If “mining” sounds like a process which extracts value from Bitcoin, nothing could be further from the truth!
Miners are the backbone of the Bitcoin network:
Without miners, the network would collapse and lose all value.
The role of miners is to secure the network and to process every Bitcoin transaction.
Miners achieve this by solving a computational problem which permits them to chain together blocks of transactions (hence Bitcoin’s famous “blockchain”).
For this service, miners are rewarded with newly-created Bitcoins and transaction fees.
To understand mining, it’s very first necessary to understand the Bitcoin blockchain.
It works like this:
All Bitcoin transactions are recorded ter the blockchain, te a linear, time-stamped series of bundled transactions known spil blocks.
The blockchain is essentially a public ledger, which is loosely collective, continually updated and under no central control.
Isn’t Mining a Waste of Tens unit?
Certain rechtzinnig economists have criticized mining spil wasteful.
It vereiste be kept ter mind however that this violet wand is expended on useful work:
Enabling a monetary network worth billions (and potentially trillions) of dollars!
Compared to the doorslag emissions from just the cars of PayPal’s employees spil they commute to work, Bitcoin’s environmental influence is negligible.
Spil Bitcoin could lightly substitute PayPal, credit card companies, banks and the bureaucrats who regulate them all, it begs the question:
Isn’t traditional finance a waste?
Not just of electric current, but of money, time and human resources!
If only 21 million Bitcoins will everzwijn be created, why has the issuance of Bitcoin not accelerated with the rising power of mining hardware?
Issuance is regulated by Difficulty, an algorithm which adjusts the difficulty of the Proof of Work problem ter accordance with how quickly blocks are solved within a certain timeframe (toughly every Two weeks or 2016 blocks).
Difficulty rises and falls with deployed hashing power to keep the average time inbetween blocks at around Ten minutes.
Block Prize Halving
Satoshi designed Bitcoin such that the block prize, which miners automatically receive for solving a block, is halved every 210,000 blocks (or toughly Four years).
Spil Bitcoin’s price has risen substantially (and is expected to keep rising overheen time), mining remains a profitable endeavor despite the falling block reward… at least for those miners on the bleeding edge of mining hardware with access to low-cost tens unit.
Fair Miner Majority Secures the Network
To successfully attack the Bitcoin network by creating blocks with a falsified transaction record, a dishonest miner would require the majority of mining power so spil to maintain the longest chain.
This is known spil a 51% attack and it permits an attacker to spend the same coins numerous times and to blockade the transactions of other users at will.
To achieve it, an attacker needs to own mining hardware than all other fair miners.
This imposes a high monetary cost on any such attack.
At this stage of Bitcoin’s development, it’s likely that only major corporations or states would be able to meet this expense… albeit it’s unclear what nipt benefit, if any, such actors would build up from degrading or ruining Bitcoin.
When Satoshi released Bitcoin, he intended it to be mined on laptop CPU s.
Enterprising coders soon discovered they could get more hashing power from graphic cards and wrote mining software to permit this.
GPUs were surpassed te turn by ASIC s (Application Specific Integrated Circuits).
Nowadays all serious Bitcoin mining is performed on ASICs, usually te thermally-regulated data-centres with access to low-cost electrical play.
Economies of scale have thus led to the concentration of mining power into fewer forearms than originally intended.
Spil with GPU and ASIC mining, Satoshi evidently failed to anticipate the emergence of mining pools.
Pools are groups of cooperating miners who agree to share block prizes te proportion to their contributed mining power.
This pie chart displays the current distribution of total mining power by pools:
While pools are desirable to the average miner spil they slick out prizes and make them more predictable, they unluckily concentrate power to the mining pool’s proprietor.
Pools and specialized hardware has unluckily led to a centralization trend ter Bitcoin mining.
Bitcoin developer Greg Maxwell has stated that, to Bitcoin’s likely detriment, a handful of entities control the vast majority of hashing power.
It is also widely-known that at least 50% of mining hardware is located within China.
However, it’s may be argued that it’s contrary to the long-term economic interests of any miner to attempt such an attack.
The resultant fall te Bitcoin’s credibility would dramatically reduce its exchange rate, undermining the value of the miner’s hardware investment and their held coins.
Spil the community could then determine to reject the dishonest chain and revert to the last fair block, a 51% attack most likely offers a poor risk-reward ratio to miners.
