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Bitcoin Mining: How to Start Mining, Bitcoin Scams, And Pros & Cons
Bitcoin mining is the process of generating new bitcoins by solving complex mathematical problems with computer hardware. Bitcoin miners are rewarded with newly created bitcoins and transaction fees for their efforts. But how do you start bitcoin mining? What are the pros and cons of bitcoin mining? What is the future of bitcoin mining?
How Bitcoin Mining and Rewarding Works
Bitcoin is the world’s first and most popular cryptocurrency, but how is it created and distributed?
What is Bitcoin Mining?
Bitcoin mining is the process of creating new bitcoins by solving complex mathematical equations, also known as proof-of-work (pow).
These equations are designed to verify the validity and security of transactions on the Bitcoin network.
Bitcoin network is a decentralized ledger of all bitcoin transactions, also known as the Blockchain.
By solving these equations, miners contribute to the maintenance and security of the network. And in return, they receive newly created bitcoins as a reward. This reward is also known as the block reward. It is given for each block of transactions that is added to the Blockchain.
What is the Block Reward?
The block reward is the amount of bitcoins that a miner receives for successfully mining a block of transactions. The block reward is currently 6.25 bitcoins, but this amount is not fixed. It changes over time according to a predetermined schedule that reduces the rate at which new bitcoins are created.
This schedule is called the halving event, and it occurs approximately every four years, or every 210,000 blocks. The halving event cuts the block reward in half, making it more difficult and less profitable to mine new bitcoins.
The halving event is designed to ensure that the total supply of bitcoins will never exceed 21 million, which is the maximum number of bitcoins that can ever exist.
When is the Next Halving Event?
The last halving event occurred in May 2020, when the block reward dropped from 12.5 to 6.25 bitcoins. The next halving event is expected to occur in 2024, when the block reward will drop to 3.125 bitcoins.
The halving events will continue until the block reward reaches zero, which is estimated to happen in the year 2140.
What Happens When All Bitcoins are Mined?
After all 21 million bitcoins are mined, miners will no longer receive block rewards for verifying transactions. However, they will still be able to earn transaction fees, which are voluntary payments that users can attach to their transactions to incentivize miners to process them faster.
Transaction fees are expected to become the main source of income for miners in the future, as they will provide an incentive for them to keep securing the network. Transaction fees are also expected to increase over time, as the demand for bitcoin transactions grows and the supply of new bitcoins decreases.
What Happens When a Bitcoin is Lost or Destroyed?
Unlike fiat currencies, which can be printed or minted by central authorities, bitcoins cannot be created out of thin air. Once a bitcoin is mined, it exists on the network until it is spent or transferred to another address.
However, if a bitcoin is lost or destroyed, for example by forgetting a password or losing a device that stores it, it cannot be recovered or replaced.
This means that the total supply of bitcoins can decrease over time, as some bitcoins become inaccessible or unusable. This can have an impact on the value of bitcoins, as they become scarcer and more in demand. Some experts estimate that up to 20% of all bitcoins are lost or dormant, meaning that they have not been moved or spent for a long time.
Why is 21 Million the Bitcoin Supply Limit?
The 21 million bitcoin supply limit is one of the most distinctive features of bitcoin as a cryptocurrency. It ensures that bitcoin is deflationary in nature, meaning that its value tends to increase over time due to its limited and decreasing supply.
This sets it apart from fiat currencies, which are typically inflationary, meaning that their value tends to decrease over time due to their unlimited and increasing supply.
The 21 million limit was chosen by Satoshi Nakamoto, the anonymous creator of bitcoin, who wanted to create a digital currency that would mimic the properties of gold as a store of value. Gold has a finite and stable supply that cannot be easily manipulated or inflated by central authorities.
Similarly, bitcoin has a finite and predictable supply that cannot be easily altered or controlled by anyone.
How can I start Bitcoin mining?
If you want to start bitcoin mining, here are some steps you need to follow:
Choose a mining hardware
You need to buy or rent a specialized device that can perform the calculations required for bitcoin mining. These devices are called application-specific integrated circuits (ASICs), and they are designed specifically for bitcoin mining.
ASICs are expensive, hard to obtain, and prone to obsolescence, so you need to do your research before investing in them.
Join a mining pool
You need to join a group of miners who share their computing power and split the rewards according to their contribution. Mining pools increase your chances of finding a block and earning bitcoins, as they have more hash rate (the computing power of the network) than individual miners.
You can find various mining pools online, but you need to check their reputation, fees, and payout methods before joining them.
