General IT

Bitcoin mining – what is Bitcoin and does it pay off in 2017

Bitcoin’s development is impressive. It has not even been 10 years since its creation in 2008, but this currency, discusses only in a narrow circle of cryptography specialists has transformed into a global phenomenon.

A payment system that threatens the position of central banks, commercial banks and companies serving international money transfers and making a lot of people become millionaires. In this article, I’ll explain briefly what Bitcoin is, what bitcoin mining is and if it pays to mine it in 2017.

usebitcoin-4096x2253What is Bitcoin?

Bitcoin is a digital currency and at the same time an electronic payment system. This system is decentralized, independent of any single person or organization. The computational power required for its operation is provided by hundreds of thousands of computers around the world, belonging to people who voluntarily sacrifice their resources to handle and authorize transactions through a distributed database called Blockchain (block chain). Identical copies of this database are replicated on each of the computers belonging to the system, mutually verifying, so that no one can arbitrarily make any changes.

Thus, while the security of money sent in the form of electronic records in banking systems is protected by encryption, in the case of the Bitcoin system, encryption is the foundation on which the entire system is built.

By the way – is it correct to write Bitcoin from a large or a lowercase? There seems to be some confusion with that. Well, when we write about the Bitcoin payment system, it’s capitalized. When we write about currency or bitcoins, then we will use the small letter.

What is bitcoin mining?

Bitcoin is structured in such a way that people who are devoting their computer resources to its service are rewarded by the system with virtual units of money – these are bitcoins (in short BTC). By analogy to gold mining, bitcoin generation is commonly referred to as bitcoin mining, and thus people dealing with it are “miners”.

Bitcoin digging

And where are the bitcoins?

Due to the design of the system, the maximum amount of bitcoins possible to generate is determined in advance – there will never be more than 21 million. This is a completely different approach than in the case of traditional money, which central banks can create any quantity, at any time, at their own discretion.

Kopanie bitcoinów

Is digging bitcoins profitable?

In the early days of Bitcoin, it was very easy to generate it – a simple home computer was enough and in a short time it was possible to dig several bitcoins. Today, when bitcoins are sold for about $ 17 000, the fact that we could dig it fast in the past is really impressive, however at that time they were sold for a few cents.

The continuous increase in difficulty in bitcoin system caused the ordinary processors to become unprofitable (due to the cost of electricity). When we started using the graphics processors, they were able to deal with this type of calculation much more efficiently. At about the same time, single miners began to have fewer and fewer chances of generating bitcoins themselves and began to merge into groups, so-called. bitcoin mines. Their goal was to share the computing power and be proportional to the contribution of sharing profits.

Then, specialized ASICs (i.e. Application Specific Integrated Circuit) appeared on the market, designed to generate bitcoins. Selling dedicated machines, so-called Bitcoin excavator. They offered the mining speed up to 100 times greater than graphics-based solutions.

układ ASIC BM1382
ASIC chips for bitcoin mining – Antminer BM1382

This was the beginning of the end of “home mining”, due to the rapidly growing difficulty to achieve profit, it was necessary to act professionally, on a large scale and have access to very cheap electricity. People were ordering bitcoin excavators for thousands of dollars, they waited for orders for months, and when they finally received the equipment, it turned out that it was already unprofitable in operation.

The “mining in the cloud” offers appeared too. Dedicated computing centers provide people who have interested the computing power in exchange for a predetermined fee. One of the more popular services of this type was provided by CEX.IO. Still, it was not easy to make a profit – the growing difficulty and variable price of bitcoin made it unstable. To cover the expenses related to mining, the mines had to sell fast all mined bitcoins which came as totally ineffective.

Wykres trudności kopania bitcoin
Difficulty mining bitcoins

 

As a result, it turned out that the biggest profits were recorded by people who just bought Bitcoins and kept them waiting for their increase in value.

How does bitcoin mining now look like in 2017?

Today, bitcoin mining is mainly done by professional companies operating on a large scale and maintaining computing centers located in countries where the cost of electricity is low. Capital is also necessary to be able to cover the current costs and at the same time not be forced to sell at any price.

The limited amount of bitcoins results in constant pressure to increase their prices. Yes, there are even very large fluctuations, the price jumps – both up (for example the opportunity to launch the first professional fund investing only in bitcoins on the financial market) and down (when there are disputes among Bitcoin developers, unfavorable legal regulations introduced e.g. by the Chinese government). However, in the long term, the price of bitcoins is growing. And it is beating records every day recently.

제목 없음.png

The cost of mining Bitcoin is quickly outpacing the dollar value of Bitcoin itself. The most up-to-date Bitcoin mining devices cost upwards of around $4,000, and yet by the time it produces enough Bitcoin to even break even, such a machine will already be obsolete and in need of replacement.

Silver Doctors recently took a closer look at the mathematical inconsistency, showing how a “Bitmain Antminer D3 (15GH/s X11 Dash Miner 1200W)” machine that mines Bitcoin will cost $3,900 when it is eventually released in November 2017. This machine requires a special “Antminer Power Supply (APW3++ 1200W@110v 1600W@220v w/ 10 Connectors)” power supply to operate it, which costs an additional $268.30 on Amazon.com as of this writing.

