Bitcoin mining is the term given to the process of adding new ‘blocks’ of recent transactions to the blockchain, bitcoin’s distributed ledger of transactions. This is vital to the security of the bitcoin network, and miners are rewarded for this service with transaction fees and new bitcoins (currently released in sets of 25).
Mining is the only way that new bitcoins can be created, and they are released at a pre-determined rate set by a mathematical algorithm, roughly every 10 minutes. Over time, the number of new coins will decrease, and so there will never be more than 21 million bitcoins in existence. Once the last coins have been mined, some time in 2040, miners will earn money through transaction fees alone.
Bitcoin mining is carried out by mining ‘rigs’: computers designed for the purpose of carrying out the complex calculations called hashes required to confirm a block of transactions on the blockchain. Because the supply of new bitcoins is limited, if more miners come to the network this does not mean that more coins are released – it means that each miner earns proportionally less. The bitcoin ‘Difficulty’ is a measure of how much computing power is represented by the entire mining network and how hard an individual miner must therefore work to find new coins. In the early days of bitcoin, any normal desktop computer could be used to run these calculations. This is known as CPU mining. As more hashing power was brought to the network, CPU mining became inefficient, since the electricity to run the computer cost more than the value of the bitcoins mined. Some bitcoin enthusiasts then discovered that certain graphics processing units were well suited to these calculations, and had much higher hashrates. GPU mining then became the norm, since this was far more efficient and profitable.
Ultimately, specially-designed microchips were developed for the sole purpose of bitcoin mining. These ASICs (application-specific integrated circuits) were significantly more powerful than the fastest GPUs, and used less electricity. ASICs first came onto the market in 2013, and have now become the default way of mining bitcoins. Because CPU and GPU mining are so much slower, they cannot compete against the purpose-designed ASICs that form the bulk of the current mining network. Whilst the fastest CPUs might be capable of 100 megahashes (Mh/s) or million hashes per second, and many less than 1 Mh/s, and the fastest GPUs can manage around 1 gigahash (Gh/s) or billion hashes per second, the earliest ASIC miners were designed to compete favourably with GPU mining but at far lower levels of power consumption. The latest ASIC miners are capable of several terahashes (Th/s) or thousand billion hashes per second.
Finding New Bitcoins
The way that new bitcoins are released means that without an ASIC miner it is impossible to mine coins profitably, and you may not receive any coins at all. Bitcoins are released in blocks of 25, and all 25 go to the same miner. When a block is added to Bitcoin’s blockchain, it is verified by including a hash. This is essentially the answer to a complex mathematical problem that can only be found by chance. The higher the network Difficulty, the harder this puzzle becomes. Mining rigs generate many trillions of hashes between them. Only one of them will hit upon a hash that fits the very limited criteria required by the bitcoin protocol. At this point, the new block is added to the blockchain and the miner that found the hash receives the new coins.
Because mining is such an all-or-nothing endeavor, only the fastest miners have a realistic chance of discovering useful hashes. This is a problem for lower-powered miners, and has led to the development of mining pools. These are essentially collectives of miners, who combine their hashing power so that they can compete in the mining network. The rewards they receive are shared amongst their members in proportion to the power they bring to the pool. This is the only way that most miners have of gaining any income from mining – if they were mining alone they would need to be extremely lucky to receive a whole block of bitcoins, no matter how long they mined.
Profiting from Mining
Lastly, profiting from mining does not just depend on the cost and hashrate of your ASIC. Bitcoin is still in its relative infancy and its exchange rate is extremely volatile. The current price of bitcoin will determine whether it is worth mining in the short term. Alternatively, if you plan to hold the coins you mine in the hope of future price rises, you will need to be aware of the impact of greater regulation and competition for bitcoin, as well as the effects of increasing adoption. Some of these factors are explored in articles on this site.
For technical advice and further discussion around bitcoin mining, as well as wider aspects of the bitcoin ecosystem, you can find a huge amount of expertise and opinion around the internet and in online communities such as the bitcointalk.org forum.