know

How To Start Bitcoin Mining In 2021: All You Need To Know

by CryptoWordTalk
How To Start Bitcoin Mining

In the cryptocurrency world, mining is the process of generating valid blocks that are then added to a blockchain, which is a public database of transaction records for Bitcoin (BTC). Because it solves the “double-spend” problem, it is an essential component of Bitcoin’s network.

Double-spend refers to the need to reach consensus on transactions. Public key cryptography is a mathematical method of proving ownership of Bitcoin. This cannot be broken using today’s technology. Cryptography cannot, however, guarantee that one specific coin hasn’t been sent to anyone else. To create a shared history, transactions must be ordered according to an agreed-upon order. This could be based on the date of each transaction. However, any input from outside can be altered by anyone who provides it. Participants must trust this third party.

Blockchain and mining use economic incentives to offer a trusted and reliable way of ordering data. Third parties that order transactions are not centrally controlled and receive monetary rewards for their good behavior. Contrarily, misbehavior can result in economic resources being lost, as long as everyone is honest.

This is how Bitcoin mining works: a series of blocks are created that can mathematically be proven to have been stacked correctly with a given amount of resources. This process is based on cryptographic hash, a mathematical method to encode data in a standard way.

Hashes are a one way encryption tool. This means that it is nearly impossible to decrypt them to their input data unless all possible combinations have been tested until the result matches.

This is how Bitcoin miners work: During each second, they cycle through billions upon trillions of hashes until they discover one that satisfies a criterion known as “difficulty”. Both difficulty and hash are large numbers expressed in bits. Therefore, the hash must be lower than the difficulty. To maintain a constant block-time, the difficulty is adjusted every two weeks. This refers to the time it takes to find each block while mining Bitcoin.

The block header contains the data that miners have generated. This is the hash used to identify a block. The most significant components of the hash are the Merkle root, another aggregated hash that includes the signatures for all transactions in a block, and the preceding block’s unique hash.

This means that even the smallest component of a block could be altered to change its expected hash, and every subsequent block’s as well. This incorrect blockchain version would be rejected by nodes immediately, protecting the network against tampering.

The difficulty requirement ensures that Bitcoin miners do real work. This means they spend time and electricity humming through all possible combinations. To distinguish it from other block-creation mechanisms, Bitcoin’s consensus protocol is known as “proof-of work”. Malicious entities cannot attack the network unless they have the entire mining power. This would be a huge cost for Bitcoin.

How Bitcoin miners get paid

In return for their efforts in creating new blocks, the network offers rewards to Bitcoin miners. There are two types: Bitcoin that is created with every block and fees that users pay to transact on this network. Block reward for newly minted Bitcoin is 6.25 BTC, as of May 2020. This majority of miners’ revenue is represented here. This value will decrease at regular intervals of about four years so that no more Bitcoin can be mined. Only transaction fees ensure the network’s security.

The block reward will drop to less than 0.02 BTC by 2040 and there will only be 80,000 Bitcoin left from 21 million. The final Bitcoin will be mined slowly after 2140, and that is when mining will effectively stop.

Although the block reward drops over time, past halves have been largely compensated for by an increase in the Bitcoin price. Although this does not guarantee future success, Bitcoin miners have a certain degree of certainty about their prospects. The current mining arrangement is supported by the community and there are no plans to discontinue it like Ethereum, another important mineable coin. Individual Bitcoin miners can feel confident that the venture will make a profit if the conditions are right.

Although mining is a highly competitive business, it is relatively simple to start. Hobbyists had the ability to simply open a piece of software on their computers and start mining right away in the early days of Bitcoin. Although those days are long gone, setting up a dedicated Bitcoin mining machine isn’t as difficult as you might think.

How to select hardware for mining

First, you should know that mining Bitcoin is possible only by purchasing an Application-Specific Integrated Circuit (also known as an ASIC).

They can only mine Bitcoin but are extremely efficient at doing so. They are so efficient that they almost made all other types calculating mining devices obsolete within a matter of hours.

You will need to consider other coins if you want to mine with CPUs, GPUs, or more powerful FPGAs. These devices can mine Bitcoin but they do it at a very slow rate, making it a waste of both time and electricity. The AMD 7970 was the most powerful graphics card before ASICs were invented. It produced 800 million hashes per seconds. A typical ASIC produces 100 trillion hashes per seconds today — that’s a 125,000-fold increase.

It is a measure of the performance of mining devices and is often referred to as “hash rate”.

Two other important factors should be taken into consideration when buying a Bitcoin mining device. The first is electricity consumption in watts. If two devices produce the same amount of hashes, one will be more profitable than the other.

The unit cost of each device is the third measurement. If the ASIC is not energy efficient, it doesn’t matter if it takes 10+ years to be repaid through mining.

There are many ASIC manufacturers that make Bitcoin, and they often have different specifications. While some ASIC manufacturers may be more efficient, but also more costly, others might make better-performing hardware at a lower price. Before you can determine which device is the best for your needs, it’s important to understand other factors that influence profits from Bitcoin mining.

Bitcoin mining economics

Bitcoin mining, like real estate, is all about location.

There will be a range of average electricity prices in different parts of the world. Many developed countries have too much electricity for residential use to make mining financially viable. The cost of electricity in residential areas is often between $0.15 to $0.25 per kilowatt-hour, making Bitcoin mining difficult and unprofitable.

