In this guide I will explain in the most simple way I can, what does it mean to mine Bitcoin and other cryptocurrencies. I will not be focusing on numbers or specifics. This guide is focused on the basics if you never understood it and want to learn more.
First, lets start with the basics of what is Bitcoin. Bitcoin is a digital currency that is not tied or owned by any government or company. It's software is open source and anyone can join to the network. It's value comes from what people are willing to pay for it.
Why does mining Bitcoin exist? In the beginning of Bitcoin, the designers of this technology was thinking about ways to compensate users to run the network. So what they decided to do is to give Block Rewards for users who run the Bitcoin network. They decided that if you are mining Bitcoin, which anyone can do with a computer, a certain amount of Bitcoin will be rewarded back every 10 minutes.
So mining exist as an incentive so the software will run with as many people as possible. The more people run it the more stable it is.
Now that we understand WHY mining exist, lets talk about how mining actually works with mining machines.
In the beginning of bitcoin in 2009, it was an unpopular network that a few people on Reddit talk about it and learned how to run it. At that time, the only way to mine Bitcoin was using your computer CPU or Central Processing Unit. That's that main chip in computers. At the time it was very easy to mine with no much competition.
As the value of Bitcoin grew, more and more people got into mining, just like I did a few years later. Because of the awareness and users increase, it was harder and harder to get that Block Rewards we talk about. At one point, companies like Antminer find ways to make an ASIC chip (Application Specific Integrated Circuit) that will be many times stronger than your everyday personal computer.
Today, miners are very powerful and include many chips in each unit. They also consume allot more power and require two or more big loud fans to run and cool. Those miners can run from $1,000 to $10,000 depends on how powerful they are and what coin they can mine.
Bitcoin runs on SHA-256 Algorithm. This means that if you want to mine Bitcoin, you must run compatible miner to do so. For example, the Antminer S19 runs SHA256 and can mine Bitcoin (or any other coin that uses SHA256 algorithm like Bitcoin Cash). If you want to mine Ethereum, you will need to buy an Ethereum miner. A Bitcoin Miner will not be able to mine Ethereum.
To find out how much miners make, check my guide that specifically talk about that - Crypto Mining 101 - Calculating Profitability
Alright! so now we understand Bitcoin, why mining exist and how to mine. Now the next step is for you to decide on your budget, your space and your power you have to mine on your own. Setting up a miner is a bit different from one miner to another but usually it's very similar steps.
Mining in a Pool - Now that you have your miner in your house hooked up to power and internet and have a cool environment to mine, it's time to get it to work. There are two options to mine, one is Solo mining, which means you will try to get a whole Block Reward yourself, or Pool Mining. Pool mining means you and a pool of other people will all mine together to solve the Block Reward and then split the profits depending on your mining power (Hashing Rate). Then if your pool unlocks the Block Reward, everybody in the pool gets a cut, and the pool take a small fee to make it all happen.
Solo mining is a bit different - solo mining is only really feasible for a very large scale mining operation and if you are reading this article you are definably not there yet. But let's just say it will require multiple multilevel warehouses full of equipment to achieve this level of mining.
So mining is how we get crypto circulated to the world - the miners get it first and then sell it or do whatever they want with it. When you buy some Bitcoin, you bough a Bitcoin that some one did mine in the past.
Some miners do more than just try to unlock a block. Ethereum ETH for example. When you mine ETH, you actually also download all the smart contracts to your miner, and make sure it execute the correct way. Mining also confirms transactions to make sure they are not duplicated. As a reward, ETH is paid also as a block but you also get paid "GAS" or fees that are being charged for using the network. Same with Bitcoin, all transaction fees get collected for 10 minutes and included in the block reward.
Here is some common Questions and Answers about mining -
Q: Isn't mining obsolete because of big mining facilities?
A: NO! There always be a space for one more miner (YOU) to mine cryptocurrencies. Your profits will depends on the size and the type of equipment you will be using.
Q: Is mining equipment too expensive and it's too hard to miner anyway?
A: NO! It all depends on what deal you can secure, and when you purchase the miner. If you mine a coin that doubled in price, your mining profits might double as well. Also, you can find low cost miners that might also be low profit but it's a start and you can definitely be creative and find ways to profit form it long term.
Q: Mining equipment takes too much power and will not be profitable right?
A. Depends, each miner need to do is own calculations and find out how much money electricity cost them. Some miners get free electricity from Solar or from other sources. This makes mining profitable no matter what miner you get.
Q: I have been told that it takes forever to get your investment back with mining, is that true?
A: Depends, there are many factors when it comes to ROI (Return On Investment). For example, if your coin goes up in price and you kept the mined coins - your profit just went up and your ROI is much sooner. This goes both ways and can also increase ROI if your coin is going down and you did not sold it yet. It's up to you to decide when to sell and when not to sell. It seems like in most cases it's best to never sell unless you have to, for paying electricity bills and so on.
I hope I explained in simple words what mining is, my goal is to educate and show people that mining is not rocket science. Once you start you can never stop.