Download a mining software
Download a software that connects your hardware to the network and allows you to mine bitcoins. The software also monitors your performance, temperature, and electricity consumption. You can choose from different mining software options, depending on your hardware and operating system.
Create a bitcoin wallet
Create a digital wallet that stores your bitcoins and allows you to send and receive transactions. A bitcoin wallet is a software or hardware device that generates a pair of cryptographic keys: a public key and a private key.
The public key is your address on the network. And the private key is your password that authorizes your transactions.
You can choose from different types of wallets, such as web wallets, mobile wallets, desktop wallets, hardware wallets, or paper wallets.
Start mining
Once you have everything set up, you can start mining bitcoins by running your hardware and software. You will compete with other miners to solve mathematical problems and find new blocks.
The difficulty of these problems adjusts every 2016 blocks (about two weeks) to maintain the average time between blocks at 10 minutes. The first miner who finds a valid block gets the block reward (currently 6.25 bitcoins) plus the transaction fees included in the block.
Keep track of your earnings
You need to keep track of your earnings and expenses from bitcoin mining. You will receive your rewards in your bitcoin wallet, but you also need to pay for electricity, hardware maintenance, and pool fees.
Additionally, you also need to consider the volatility of bitcoin’s price, which can affect your profitability. Moreover, you need to be aware of the tax implications of bitcoin mining in your jurisdiction, as some countries may consider it as income or capital gains.
What is the best mining pool?
A mining pool is a group of miners who share their computing power and split the rewards according to their contributed mining hash power. Mining pools are desirable to the average miner as they make miner rewards more predictable and consistent.
There is no definitive answer to what is the best mining pool, as different pools may suit different miners depending on their location, hardware, preferences, and goals.
Factors that can help you choose a mining pool
- Hash rate: The hash rate is the total computing power of the pool. A higher hash rate means a higher chance of finding blocks and earning bitcoins. However, a higher hash rate also means more competition and lower rewards per share.
- Fees: The fees are the percentage of the rewards that the pool charges for its services. Lower fees mean higher profits for miners, but they may also indicate lower quality or reliability of the pool.
- Payouts: The payouts are the way the pool distributes the rewards among its members. There are different payout schemes, such as pay-per-share (PPS), pay-per-last-n-shares (PPLNS), or full-pay-per-share (FPPS), that have different advantages and disadvantages. You can learn more about them here.
- Location: The location is the geographical region where the pool’s servers are located. A closer location means lower latency and better performance, but it may also affect the pool’s legal status and regulation.
- Reputation: The reputation is the level of trust and satisfaction that the pool has among its users and the community. A reputable pool is more likely to be secure, stable, transparent, and fair.
Some of the best mining pools for bitcoin
Braiins Pool (Formerly Slush Pool)
Braiins Pool is one of the oldest and most popular mining pools, founded in 2010. It has a hash rate of about 11.9% of the network and charges a 2% fee. Braiins Pool uses a score-based payout system that rewards loyal miners. It also offers zero-cost mining with Braiins OS+, a custom firmware for ASIC miners.
F2Pool
F2Pool is another veteran mining pool, founded in 2013. It has a hash rate of about 8.4% of the network and charges a 2.5% fee for PPS and 3% for PPLNS. It supports merged mining of four cryptocurrencies: Bitcoin, Litecoin, Dogecoin, and Syscoin. F2Pool supports multiple cryptocurrencies, including Bitcoin, Ethereum, Litecoin, Zcash, Monero, and more.
Antpool
Antpool is a mining pool owned by Bitmain, the largest manufacturer of ASIC miners. It has a hash rate of about 13.6% of the network and charges a variable fee depending on the payout scheme, ranging from 1.5% to 4%. It offers PPS and PPLNS payouts, as well as solo mining for advanced users.
ViaBTC
ViaBTC is a public mining pool that was launched in 2016. It has a hash rate of about 9.4% of the network and charges a 4% fee for PPS+. It also offers PPLNS and FPPS payouts, as well as hash rate trading, loans, and trading crypto services.
Binance Pool
Binance Pool is a fast-growing pool owned and operated by Binance, one of the largest crypto exchanges in the world. It was launched in 2020 and has a hash rate of about 8% of the network. It charges a 4% fee for FPPS payouts and offers various benefits for Binance users, such as lower fees, higher interest rates, and more trading options.
How to Identify Bitcoin Mining Scams
Not all bitcoin mining opportunities are legitimate. There are many bitcoin mining scams that prey on unsuspecting and inexperienced users, promising them high returns or low costs, but in reality stealing their money or compromising their security.
