A simple step-by-step guide to mining bitcoin (BTC)

bitcoin mining

Bitcoin mining is an interesting way of trying to make a few bitcoin tokens on the side, but it also serves a very important purpose in maintaining and keeping the bitcoin blockchain secure.

Unlike regular fiat currencies (such as US dollars or euros) bitcoin assets are not controlled by a central government or bank, and new bitcoin (BTC) cannot be printed and issued like paper money. Instead, bitcoin tokens are introduced into the market via a process known as “mining”. BTC are awarded to the miners who have solved the math problems necessary to verify bitcoin transactions.

In this guide we’ll look at how mining works, why it’s a necessary component of bitcoin infrastructure, and whether it’s a good way of making a buck.

Bitcoin miners are responsible for validating transactions and ensuring the security of the bitcoin network, and miners are rewarded with BTC for their efforts. However, if you want to make a profit mining bitcoin, you’ll need to obtain some specialized hardware.

Let’s take a closer look at how you can mine bitcoin and where to start.

Must read before starting - Mining profitability

In many cases, the economics of cryptocurrency mining mean it will inevitably be more cost-effective to just buy Bitcoin instead of trying to mine for it.

This is because Bitcoin mining is extremely competitive, so the value of any personal mining equipment or a cloud mining contract is constantly depreciating. Even if Bitcoin prices fall, Bitcoin mining difficulty tends not to fall quite as much.

Generally, the only way cloud mining will be profitable is if Bitcoin prices keep rising for the entire duration of the contract. Similarly, unless you’re professionally mining Bitcoin on an industrial scale with wholesale electricity prices, you risk being unable to recoup the initial equipment costs unless Bitcoin prices rise sharply.

If Bitcoin prices rise, it will typically be more profitable to simply buy Bitcoin instead of investing in quickly-depreciating equipment or locking yourself into an increasingly unprofitable cloud mining contract.

If Bitcoin prices fall, your Bitcoin will still be worth something, but the cloud mining contract and mining equipment will keep rapidly losing value, while potentially earning very little Bitcoin.

>> Learn how to trade Bitcoin

What is Bitcoin Mining?

Whenever a transaction is made in bitcoin, a record of it is made on a block containing other recent transactions, like a page in a ledger. Once the block is full, bitcoin miners compete against each other to verify and validate the block and all its transactions by solving a complex cryptographic problem.

The first miner to accomplish this is awarded a set amount of bitcoin, based on the mining difficulty at the time. The verified block is then added to the blockchain, a history of all blocks verified since the beginning of bitcoin, and transmitted to all users of bitcoin so that they can have the latest blockchain.

Available setups

Though it was once possible to mine bitcoin with your personal computer’s CPU or a high-speed graphics card, that’s no longer the case. With the advent of increasingly sophisticated mining hardware, specifically, ASIC (application-specific integrated circuit) chips designed for the sole purpose of mining bitcoin, digging for digital gold via your desktop PC is a thing of the past.

These days, there are two main options for mining bitcoin:

  • Cloud mining
  • Personal mining

Cloud mining

To make a profit mining bitcoin, you’ll need access to the best hardware built specifically for that purpose. However, this hardware doesn’t come cheap, so some users opt to use a bitcoin cloud mining service. These services, such as Genesis Mining and Hashflare, allow you to rent sophisticated mining hardware and have someone else do the hard work for you.

The biggest advantage of cloud mining is that the initial outlay is much smaller than it is with personal mining. On the downside, the fact that you don’t physically control the hardware means there’s an increased level of risk, and there have been numerous examples of cloud mining scams over the years.

With this in mind, it’s essential to do your research and choose a reputable provider.

Personal mining

The specialized ASIC hardware needed to mine bitcoin is expensive to buy and run. This means you’ll need to be willing to make a significant investment, and also have access to cheap electricity and a fast network connection if you want to mine bitcoin at home.

The first thing you’ll need to do is to purchase an ASIC miner. Prices vary, depending on the device you choose and whether you buy new or used, but prices can range from $500 to upwards of $3,000. You’ll also need to pair it with the right bitcoin mining software.

Rather than forging ahead on your own, which would make you highly unlikely to turn a profit, it’s recommended that you join a bitcoin mining pool. These mining collectives allow you to combine your resources with other miners and receive regular rewards based on how much mining power you contribute.

You’ll need to pay a fee from your earnings to be part of the mining pool, and it’s also essential that you choose an established, reputable pool.

How to start mining bitcoin

These are your two main options for mining bitcoin:

Method 1: How to mine bitcoin with a cloud mining service

  • Choose a mining company. If you want to lease mining power and time, you’ll first need to compare cloud mining services. Compare the contracts they offer, the fees they charge and their overall reputation before making your decision.
  • Select a mining package. Next, review the contracts on offer from your chosen mining company. How long is the contract? How much does it cost? What mining hardware will be used? Are the terms of the lease set in stone or can you customize a contract to meet your needs?
  • Pick a mining pool. Once you’ve purchased a plan, most cloud mining services will require you to choose a mining pool. Compare a range of pools, and choose one with a proven track record.
  • Start mining. With these steps completed, cloud mining of bitcoin can begin. Your cloud mining account should start filling up with BTC in the coming weeks, so it’s a good idea to transfer your earnings into a secure bitcoin wallet of your own.

Method 2: How to mine bitcoin at home with your own hardware or software

  • Use a mining profitability calculator. Before going any further, use an online mining profitability calculator to work out the likelihood that you’ll be able to make bitcoin mining worth your while.
  • Choose your mining hardware. Next, compare the features and cost of ASIC mining devices before choosing the one you want to use. Keep in mind that you’ll most likely also need to buy a separate power supply unit to support the hardware.
  • Join a mining pool. To have a better chance of turning a profit, it’s recommended that you pool your resources with other miners in a mining pool. Compare a variety of pools before selecting the one that’s well established and reputable.
  • Download mining software. There are several programs available designed for bitcoin mining. Some are command-line programs while others offer a GUI for increased ease of use. It’s also worth pointing out that some mining pools will offer their own software.
  • Start mining. Set up a secure wallet for storing your BTC and link it to your mining rig. Make sure you stay abreast of bitcoin price developments and mining difficulty adjustments to ensure that your mining setup remains profitable.

If you want to dig for this digital gold, be aware that bitcoin mining is a complicated and costly process, and it’s no longer possible for hobby miners to compete with large mining pools and firms. However, with the right setup and approach, either by joining a pool or using a cloud mining service, it’s still possible to make a profit.

Bottom line

The rising costs of mining effectively and competing against large mining pools have made it harder for the hobbyist to profit on mining bitcoin.

It’s virtually impossible to mine enough bitcoin to recoup your initial cost of equipment and electricity. But if you’re not so concerned about making a buck, you could have fun panning for this cool currency.

Understanding Bitcoin Mining is important, but if you need help MetaTrader 5 provides access to the most popular form of dealing with Bitcoin, CFD trading, available 24/7.

>> Let's Get You Started

Categories:  Education