Bitcoin mining explained step-by-step: GUIDE FOR 2018

$400,000 – that is the price a research expert once predicted bitcoin would get to once it hits maturity.  Sounds so unrealistic but at least the value of bitcoin had at one time reached $20,000.  With the supply capped at 21 million, we can only hope the value of bitcoin will grow substantially, and at some point surpass the 20K mark.

If you are hoping to get hold of some bitcoins, mining is one way to go about it. However, bitcoin mining is no longer that simple, mainly because of the increasing bitcoin difficulty and high energy costs. With more miners joining the bitcoin scene, this difficulty is going all the way up. Still, with the right approach, bitcoin mining is doable; it can earn you a handsome profit -- again, if you follow the right approach.

Without proper planning, you may end up dedicating massive resources without getting any bitcoins; that can be traumatic, considering you will have invested heavily in mining.

For the sake of those who are yet to understand how bitcoin works, I’ll start off by explaining bitcoin mining.

What is bitcoin mining?

Simply stated, bitcoin mining is the process through which a block, which contains a bundle of transactions) is verified and recorded to the public ledger, the blockchain.  For every block that ends up on this long chain, it must be valid. That means, it must have valid transactions, and the properties of that specific block must meet a set condition. Every block that goes through this process is considered to have been mined, and results in the creation of new coins - for the case of bitcoin; you get BTC.

Now, creating a valid block involves finding a solution to a hash puzzle. To do this, those who do the mining have to find a block whose hash value satisfies a specified mathematical problem.  Bitcoin uses cryptographic hash functions to protect the integrity of the data, making it possible to verify transactions. This process requires miners to expend a lot of computational power to solve the hash puzzle.

Furthermore, miners have to compete against one another to find a hash that meets the set properties. The node that finds the solution gets rewarded with bitcoins along with the transactions associated with the newly discovered block. Currently, the block reward is 12.5 BTC.

Is Bitcoin mining profitable in 2018?

Well, the answer to that question is: it can be profitable or unprofitable.  It all depends on the choices you make and the amount of money you are willing to invest in mining.

When bitcoin was still in its young stages, you could mine with CPUs, GPUs, and FPGAs. We are now in the ASIC era. ASIC stands for Advanced-Specific-Integrated-Chips; these are specialized hardware that is dedicated for mining purposes only.  At this stage, you can hardly make any profits in mining without using ASIC chips.

Before you jump into bitcoin mining, think about all the costs you will incur.  Foremost, there is the issue of power and the bitcoin mining difficulty.

Power costs

As more miners join the race, the hashing power needed to solve the hash puzzle increases as well. Any person hoping to mine would have to use ASICs; this requires vast amounts of computing power.  If you are going to mine bitcoins, you have to think about the cost of electricity per KWh in your area.

Just to put this into perspective, according to a bitcoin energy consumption index by Digiconomist, a single bitcoin transaction is consuming 1,020 kWh, enough energy to power about 34 U.S households in one day -- as of June 2018.  

This figure is close to what Chile consumes in power.  Furthermore, the amount of power that bitcoin consumes can power approximately 6,490,712 U.S. households.

Bitcon Energy Consumption Index is growing every month

As you can see from the chart above, the network’s hashrate has already reached 70 TW/h. Source: https://digiconomist.net/bitcoin-energy-consumption

The issue of high-energy usage and the rising difficulty level is what led to the emergence of ASICs in the mining industry. Consequently, this brought about a centralization problem in a world where everything is supposed to be decentralized.  People who have cheap energy alternatives and easier access to ASICs machines have an upper hand in this race. This creates a situation where a few people control the network’s hashrate. Thus, they control the network’s operations, and they get to mine most of the block. Ultimately, we have to depend on the few that have these facilities to act in good faith when it comes to securing the network, and ensuring the Bitcoin protocol rules are followed.

A photo showing a mining facility.

A photo showing a mining facility.

Bitcoin mining difficulty

The mining difficulty is a parameter that measures the difficulty of finding a hash value that meets a set target. When a miner finds a hash value that satisfies the predetermined target (also known as difficulty), he/she is said to have solved the puzzle.  

The difficulty level adjusts itself automatically, such that no matter how big or small the network grows, the block creation time will always average 600s, equivalent to 10 minutes.   After every 2016 blocks are mined, the difficulty level adjusts itself -- this happens roughly after every two weeks. Plus, when more miners join the network, the hash rate goes up, speeding up mining activities. When this happens, the network heightens the difficulty level to maintain the block creation time to be around 10 minutes.  It gets harder to mine bitcoins as the difficulty level rises. Consequently, mining is slow when the total hash rate goes down; when the hashrate dips the difficulty level drops as well.