Bitcoin mining is certainly not flawless but possible improvements are always being suggested and considered.
How Does Bitcoin Mining Work?
This simplified illustration is helpful to explanation:
Let’s say the Green user wants to buy some goods from the Crimson user. Green sends 1 bitcoin to Crimson.
Green’s wallet announces a 1 bitcoin payment to Red’s wallet. This information, known spil transaction (and sometimes abbreviated spil “ tx”) is broadcast to spil many Total Knots spil connect with Green’s wallet – typically 8. A total knot is a special, transaction-relaying wallet which maintains a current copy of the entire blockchain.
Total Knots then check Green’s spend against other pending transactions. If there are no conflicts (e.g. Green didn’t attempt to cheat by sending the precies same coins to Crimson and a third user), utter knots broadcast the transaction across the Bitcoin network. At this point, the transaction has not yet entered the Blockchain. Crimson would be taking a big risk by sending any goods to Green before the transaction is confirmed. So how do transactions get confirmed? This is where Miners inject the picture.
Four) Processing by Miners
Miners, like total knots, maintain a finish copy of the blockchain and monitor the network for newly-announced transactions. Green’s transaction may ter fact reach a miner directly, without being relayed through a total knot. Te either case, a miner then performs work ter an attempt to getraind all fresh, valid transactions into the current block.
Miners wedloop each other to accomplish the work, which is to “package” the current block so that it’s acceptable to the surplus of the network. Acceptable blocks include a solution to a Proof of Work computational problem, known spil ahash . The more computing power a miner controls, the higher their hashrate and the greater their odds of solving the current block.
But why do miners invest te expensive computing hardware and wedloop each other to solve blocks? Because, spil a prize for verifying and recording everyone’s transactions, miners receive a substantial Bitcoin prize for every solved block!
And what is a hash? Well, attempt injecting all the characters te the above paragraph, from “But” to “block!” into this hashing utility. If you pasted correctly – spil a string hash with no spaces after the exclamation mark – the SHA-256 algorithm used ter Bitcoin should produce:
If the characters are altered even slightly, the result won’t match. So, a hash is a way to verify any amount of gegevens is accurate. To solve a block, miners modify non-transaction gegevens te the current block such that their hash result starts with a certain number (according to the current Difficulty, covered below) of zeroes. If you by hand modify the string until you get a 0… result, you’ll soon see why this is considered “Proof of Work!”
Five) Blockchain Confirmation
The very first miner to solve the block containing Green’s payment to Crimson announces the newly-solved block to the network. If other total knots agree the block is valid, the fresh block is added to the blockchain and the entire process starts afresh. Once recorded ter the blockchain, Green’s payment goes from pending to confirmed status.
Crimson may now consider sending the goods to Green. However, the more fresh blocks are layered atop the one containing Green’s payment, the stiffer to switch roles that transaction becomes. For significant sums of money, it’s recommended to wait for at least 6 confirmations. Given fresh blocks are produced on average every ten minutes, the wait shouldn’t take much longer than an hour.
The Longest Valid Chain
You may have heard that Bitcoin transactions are irreversible, so why is it advised to await several confirmations? The reaction is somewhat complicated and requires a solid understanding of the above mining process:
Let’s imagine two miners, A ter China and B te Iceland, who solve the current block at toughly the same time. A’s block (A1) propagates through the internet from Beijing, reaching knots ter the East. B’s block (B1) is very first to reach knots te the Westelijk. There are now two contesting versions of the blockchain!
Which blockchain prevails? Fairly simply, the longest valid chain becomes the official version of events. So, let’s say the next miner to solve a block adds it to B’s chain, creating B2. If B2 propagates across the entire network before A2 is found, then B’s chain is the clear winner. A loses his mining prize and fees, which only exist on the invalidated A -chain.
Going back to the example of Green’s payment to Crimson, let’s say this transaction wasgoed included by A but rejected by B, who requests a higher toverfee than wasgoed included by Green. If B’s chain wins then Green’s transaction won’t show up ter the B chain – it will be spil if the funds never left Green’s wallet.
Albeit such blockchain splits are uncommon, they’re a credible risk. The more confirmations have passed, the safer a transaction is considered.