Combined, the cost of the two pieces of hardware is a hefty $4,168.30, which is roughly the price of a single Bitcoin (as of this writing). According to Silver Doctors, this setup will probably have a life cycle of around two years maximum before it needs to be replaced with a faster machine that likely costs even more. But it takes time to mine Bitcoin, and the expected return doesn’t seem to outweigh the costs of buying the mining technology – not to mention the exorbitant electrical costs associated with running it 24 hours a day, seven days a week.

Citing a cost calculator offered by Crypto CompareSilver Doctors illustrates how those who mine Bitcoin using even the latest and fastest technology will still incur a net loss when all is said a done – a phenomenon that some are referring to as “peak Bitcoin.”

“CryptoCompare shows that a rig set-up for this would be a net loser daily, monthly, yearly, or however long the miner chooses [sic] to lose money by turning it on,” the site explains. “Since people are looking to ‘get rich’ off of Bitcoin, it’s not like they’re contributing to some sense of community either because the community is motivated by profit.”

China mines the most Bitcoin because electricity is cheaper there than in the West

When Mike Adams, the Health Ranger, interviewed cryptocurrency expert Kevin Lawton to unpack his views about the Bitcoin phenomenon, Lawton explained that China is currently the world leader in Bitcoin mining. The reason for this, he explained, is that electricity costs in China are far cheaper than they are here in the West, which makes it more economically viable for mining operations to thrive.

But for those in the United States trying to do the same thing, it’s not necessarily worth the investment. In fact, it’s pretty much a bad idea all the way around to even attempt to get involved with Bitcoin mining this late in the game, especially as the costs of both electricity and the equipment to mine Bitcoin continue to go up and up. The algorithms that have to be “unlocked” in order to mine more Bitcoin are also becoming increasingly more complex as time goes on, which will further exacerbate the problem and create what some see as an energy crisis in the future.

“The mining metaphor is apt because bitcoins are created through specialized computers looking for the correct codes (hash keys), just like digging for gold,” reads an analysis about Bitcoin published by Green Tech Media.

“That electronic digging takes more and more power as more and more people dig for that virtual gold. Sebastian-Deetman calculated in 2016 that mining would require as much electricity by 2020 as the entire nation of Denmark currently consumes … Bitcoin’s algorithm requires that it get more and more difficult over time to mine, as long as mining itself becomes increasingly popular. With an approximately 132-year discovery cycle to mine all 21 million bitcoins, mining power demand will go up exponentially.”

If you really want to be a miner, here are 10 Best and Biggest Bitcoin Mining Pools 2017 (Comparison)

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What is a Mining Pool?

Mining pools are groups of cooperating miners who agree to share block rewards in proportion to their contributed mining hash power.
While mining pools are desirable to the average miner as they smooth out rewards and make them more predictable, they, unfortunately, concentrate power to the mining pool’s owner.
Miners can, however, choose to redirect their hashing power to a different mining pool at any time.

  1. Antpool
    Antpool is a mining pool based in China and owned by BitMain. Antpool mines about 25% of all blocks.
  2. BTC.top
    BTC.top is a private pool and cannot be joined.
  3. BTC.com
    BTC.com is a public mining pool that can be joined. However, we strongly recommend joining Slush Pool instead.
  4. Bixin
    Bixin is another mining pool that is based in China. It is a public pool, but unless you speak Chinese we do not recommend joining this pool.
  5. BTCC
    BTCC is a pool and also China’s third largest Bitcoin exchange. Its mining pool currently mines about 7% of all blocks.
  6. F2pool
    DiscusFish, also known as F2Pool, is based in China. F2Pool has mined about 5-6% of all blocks over the past six months.
  7. ViaBTC
    ViaBTC is a somewhat new mining pool that has been around for about one year. It’s targeted towards Chinese miners.
  8. BW Pool
    BW, established in 2014, is another mining company based in China. It currently mines about 5% of all blocks.
  9. Bitclub.Network
    Bitclub Network is a large mining pool but appears to be somewhat shady. We recommend staying away from this pool.
  10. Slush
    Slush was the first mining pool and currently mines about 3% of all blocks.
    Slush is probably one of the best and most popular mining pools despite not being one of the largest.

Get a Bitcoin Wallet and Mining Software

Before you join a mining pool you will also need Bitcoin mining software and a Bitcoin wallet.

Mining Pools vs Cloud Mining

Many people read about mining pools and think it is just a group that pays out free bitcoins. This is not true! Mining pools are for people who have mining hardware to split profits.

Many people get mining pools confused with cloud mining. Cloud mining is where you pay a service provider to miner for you and you get the rewards.

Why are Miners Important?

Bitcoin miners are crucial to Bitcoin and its security. Without miners, Bitcoin would be vulnerable and easy to attack.

 

Unfortunately, this does not mean that bitcoin mining is still profitable – increasing mining difficulty makes it necessary to engage more and more computing power, which leads to high cost of equipment and electricity. The price fluctuations cause that there are periods when the sale of bitcoins does not generate enough revenue to cover the cost their extraction.

That’s why I’ve completely abandoned the idea of mining. Instead, it is better to simply buy bitcoins (I recommend the CEX.IO exchange) and earn more when they reach a higher value.


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