Bitcoin can be easily transferred from one user to another user without any intermediaries on the peer to peer Bitcoin network. So what are the some of the investments on Bitcoin? How to mine bitcoin? Is it profitable or not? How has it developed over the years? Let us find out the answers to all these questions in the article below.
1. What is bitcoin mining?
The process of verifying transactions in the digital currency system is known as Bitcoin Mining. In Bitcoin mining, blocks which are the records of the Bitcoin transactions get added to blockchains, which contains records of past transactions.
Recorded transactions which are digitally and start with their creation get called as Bitcoin. So what is the purpose of a block? The primary purpose of the block is that it receives the hash proof of work as a description. This hash proof of work is encrypted and is created in an extremely intensive computer process.
To solve transaction-related algorithms, miners make use of software that can quickly help in accessing their processing capacity. In return for using these softwares, the miners get rewarded with a certain number of Bitcoins per block accessed.
But what is the use of a blockchain? The presence of the blockchain helps in preventing any attempt to spend the Bitcoin more than once. This step, if not materialized, may lead to the counterfeit of the digital currency by copy and paste.
Initially, Bitcoin mining was performed on the central processing units of individual computers which had more numbers of cores and higher speed. This attribute helped to accumulate higher profits.
Sooner or later after this, systems started to get dominated by more evolved systems such as multi-graphics card systems which further got developed into field-programmable gate arrays. This evolution finally reached the application-specific integrated circuits with an attempt to find more number of hashes with less amount of electrical usage.
It has become tough for new miners to enter into this digital platform due to this constant escalation and evolutions in the systems. To be precise, this adjustable difficulty was an intentional mechanism to assist in preventing inflation.
This fact is the prime reason why individuals would prefer to work around in mining pools often so that they can get around this problem. This step shows how Bitcoin got started with individuals and small organizations beginning to mine on it. Any startup at that time could use a high-end gaming system.
Bu now, the scenario is different. Now, larger mining organizations spend tens of thousands just for purchasing a high-performance, specialized computer only for the sake of higher efficiency in mining. In a world full of malware and viruses, the most prevalent threats in the mining sector are the mining botnet infections.
These mining botnet infections employ the user systems in mining for Bitcoin without any knowledge of the owner, and the funds get channeled to the botnet master.
2. What are the incentives for miners and their trends?
As already stated before, blocks are the units through which Bitcoins get mined. The prize for completing a block is 12.5 Bitcoin if recent reports are taken into consideration. The price of Bitcoin is around 10,502 US dollars as of 14th August 2019. This fact means that for 12.5 Bitcoins, you will be getting an amount of 1,31,275 US dollars(12.5 x 10,502).
In 2009, when Bitcoin first got mined, mining one block was getting rewarded with 50 Bitcoins. By the year 2012, it was halved to 25 Bitcoins, and currently, it is again halved to 12.5 Bitcoins. If it goes like this, then in around 2020, the reward may get halved again to 6.25 Bitcoins for mining one block.
Bitcoin Clock provides accurate updates in real-time regarding the occurrence of these halvings of Bitcoin. Co-incidentally the marginal cost of mining a Bitcoin corresponds closely with the market price of Bitcoin.
You can look into several sites like blockchain.info if you are enthusiastic about knowing how many blocks have been mined so far. These sites provide you with real-time information.
3. What do bitcoin miners do?
Miners often get paid for their work as auditors. Their original work lies in verifying the previous transactions which have happened in Bitcoin. This method is utilized to keep the level of honesty high in Bitcoin users. This step was conceived by the founder of Bitcoin, Satoshi Nakamoto.
Miners help in preventing the double-spending problem by verifying the Bitcoin transactions. When a Bitcoin user illicitly spends the same money twice, then it is called double-spending, which was what its name suggests. This risk isn’t a big issue if it is done with physical currency. But with the digital currency, it is more of a threat as the holder could make a copy of the digital token and sell it to a merchant while retaining the original token.
This fact invites lots of risks as there will be a presence of two bills of the same serial number and you may get caught by the police. This attribute is the main reason why Bitcoin transactions have to be verified, and that is the reason why a Bitcoin miner is needed.
Once a 1 MegaByte worth of Bitcoin transactions are verified by the miner, he will be eligible for a reward of 12.5 Bitcoins. This limit of a 1-MegaByte transaction for receiving the award was set by Satoshi Nakamoto himself and has erupted a controversy in the digital currency sector.
The reason behind the controversy is that most of the miners feel that the block size should be allowed to increase so that it can accommodate more amount of data. Though the miner is eligible for the reward after verifying 1 MegaByte worth of Bitcoin transactions, it is seen that everyone eligible is not getting rewards correctly.
4. History of mining and its evolution?
Bitcoin mining hardware has undergone many crucial changes until now. In 2009, the year when Bitcoin got created, mining was comparatively more relaxed as the computer processers quickly solved the algorithms. However, as the years passed by mining started to become painful, which made the miners lookout for special equipment with more processing and computing power to solve math problems.