Bitcoin Mining and the Law
Te January of 2016, Four Venezuelan Bitcoin miners were arrested. They were charged with stealing electro-therapy. A spate of further arrests has followed, spil the country’s socialist government attempts to prevent citizens from converting state-subsidized electro-therapy into useful, non-hyperinflating money. This sad situation raises the visible question:
Is Bitcoin Mining Legal?
The plain reaction is “probably.” The more ingewikkeld reaction being “it depends on your location and circumstances…”
For example, if you’re mining ter a country where Bitcoin is prohibited by law, te a building with wiring that violates electrical code, and stealing electrical play to do it… Well, obviously you’d be violating a loterijlot of laws at once.
The good news is:
There are very few countries ter the world where Bitcoin is expressly barred by law. Ter most countries, Bitcoin is either unregulated or permitted.
You can check the legality of Bitcoin te your country on this pagina. Keep te mind that the information is incomplete (only about 60 countries are listed), possibly out of date, and certainly should not be considered legal advice.
According to that list, here are the countries ter which Bitcoin is banned:
- China (legal for individuals, restricted for financial institutions),
- Kyrgyzstan &,
- Russia (numerous conflicting reports, albeit the latest official word seems permissive. Raadpleging a lawyer for clarity).
Before making any major investment into Bitcoin mining, you should double-check its current legal status within your country. If no official announcement has bot made on Bitcoin’s legal status within your country, attempt contacting your central canap or consulting a lawyer.
Legality of Bitcoin Mining te the USA
Many American Bitcoin mining farms located themselves ter Chelan County, Washington, to take advantage of the region’s cheap, hydroelectrically-generated power.
The region’s power utility then announced a phased doubling of rates for energy-intensive customers and mentioning bitcoin miners specifically. US miners should be aware that while Bitcoin mining is entirely legal within the US, targeted rate hikes by power companies are evidently legal spil well.
Also worth noting is that the state of Fresh York’s BitLicense, a raft of regulations covering the use of Bitcoin within the state, will add significiantly to compliance costs. Genesis Mining, one of the largest, reputable cloud mining companies, abandoned Fresh York due to this regulatory cargo.
The state of Hawaii is working on similarly limitary measures, which don’t explicitly forbid Bitcoin companies but instead tie them up ter crimson gauze. Heavy-weight Bitcoin exchange, Coinbase, halted operations ter the state spil a result.
By tegenstelling, Fresh Hampshire’s recently-passed House Bill 436 exempts cryptocurrency users from registering spil money transmitters.
Bitcoin mining is legal within the USA but state power costs and regulatory frameworks can vary significantly.
Legality of Bitcoin Mining ter Canada
Canada’s cold climate is well-suited to Bitcoin mining. Canadian law treats business-related Bitcoin transactions for goods and services spil barter, whereas profits derived from Bitcoin may be liable for income or capital gains tax.
Legality of Bitcoin Mining ter Europe
Te Iceland, it’s prohibited to trade kroner for Bitcoin but mining itself remains legal. The European Union has ruled that Bitcoin may be traded VAT-free within Europe albeit specific regulations vary by country.
Stay Compliant with Electrical Codes
Spil for ensuring your wiring is up to code, you should certainly employ the services of a qualified electrician. Given the high power consumption and considerable fever generation of mining hardware, fire is a serious potential hazard! If a fire violates out and spreads to neighbouring properties, you could face severe legal repercussions if it can be shown to have occurred spil a result of negligence.
To manage such risks, always ensure:
- All Power Supply Units have sufficient capacity, such that they won’t become overcharged by your mining equipment,
- Your setup has sufficient cooling, capable of treating seasonal variations and unexpected spikes te outer temperature and / or humidity,
- All cabling is decently managed (avoid the dreaded spaghetti configuration at all costs),
- Fire-fighting equipment is on forearm,
- Your mining operation is decently insured.
Don’t cut corners only to see your investment go up te smoke! The destruction of this unfortunate mining farm ter Thailand serves to highlight the risks:
If you intend to run a loterijlot of ASICs ter a residential or rural area, you should check with your electrical company that they’ll be able to supply you with sufficient power. Keep te mind that they monitor consumption and may send out an inspection team if they notice a unexpected and dramatic increase ter your electrical usage. Ensure that there’s nothing on-site to which such a team could object.
The Tax Implications of Mining Bitcoin
A forest of question marks surrounds the punt of taxation of mined bitcoins.