Over the last couple of years, the bitcoin network hash rate has significantly grown.  As of 5th June 2018, the hash-rate had surged to a high of 42,980,660 TH/S; as a result, the difficulty level shot up by 14.71% -- so far these are the highest figures to be observed this year.  My wild guess is that both the hash-rate and difficulty level are not going down anytime soon.  

Bitcoin Hash Rate vs. Difficulty. Source: bitcoinwisdom.com

Bitcoin Hash Rate vs. Difficulty. Source: bitcoinwisdom.com

If you are still wondering, this means it can be unprofitable to go into solo mining.  The truth is, even if you manage to set up a personal rig, your chances of successfully solving a block are slim.  It may take you a long time to mine a block, and by then you will have put massive resources into it, such that you would make losses.

Because of such challenges, your best shot at bitcoin mining would be to join mining pools.  It is these same reasons that led to the development of mining pools.

How the number would look like with a single S9 antminer while paying electricity at 0.1 KW/h.

How the number would look like with a single S9 antminer while paying electricity at 0.1 KW/h.

Mining Costs

It is obvious you want to mine bitcoins to grow your wealth.  However, you have to weigh the options first to see whether it is a worthy investment.  After all, you want to know how much ROI you can make given a specific time-frame in this pursuit.

Just like any investment, bitcoin mining requires that you have cash, a lot of it.  Two significant factors that affect cost, and eventually your profitability are hardware costs and energy costs.

You need to invest in the ASIC hardware (if you can afford more than one the better).  The average cost for this specialized hardware ranges between $800 and $5,000. You will also have to buy a power supply unit (PSU) for your equipment; add another  $200 and $300. The other thing you have to think about is the power costs; the numbers can be quite high depending on where you live.

Because these machines are exceedingly noisy, up to 90 decibels, you will want to set up a soundproof system.  There is no way you can enjoy quality time with ASIC miners working in the same room. This means you have to set up your mining rig in a secluded environment. Additional costs include setting up a cooling system for the miners to deal with overheating; temperatures can go beyond 50°.

This is why it can be difficult to make any profits when mining solo. Even if you created your mining rig with about five ASIC miners, each having a hashing power of 14 TH/s, and the price for each being only $800, you would end up in losses in one year’s time; see the screenshot below.

Using a simple bitcoin calculator like this one, you can see a rough estimate of how your figures would look like.

Using a simple bitcoin calculator like this one, you can see a rough estimate of how your figures would look like.

Bitcoin Mining Pools

With ASIC mining becoming popular in the bitcoin world, perhaps your best luck with mining pools.  If mining pools were not around, it would take many months, probably years, before some people can generate a valid block.

Pools started to exist when the computational power needed to mine blocks went up, such that the average Joe was unable to mine without combining hash power with other people. Typically, a mining pool combines all members’ hash power, and it performs the necessary calculations while recording each participant’s work; when the pool mines a valid block, each participant will receive a portion of the reward based on the amount of proof of work submitted. It is just like playing the lottery; if you do it alone, the odds of winning are few unlike when playing as a group; as a group, your odds of winning increases but the payouts are much less – it is the same thing with mining pools.

A chart showing the hashrate distribution for various pools in the bitcoin network.

A chart showing the hashrate distribution for various pools in the bitcoin network.

Because the hash puzzle requires substantial computational power to solve, miners pool resources by combining hash power from various ASIC miners; each machine participates by solving a portion of the SHA-256 hash puzzle; for every proof of work submitted by an ASIC miner, the owner will receive a portion of the block reward.  

When miners contribute hash power to the pool, they earn “shares” in the pool. A pool’s reward method will determine the remuneration that goes to participating miners.

While it is possible to join a mining pool with non-specialized hardware like GPUs and CPUs, it is obvious you would contribute less hash power; consequently, your earnings would be small.  If you do not like the idea of mining with ASIC chips because of the cost, maybe you could consider mining altcoins – this can be done with GPUs.

Take a look inside the largest mining farm in Russia.

What to consider, and how much can you make?

The profits you can make with pools will largely depend on how much hash power you can contribute to solving part of the hash-puzzle. You will be paid based on the number of calculations your machines have performed for every valid block generated – more hash power means more calculations, and thus, high income when a block is mined.

Another factor that can affect your profitability is the reward method the pool uses. Pools have different reward methods; this means the rewards you get vary depending on the pool you decide to join.

You can use the following website to compare profitability for different mining pools: https://poolprofit.io/en/.

You can use the following website to compare profitability for different mining pools: https://poolprofit.io/en/.