Development of graphic processing units from the gaming industry was the second step of hardware mining. Eventually, the miners started to develop or create specialized pieces of equipment for the process of Bitcoin mining. These types of equipment were called application-specific integrated circuits. The creation of this equipment took Bitcoin mining to an entirely whole new level as they consumed less energy but at the same time promised higher hashing speed.
The first stages of Bitcoin mining were carried out by individual Bitcoin miners who purchased specialized hardware for this purpose. In the beginning, Bitcoin mining was quite profitable, but the use of personal equipment provided lots of disadvantages. As the difficulties of mining increased, it came to the limelight that use of its hardware was costly and time-consuming.
It was also seen that it promised no longer financial gain. The difficulty also required more energy to cool down the software and created the necessity of utilizing special cooling conditions. Due to this factor, the use of personal hardware became unprofitable as it required many individual pieces of equipment only for one purpose, which was Bitcoin mining. Because of this reason, many individual miners started to combine Bitcoin mining with many other activities which can utilize the heat produced during the mining process.
We know that most of the mining process is performed by mining hardware. But little do we know that the usage of mining software guarantees the link between the blockchain and the equipment. The primary purpose of any mining software is passing the data efficiently from miner to blockchain and another way around.
This type of software allows the miner in following the general mining statistics such as the average speed of the miner, the hash rate, and many more. This type of software is also compatible with many of the major operating systems.
Some of the most commonly used software mining companies are CGMiner, BFGMiner, and EasyMiner.
Cloud mining is an innovative notion which was found by CEX.IO in the year 2012. Cloud mining implies that the miners can form groups which will help them in decreasing the mining costs, which will, in turn, maximize their profits.
This whole process takes place in a cloud, hence the name of cloud mining. According to their share right after obtaining the mining power, users would receive their financial reward.
Cloud mining helps in avoiding frequently observed problems during mining, such as excessive energy consumption, complicated installation, complex maintenance, and unstable connectivity of the internet.
So seeing all the options presented above, miners have to choose their method accurately to make a profit out of Bitcoin mining. They have to also consider some of the parameters like installation, profitability, timeliness, stability, maintenance, connectivity, and many more.
Developers will always find innovative solutions to gain higher profit as well as to decrease the mining difficulty. Just remember, the era of mining has just begun.
4. Explain Bitcoin Consensus protocol?
A consensus protocol is a fault-tolerant mechanism which gets used in computer and blockchain systems. This protocol is used to achieve the necessary agreement on a single data value or a separate state of the network. This protocol can also get used for distributed processes or multi-agent systems, such as with cryptocurrencies. The consensus protocol in Bitcoin helps to keep the records of the transactions and many other things.
Consensus Mechanism Explained
In any database, which holds vital information in a centralized system, a central administrator will get bestowed with the authority of maintaining and updating the database. The task of making any updates is performed by the central authority, who is the sole person-in-charge for maintaining the official records. The job of updating includes adding, updating, and deleting names of people who have qualified for specific licenses in any database.
Public blockchains are the blockchains which work on a global scale without any single authority. These open blockchains operate as self-regulating and decentralized systems. They involve contributions from hundreds and thousands of miners and developers. These people work on the verification and authentication of transactions which occur on the blockchain as well as on block mining activities.
These publicly shared ledgers need an efficient, real-time, functional, fair, secure, and reliable mechanism. As the status of the blockchain gets dynamically changed daily, these factors are required to ensure that the transactions which are happening on the network are genuine. It is also necessary to know that all participants in mining agree on a consensus, which is the status of the ledger.
The consensus protocol performs all these crucial tasks, which are nothing but a set of rules decided by the contributions of various participants of the blockchain.
One of the most commonly used consensus protocol is the Proof of Work (POW) protocol. This protocol gets mostly used by popular cryptocurrency networks like bitcoin and litecoin. This protocol requires the participant node to prove that the work done and submitted by them qualifies in receiving the right through which they can add new transactions to the blockchain. However, this whole mining mechanism of bitcoin needs longer processing time and consumes higher energy.
There are some more commonly used protocols such as the Proof of stake (POS) protocol and the Proof of Capacity (POC) protocol.
5. Explain various methods for profitable mining? Also, mention their risks and rewards.
Mining of this digital currency seems like a no-brainer nowadays. Firstly, you have to set up a computer which helps you in solving math puzzles. Upon solving those math puzzles, you are rewarded with a coin or sometimes with a fraction of coin. The first Bitcoin miners were able to extract coins very swiftly just because they housed computers with higher processing powers with them.
Over the years, mining cryptocurrency has become a little bit complicated and involved. If you consider Bitcoin, the reward gets halved every four years.
On top of that, serious miners are building a massive number of arrays to mine, making it difficult for smaller miners or beginners to compete. To be more effective in mining, you can join a bitcoin mining pool, but it comes with an expensive fee, which may reduce your profits significantly.
Some miners in this sector opt for other digital currencies. Some digital currencies are worth very little in U.S. dollars, but it is better to use what you can mine and later convert them into fractional Bitcoins. These fractional Bitcoins, when exchanged, can gain in the value of Bitcoins.