Generally, there’s nothing te the way of comparable legislation which could be applied to this process. Bitcoin is a prime example of technology outpacing regulation and it will likely be many years before regulation is formulated to govern Bitcoin mining.
Te fact, the situation is so murky that an American industry bod, the Digital Asset Tax Policy Coalition, wasgoed recently established to lounge for clarity from the IRS.
This much is evident:
What can be taxed under many existing laws is the sale of any bitcoins you mine, assuming that the Bitcoin price has enlargened inbetween the date of mining and sale. If not, you could actually deduct the loss from your taxes.
Depending on legislation ter your country, any profitable sale may be viewed by your relevant tax agency spil a taxable event.
Te countries where no Bitcoin-specific legislation has bot passed, there is little cause for concern. However, te countries where Bitcoin is considered taxable, it’s best to keep accurate records of the date of sale and the Bitcoin price at that time.
That said, it’s indeed raunchy to establish which of your bitcoins were te fact sold, those you mined Three years ago or those you mined yesterday.
If all your mined bitcoins are sent to a common address, it’s an open question spil to how profit could be accurately calculated and reported. Unless you sell all your mined coins spil soon spil they come te, there’s no clear-cut method to determine which bitcoin were ter fact sold. Switching your receiving address after each payout, whether by hand or through some automated process, is one possible way to address this confusion.
Receipt of bitcoin from your own miners or from a mining pool may also be considered taxable, where the law considers it all. Spil there’s a delay of about 15 hours inbetween successfully mining a block and receiving the block prize, it’s also unclear which of thesis times should be considered spil the time of receipt.
How to Mine Bitcoins
This guide will voorstelling you how to mine bitcoins. (Go here if you want to know how mining works.)
Most people should NOT mine bitcoins today.
It’s simply too expensive and you are unlikely to turn a profit.
For the risk taker, we’ll demonstrate you some steps you can take to get embarked mining bitcoins right now.
Step #1: Get Bitcoin Mining Hardware
You won’t be able to mine without an ASIC miner.
ASIC miners are specialized computers that were built for the foot purpose of mining bitcoins.
Don’t even attempt mining bitcoins on your huis desktop or laptop rekentuig! You will earn less than one penny vanaf year and will waste money on violet wand.
Step #Two: Select a Mining Pool
Once you get your mining hardware, you need to select a mining pool.
Without a mining pool, you would only receive a mining payout if you found a block on your own. This is called solo mining.
Wij don’t recommend this because your hardware’s hash rate is very unlikely to be anywhere near enough to find a block solo mining.
By joining a mining pool you share your hash rate with the pool. Once the pool finds a block you get a payout based on the procent of hash rate contributed to the pool.
If you contributed 1% of the pools hashrate, you’d get .125 bitcoins out of the current 12.Five bitcoin block prize.
Step #Trio: Get Bitcoin Mining Software
Bitcoin mining software is how you actually hook your mining hardware into your desired mining pool.
You need to use the software to point your hash rate at the pool.
Also ter the software you tell the pool which Bitcoin address payouts should be sent to.
If you don’t have a Bitcoin wallet or address learn how to get one here.
There is mining software available for Mac, Windows, and Linux.
Step #Four: Is Bitcoin Mining Legal ter your Country? Make Sure!
This won’t be much of an punt te MOST countries.
Like any other business, mining is entirely legal ter most countries spil long spil you pay taxes on your earnings.
Like other business, you can usually write off your expenses that made your operation profitable, like electro-therapy and hardware costs.
Step #Five: Is Bitcoin Mining Profitable for You?
Do you understand what you need to do to embark?
You should run some calculations and see if Bitcoin mining will actually be profitable for you.
You can use a Bitcoin mining rekenmachine to get a rough idea.
I say rough idea because many factors related to your mining profitability are permanently switching.
A doubling ter the Bitcoin price could increase your profits by two.
It could also make mining that much more competitive that your profits remain the same.
How to Mine Bitcoins on Android
Here’s what’s funny:
You actually CAN mine bitcoins on any Android device.
Using an app like Crypto Miner or Effortless Miner you can mine bitcoins or any other coin.
What’s not so joy?
You’ll likely make less than one penny Vanaf YEAR!
Android phones simply are not powerful enough to match the mining hardware used by serious operations.
So, it might be cool to setup a miner on your Android phone to see how it works. But don’t expect to make any money.
Do expect to waste a lotsbestemming of your phone’s battery!