Here are some common reward methods that mining pool use:

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    Pay-Per-Share: In this model, miners get a fixed reward for every share they submitted even if the pool does not mine a block at the estimated time.  Here, the pool’s owner bears all the risks while minimizing those of miners. For this reason, most pools that use this model charge higher fees.  
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    Pay Per Last N Shares: In PPLNS, miners get rewarded based on the last N shares submitted for valid proof of work; shares are equivalent to the hash-power miners contribute. With this reward system, you get paid when the pool mines a block; hence, the payouts can be small at times, and other times you would get multiple payments.
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    Proportional:  This method is the most basic. Miners get rewards proportional to the amount of hash power they contributed to the pool. Pool hoppers will find this model friendly.  Compared to other reward methods, pools that use proportionate model tend to have a higher variance.
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    Score based: For every share a miner earns, the pool assigns awards them a score based on the time submitted. The score a miner receives determines their payout. If you halt mining, your score will  drop; that can affect your profitability.

This article explains more reward models.  

When searching for the right mining pool, hashing power and the reward method used are not the only factors to consider. You also have to think about:

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    History and Transparency of the pool.
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    The fees charged by the pool.  Fees affect your profitability. Some pools have zero-fees while others charge a fee for pool maintenance.
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    Withdrawal method being used. Some pools have withdrawal limits; others have automatic withdrawals.
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    Wheth​​​​er the pool is stable.
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    Pool’s location, and if they have servers based in other places.
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    The Pool’s speed.  A pool with more TH/s will find blocks faster compared to smaller pools; it can take days or weeks for them.
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    Will you be a steady or intermittent miner? A sporadic miner can be on and off perhaps due to power or internet outages. Some pools, such as those that use a score-based model, require miners to mine consistently; otherwise, a miner's score deteriorates, affecting their profitability.


Getting started with mining pools  

When you start mining with pools, at least you can earn small profits. Before you sign up with any mining pool, first choose a suitable location for your miners. You will want to pick a location with adequate and cheap electricity; think of how you will ventilate it, and supply cold air to combat the high temperatures; it must be secure; and, it should be a location where high noise will not irritate people. Once you pick a suitable location, you are ready to buy your ASIC miners.

It is much profitable to invest in several ASIC miners.  Also, it makes sense to get an ASIC hardware that spits out hash-rate in big numbers while consuming less power.  The more hash power you submit to the mining pools, the more shares you earn; this means more bitcoins for you since the pool will get to solve a block at some point.  

When searching for ASIC chips, be vigilant of scams – dishonest traders will go a long way to get your hard-earned money.  With the bitcoin difficulty soaring higher and higher, some people who had earlier bought ASIC chips are dropping out of the race; often, they will resell the hardware cheaper.  You could try to connect with them.

Whether you will go for brand new chips or second hand is up to you. To be safe, get your hardware from the authorized seller, either from their official website or Amazon.

Here are recommendations to different hardware:

Bitmain Antminer S9i  

Link to website: https://shop.bitmain.com/

Bitmain has been around for some time, and for the longest, it has been the leading distributor of ASIC chips. Its latest ASIC chip is the S9i, which was released in May 2018.

Features:  

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    Hashing power: 14 TH/s.
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    Power consumption: 1320w.
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    Energy efficiency: 0.094 J/GH.
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    Noise level: 75db.
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    Cost: Currently at $750 at Bitmain.

Dragonmint T1 miner

Dragonmint T1 miner

Features:  

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    Hashing power: 16 TH/s.
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    Power consumption: 1480 W.
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    Energy efficiency: 0.093 J/GH.
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    Noise level: 76 db.
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    Cost: $2729.

B8 from Bitfury

BitFury B8

Bitfury released this ASIC miner in December 2017.  The ASIC miner has the following features:

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    Hashing power: 49 TH/s.
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    Power consumption: 6.400 W.
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    Energy efficiency: 0.131 J/GH.
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    Noise level: 85 db.
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    Cost: ***

​​​​GMO B2 miner

GMO B2 miner from Bitmart will be released to the market in the last quarter of 2018. If you pre-order before the release date you can get it at less than half the price.  Being a new vendor, do your research before you order.

GMO B2

It has the following properties:

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    Hashing power: 24 TH/s.
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    Power consumption: 1950 W.
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    Energy efficiency: 0.009 J/GH.
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    Noise level: 70 db.
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    Cost: $3,662.36.
Here is a screenshot showing a comparison of various mining hardware along with an estimated profit per day. Image source: https://www.asicminervalue.com/

Here is a screenshot showing a comparison of various mining hardware along with an estimated profit per day. Image source: https://www.asicminervalue.com/​​https://www.asicminervalue.com/

Setting up your ASIC hardware, and signing up

As soon as you finish installing the equipment, you can start mining immediately with a pool of your choice.  ASIC chips do not need to be used with software; in this case, you will not need bitcoin mining software like Cgminer and bfgminer.

Setting up your ASIC miner should not be as complicated.  Most ASIC manufacturers do provide a detailed setup guide for users. With a comprehensive guide and a few videos at your disposal, installation of the mining equipment is straightforward.

Watch this video below; it explains how to set up the Antminer S9, and start mining with bitcoin mining pools.