You need to build some specialized pieces of equipment and spend some money on specializing your gears to endorse efficient mining. On top of this, you also need to realize that specialized machines will be using lots of power while mining. If your power rates are frequently higher, then you can end up spending a lot of your money on coins, especially Bitcoin.
According to a report from Marketwatch, for mining a single Bitcoin, the electricity cost will be around 3,000 US dollars that too in the cheaper states.
For states which are having higher rates for electricity, the cost for mining one Bitcoin will be around 6,000 US dollars. The energy costs are not worthy of spending when you consider that the price of one Bitcoin is itself approximately 10,500 US dollars. The costs of the high-end pieces of equipment will also come under your investments. So you have to think about a strategy before mining Bitcoin practically.
So for saving money, you can opt for less powerful pieces of equipment for mining Bitcoin. But still, it will take several weeks or even months to get back your original investment and reap profits.
The Long View:
If the price of one Bitcoin will rise in the coming days beyond 13,000 to 14,000 US dollars range, then it will make some sense in investing in some expensive equipment for mining. It will also help in returning your investment on paying high rates on electric bills for mining one Bitcoin.
So, the bottom line would be that though it has excellent potential, there remains a factor of high risk in Bitcoin and other cryptocurrencies. A high reward investment with little consensus cannot be guaranteed so early in this sector, but it will surely reap profits in the coming years.
6. Why have mining difficulties increased, and was it intentional?
Mining Bitcoin is getting a lot harder nowadays because there are lots of devices in the network which enclose more hash power than the standard user. This reason is primarily why mining Bitcoins is getting harder even if you mine with an efficient CPU/GPU.
The time is kept constant by updating the characteristics of the block enclosed on the blockchain. In simple words, the hash of a block should begin with ten zeroes, and the miner in the network should be mighty to find the hash in just 5 minutes. The Bitcoin protocol requires more than 15 zeroes to move to the next block. This feature uses more time to find the right hash and slows the mining process.
Also, to mention, mining of Bitcoins has become more competitive than ever. Bitcoin mining difficulty gets measured based on how difficult it is to earn rewards by mining in this world’s largest cryptocurrency market. The amount has reached a record high of 7.93 trillion.
This number is a seven percent jump from the recent two-week cycle and the highest since October 2018. Bitcoin gets adjusted to its mining difficulty for every 2,016 blocks, which are approximately 14 days. This adjustment gets based on the amount of computing the power which gets deployed to the network.
This adjustment is primarily made to ensure that block production time interval would remain constant for every 10 minutes. When there are few numbers of machines racing to solve the math problems for earning Bitcoins, the difficulty fail. Similarly, when there are several devices, the difficulty rises.
7. What will be the future of Bitcoin mining look like?
Before starting with its future, let me tell you that Bitcoin is still profitable. Many experts have even opined that it may reach a value of 20,000 US dollars in the next set of years. Yes, indeed, most of the things fade away with the time, and Bitcoin is not an exception for that. Yes, Bitcoin may not exist after some 20 years, and other digital currencies might take its place.
Moreover, we might even see various other alternatives and even the invention of newer technologies in the future. It is also predicted that Bitcoin may become an alternative to gold.
There are indeed lots of criticisms drawn on Bitcoin, but no one appropriately justifies all those criticisms.
Bitcoin is one of the most promising technologies we have seen in the 21st century, and it is too early to speak in its future as it is still in its primary stages. It needs time to settle just like other technologies, and we people must give that time to Bitcoin.
Economists opine that the future of cryptocurrencies may explode in the next five years, rising to a value of around 5-10 trillion U.S. dollars. The long term of Bitcoin is still questionable, but recent reports have opined that there is no reason to panic though Bitcoin has experienced a downward trend in the past.
Bitcoin is the top-most valued digital currency in the world. The second most valuable currency, according to coinmarketcap.com, is the Bitcoin Cash, which is valued at around 325 US dollars for one Bitcoin Cash.
This fact adds to a vast amount of difference as we already read the value of one Bitcoin to be around 10,500 US dollars. So we can see here that the cost to one Bitcoin is 10,000 US dollars more than the second most valued digital currency.
What can we infer from this above fact? We can conclude that even if Bitcoin undergoes a significant downward trend in the upcoming years, it will remain on the top as other digital currencies would require a lot of time in overtaking the value of Bitcoin. Such is the brand value of Bitcoin.
And though many analysts have predicted that Bitcoin may become an alternative to gold in the coming future, there lies a difference in it. Unlike physical gold, the use of Bitcoin is limited to transactions, which makes it more vulnerable to bubble like collapse.
And also we have to note that, cryptocurrency involves a high energy-intensive verification process which is considered to be less efficient. And even these systems do not rely on a trusted authority like a central bank for transactions making it more vulnerable to threats and disadvantages.
Mining Bitcoin has a bright future only if you have vast amounts of money to spend on it. However, first, understand what is mining and how it gets done before investing in cryptocurrency.
Bitcoin mining encloses of a two-way confirmation and verification of transactions on the blockchain network. We can safely call as a secured transaction method which happens between two users, which involves no government, neither the bank or any central authority.
To verify transactions on a blockchain, the usage of bitcoin nodes are made, which also eliminates the problem of double-spending of coins.