Here are some of the common types of bitcoin mining scams and how to avoid them.
Cloud mining scams
Cloud mining is a service that allows users to rent computing power from a remote data center and mine bitcoins without owning or operating any hardware.
However, there are many cloud mining scams that offer unrealistic or fraudulent deals, such as guaranteed profits, low fees, or free trials. These scams may also use fake testimonials, reviews, or websites to lure users.
Some of the signs of a cloud mining scam are:
- The service does not provide any information about its owners, location, or registration.
- The service does not provide any proof of its mining operations, such as hash rate, mining pool, or payouts.
- The service requires users to pay upfront fees or make deposits before they can start mining.
- The service does not allow users to withdraw their earnings or imposes unreasonable conditions or limits.
- The service stops paying users or becomes inaccessible after a while.
To avoid cloud mining scams, users should do their research and due diligence before signing up for any service. They should also compare different options and look for reputable and transparent providers that have a proven track record and positive feedback from the community.
Ponzi scheme scams
These are fraudulent investment schemes that pay returns to existing investors from the funds of new investors, rather than from legitimate profits. Ponzi schemes often use bitcoin mining as a cover or a lure to attract investors, promising them high and consistent returns for their participation.
However, these schemes are unsustainable and eventually collapse when they run out of new investors or funds.
Some of the signs of a Ponzi scheme scam are:
- The scheme offers unrealistic or guaranteed returns that are higher than the market average.
- The scheme does not provide any information about its business model, strategy, or operations.
- The scheme does not provide any proof of its mining activities, such as hash rate, mining pool, or payouts.
- The scheme requires users to recruit new members or referrals to earn more rewards.
- The scheme does not allow users to withdraw their principal or imposes unreasonable conditions or penalties.
To avoid Ponzi scheme scams, users should be wary of any investment opportunity that sounds too good to be true. They should also verify the legitimacy and credibility of the scheme and its promoters before investing. They should also avoid any scheme that requires them to recruit others or pay fees to join.
Malware scams
Malware is malicious software that can infect computers and devices and perform harmful actions, such as stealing data, locking files, or hijacking resources.
These scams use various methods to trick users into downloading or installing malware on their devices, such as phishing emails, fake websites, or infected downloads. Some malware scams target bitcoin miners specifically, by stealing their wallet credentials, redirecting their mining rewards, or using their computing power for unauthorized mining.
Some of the signs of a malware scam are:
- The source of the software or link is unknown, suspicious, or unsolicited.
- The software or link requires users to grant excessive permissions or access to their devices.
- The software or link contains spelling errors, grammatical mistakes, or poor design.
- The software or link asks users to enter their personal or financial information.
- The software or link causes unusual behavior or performance issues on the devices.
To avoid malware scams, users should be careful about what they download or click on online. They should also use antivirus software and firewall protection on their devices and update them regularly.
In addition, they should also backup their data and wallets and use strong passwords and encryption. They should also monitor their mining activities and earnings and report any suspicious activity.
Pros of Bitcoin Mining
Financial Rewards
Bitcoin mining can be a lucrative source of income for those who have the necessary equipment and skills. The mining rewards are generous because creating a new bitcoin is exceptionally challenging.
According to Blockchain Council, the current reward for each block mined is 6.25 bitcoins, plus the transaction fees included in the block. At the time of writing, one bitcoin is worth about $34,106, which means that each block reward is worth about $213,162.5.
Additionally, bitcoin miners can benefit from the appreciation of bitcoin’s price over time, as they can sell their bitcoins at a higher value than they acquired them.
Decentralization
Bitcoin mining is one of the pillars of bitcoin’s decentralized network. By mining bitcoins, miners contribute to the security and stability of the system.
They validate transactions and prevent double-spending, fraud, and censorship.
Bitcoin mining is also a way of participating in the governance of the network, as miners can choose which software version to run and which transactions to include in the blocks they mine.
Flexibility
Bitcoin mining is a flexible activity that can be done from anywhere in the world, as long as there is access to electricity and internet.
Bitcoin mining does not require any formal education, certification, or registration. Anyone can become a bitcoin miner by purchasing or renting the appropriate hardware and joining a mining pool.
Mining pools are groups of miners who share their computing power and split the rewards according to their contribution.
Transparency
Bitcoin mining is a transparent process that can be verified by anyone. All the transactions and blocks mined are recorded on the public ledger, known as the blockchain, which is accessible to anyone with an internet connection.