These Bitcoin miners often enjoy prices below $0.06/KWh. This is low enough to make a profit even in market downturns.

To ensure a strong operation, it is best to keep prices under $0.10. The location of the mine depends on one’s situation. While people living in developing countries might not have to travel far from their home, those in developed countries will likely face higher entry barriers.

Apart from choosing the right hardware, a miner’s revenue and profit depend heavily on the market conditions and whether or not there are other miners. Bitcoin’s price can soar during bull markets. This means that the BTC they mine may be worth more per dollar.

Positive inflows from bull market are offset by Bitcoin miners seeing increased profits and buying more devices to tap into this revenue stream. Each miner now generates less Bitcoin than ever before. The revenue generated eventually tends to an equilibrium point, where less efficient miners earn less than what they spend on electricity. This allows others to make more Bitcoin.

This does not usually happen immediately. There can be a delay as ASICs are sometimes not produced in a timely manner to compensate for the rise in Bitcoin prices.

The opposite principle applies in a bear market: Revenues are depressed until miners turn off their devices en masse.

Existing Bitcoin miners need to find the right combination of hardware and location in order to avoid being outcompeted. As more efficient hardware can reduce older miners’ profits, they must continue to reinvest and maintain their capital.

Comparison of profitability in mining hardware

You can quickly check the profitability of your mining device by using online calculators such as AsicMinerValue or CryptoCompare. You can also estimate profit manually using the following formula

This formula is used by many calculators. It simply represents your share in the total hashrate divided with the network’s total dollars issuance. These input values can either be fixed parameters (for example, the block time for Bitcoin is 10 mins so six blocks are mined in an hour and there are 144 in one day), or they can easily be found on data websites such as Blockchain.com and Coinmetrics.

The cost of electricity is also needed to calculate the profit. This is possible because of the equivalence between Kilowatts (kilowatt hours) and Kilowatt Hours (kilowatts). Simply multiply the device’s power consumption by 24 hours per day and subtract the electricity price per unit.

Below is a table that illustrates major ASICs currently on the market and their payback periods. This is how long it would take to make current revenues breakeven. Noting that Bitcoin miners’ profit fluctuates over time can cause inaccurate results when extrapolating to the future. It’s still a useful way to compare the relative effectiveness of different devices.

ASIC profitability comparison

The table shows that none of the ASICs make a profit when electricity prices are $0.20/KWh. While the relative performance of each new-generation ASIC is almost identical, older models may be more attractive if electricity costs are low.

The Canaan AvalonMiner 1066, for example, has a low energy efficiency and a very low cost. This makes it quite competitive in the low electricity price bracket, despite the fact that it is an older model. Bitmain S17 Pro is a former-generation ASIC that holds its ground due its lower cost but becomes less attractive when the reference electricity rate rises. MicroBT’s devices seem to offer the best overall performance for mining.

Last, but not least, this table was created in a bullish market. Although profits may be higher than the average, the 2020 halving is still fresh and could counterbalance the effect of lower Bitcoin issuance.

Setting up and buying hardware

ASICs can be purchased directly from manufacturers or sold in shops. Although they are more difficult than other graphics cards, ASICs can still be purchased at a reasonable price. You should be aware that mining equipment purchased from overseas manufacturers or shops may incur high import duties.

ASICs can be sold without power supply units depending on where they are manufactured or purchased from. ASIC manufacturers may sell their own units. However, it is possible to purchase PSUs that were specifically designed for gaming or servers.

ASICs must be connected to the internet using an Ethernet cable. ASICs can only be configured via a web browser connecting to the local IP address. This is similar to a home router.

It is important to create an account with your chosen mining pool before you can proceed. This will provide details on how to connect and the best way to do so. You will need to enter the connection information and account information for the pool via the ASIC’s website panel. Once the connection information is entered, the miner will begin to generate Bitcoin.

It is highly recommended to mine through an established pool. You will be able generate consistent returns by pooling your hardware. Your mining contribution will still be recognized, even though your device might not always find the right hash to create a block.

Bitcoin mining: Risks and considerations

Management of high-powered devices like ASICs carries technical risks.

To avoid equipment from overheating, ventilation is essential. The entire electricity consumed by the miner is lost to the environment as heat. One ASIC will likely be the most powerful appliance in your house or office.

This means that you must be aware of the limitations of your electricity grid when Bitcoin mining. Each socket is assigned a rating and your home’s electricity network has a maximum power rating. Frequent outages and electrical fires can easily occur if you exceed these limits. Talk to an expert about whether your electrical system is safe for mining.

To keep your mining equipment healthy, you need to maintain it against dust and other environmental factors. Although failures are rare, ASICs may need to be maintained in order to avoid them from going out of service sooner than expected.

Although single ASICs might fail, their viability is most at risk if they become obsolete. Older devices will be outnumbered by more efficient miners.

The Bitmain S9 was one of the oldest generations of miners. It was released in 2016, and was profitable for approximately four years until it became unprofitable. The pace of computing technology’s advancements is unpredictable.

Bitcoin mining is just like any other venture. There are both rewards and risks. This guide should have provided some guidance to help you evaluate each.

Related Posts

Leave a Comment

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More