Ideally, your ROI will depend on the mining pool you join. When you sign up with a mining pool, you need the following details to start mining with your ASIC miners:

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    Stratum mining URL of the pool.
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    Your worker ID.
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    Your password (some pools do not require one)

Here are some famous and lucrative mining pools:

Pool's name

Features

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    Has been around since 2014.
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    About 0.4% of the network’s hash-rate.
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    Transparent.
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    Worldwide servers.
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    PPLNS reward system.
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    Variable difficulty.
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    Stratum mining protocol.
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    No registration.
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    Oldest bitcoin mining pool.
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    Based in Czech Republic.
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    Score based reward method.
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    Contributes about 9.7% hash-rate.
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    Fees are 2%; miners share the fee.
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    Automatic withdrawal.
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    Based in the U.S.
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    Has been around since 2011.
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    Small pool (1% of the network’s hash rate)
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    No commissions.
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    Miners are paid transactions fees.
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    PPS payment method.
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    Minimum Withdrawal limit > 0.04
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    One of the largest bitcoin mining pools.
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    Has been around since 2015.
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    Transparent.
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    Average fee: 1.5%.
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    PPS reward model.
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    Vardiff & stratum mining protocol.

Keep in mind, have your bitcoin wallet ready by the time your ASIC device (s) gets to work, have your  bitcoin wallet ready. If you do not have a wallet yet, you can read our guide on how to set up different bitcoin wallets, including desktop wallets, paper wallets, and hardware wallets.  If you are new to crypto, it is important you see the exact steps on how to set up a wallet, and manage it. Often, many people lose their bitcoins because of mismanaging their private keys; the secret key that controls digital wallets.

What about cloud mining?

Cloud mining is not worth the hassle anymore.  First, it is not as profitable, especially with the increasing bitcoin mining difficulty.  Second, many of the cloud mining companies out there are just Ponzi schemes masquerading as cloud miners; a ponzi scheme is not what you want to get yourself into if at all you want to mine bitcoin. Nonetheless, there are some legit cloud mining companies. It is just that, the approach is less profitable.

Cloud mining companies thrive from the money you invest in them.  It is more profitable to buy bitcoins equivalent of the cash you want to put in crypto. Think of it this way: you buy hash power from the cloud miners, in turn, they mine for you.  They get to make money by selling hash power while at the same time you get to earn a portion a few coins. With cloud mining, the returns are small and spread over an extended period.  

The people who run the cloud mining networks benefit the most. Perhaps, this option would be viable if you are the busy investor – you want to avoid doing all the installation, maintenance, and paying the bills.  If you do choose to follow this path, I have heard positive feed about Nicehash, Miner rig rentals, and Genesis Mining.


Bitcoin Mining in 2018 Frequently Asked Questions       

What is mining?

Mining is the process of verifying transactions and generating valid blocks; this blocks are linked to form the blockchain. Technically, it involves finding a solution to a hash puzzle, a process that mints new bitcoins and expends a lot of energy at the same time.

What is a hash?

A hash or hash value is the output you get when you run arbitrary data through a hashing algorithm to get a fixed size output. This fixed size output is a string of alphanumeric characters, and you can think of it as a “digital fingerprint” that prevents that safeguards the integrity of that data.

What is Hash power or hash-rate? 

When mining a block, miners have to solve a computational puzzle, which involves finding a hash value. The hash-rate is the speed at which the bitcoin network solves the mathematical puzzle.  

What is a block reward?

Every time a miner finds a valid block, the bitcoin protocol rewards the miner who solved the puzzle with new bitcoins as a reward for creating a block.  

What is bitcoin difficulty?

The bitcoin difficulty is a parameter that ensures the bitcoin protocol mines blocks at 10 minutes on average regardless of the total hash power of the network; the more miners in the network, the higher the hash-rate, and consequently the difficulty level.

What is an ASIC hardware?

This is specialized mining equipment that provides more calculations per second, that is, more hash-rate, compared to the predecessor mining hardware - CPUs, GPUs, and FPGAs.

What is a mining pool?

A mining pool refers to a group of miners who combine the hash-power of their ASIC hardware to simplify mining.

What is a bitcoin mining rig?

A mining rig is a set up of computer systems dedicated to mining bitcoin.  


Final Thoughts

Bitcoin mining is still profitable.  However, to earn profits, you have to play smart. Before you even rush to buy the necessary equipment, do some maths to see whether you will be able to break-even if you go into mining. You have to consider all the costs that will be involved, then determine if the amount of BTC earned in a set period will be enough to cover your expenses.

Also, weigh the options between mining and buying. You may find that it is profitable to buy and hold, rather than mine. You see, I have come to realize that bitcoin mining is not for everyone. You can try alternative ways to get the BTC; like mining altcoins with a GPU setup, and then converting to BTC. See our guide on how and where to buy bitcoin.