The blockchain provides a clear and auditable history of all the transactions that have ever occurred on the network. Moreover, bitcoin mining is based on a set of rules and algorithms that are open-source and can be reviewed by anyone.
Cons of Bitcoin Mining
High Energy Consumption
Bitcoin mining is a very energy-intensive process that consumes a lot of electricity.
According to the Cambridge Bitcoin Electricity Consumption Index, bitcoin mining consumes about 134.75 terawatt-hours (TWh) of electricity per year, which is more than many countries.
The high energy consumption of bitcoin mining has been criticized by environmentalists and regulators for its impact on climate change and carbon emissions.
Complexity
Bitcoin mining is a technically complex process that requires specialized hardware and software.
The difficulty of mining bitcoins increases over time, as more miners join the network and compete for the limited supply of new bitcoins. The difficulty adjustment ensures that the average time between blocks remains at 10 minutes, regardless of the number of miners.
To mine bitcoins efficiently, miners need to invest in advanced equipment, such as application-specific integrated circuits (ASICs), which are designed specifically for bitcoin mining.
These devices are expensive, hard to obtain, and prone to obsolescence.
Volatility
Bitcoin mining is a risky activity that depends on several factors. These factors include the price of bitcoin, the difficulty level, the cost of electricity, and the competition from other miners.
The profitability of bitcoin mining can fluctuate significantly depending on these variables, which are often unpredictable and beyond the control of miners.
For instance, if the price of bitcoin drops sharply or the difficulty level increases dramatically, miners may incur losses or be forced to shut down their operations.
Centralization
Bitcoin mining is supposed to be a decentralized process that allows anyone to participate in the network.
However, in reality, bitcoin mining has become increasingly centralized over time, as large-scale mining operations dominate the market. These operations have access to cheap electricity, advanced equipment, and economies of scale that give them an edge over smaller miners.
According to Blockchain.com, the top four mining pools control more than 50% of the total hash rate (the computing power of the network), which poses a threat to the security and diversity of the network.
What is the future of Bitcoin mining?
What is the future of bitcoin mining? Here are some of the possible scenarios and trends that may shape the mining industry in the coming years.
Sustainability
Bitcoin mining is a very energy-intensive process that consumes a lot of electricity. According to the Cambridge Bitcoin Electricity Consumption Index, bitcoin mining consumes about 134.75 terawatt-hours (TWh) of electricity per year. This is more than many countries’ consumption.
The high energy consumption of bitcoin mining has been criticized by environmentalists and regulators for its impact on climate change and carbon emissions.
Therefore, one of the main challenges and opportunities for bitcoin mining is to become more sustainable and environmentally friendly. This may involve using renewable energy sources, such as solar, wind, or hydro power, to power the mining operations, as well as developing more efficient and less wasteful hardware and software solutions.
Regulation
Bitcoin mining is a decentralized process that operates outside the control and jurisdiction of any central authority. However, this does not mean that it is immune to regulation and legal challenges from governments and regulators around the world.
Depending on the country, bitcoin mining may face different levels of scrutiny, taxation, or prohibition. For instance, China has banned bitcoin mining within its borders, citing environmental and financial risks.
On the other hand, some countries have embraced bitcoin mining as a source of economic development and innovation. For example, El Salvador has legalized bitcoin as legal tender and plans to use geothermal energy from volcanoes to power bitcoin mining.
Therefore, one of the main uncertainties and risks for bitcoin mining is the regulatory environment and its potential impact on the profitability and viability of the activity.
Innovation
Bitcoin mining is a dynamic and competitive industry that requires constant innovation and adaptation to stay ahead of the curve.
As the difficulty of mining bitcoins increases over time, as more miners join the network and compete for the limited supply of new bitcoins, miners need to invest in advanced equipment, software, and services that can improve their performance and efficiency.
Some examples of innovation that may shape the future of bitcoin mining are:
- Artificial intelligence (AI), which can help optimize the mining process by automating tasks, enhancing decision making, and reducing errors.
- Quantum computing, which can potentially offer a breakthrough in computing power and speed that could revolutionize bitcoin mining.
- Liquid cooling, which can help reduce the heat generation and energy consumption of mining hardware by submerging it in a non-conductive liquid coolant.
The future of bitcoin mining is closely intertwined with the ongoing quest for greater efficiency, security, and sustainability.
As the cryptocurrency landscape evolves, bitcoin hardware manufacturers and developers are continually striving to push the boundaries of innovation, delivering cutting-edge solutions that cater to the needs of miners, investors, and users alike.
