If you want to join in the bitcoin frenzy without simply buying the digital currency at today's inflated prices, then bitcoin mining is another way to get involved. However, mining bitcoins does come with expenses -- and risks -- of its own. And the more popular bitcoins become, the harder it is to mine them profitably.
What is bitcoin mining?
Unlike paper currency, which is printed by governments and issued by banks, bitcoins do not come in any physical form. That creates a major risk, as hackers could theoretically create bitcoins from nothing. Bitcoin mining is how the bitcoin network keeps its transactions secure.
Bitcoin transactions are secured by blockchains, which make up a public ledger of transactions. Because of how blockchain transactions are structured, they're extremely difficult to alter or compromise, even by the best hackers. But in order to secure these transactions, someone needs to dedicate computing power to verifying the activity and packaging the details in a block that goes into the bitcoin ledger. And that's precisely what bitcoin miners do. As a reward for doing the work to track and secure transactions, miners earn bitcoins for each block they successfully process.
The bitcoin founders have set a limit of 21 million bitcoins available for mining. Once that total is reached, miners will still be able to benefit from transaction fees, but they won't be granted bitcoins as a reward for their work. As of mid-January 2018, approximately 16.8 million of those 21 million bitcoins have already been mined. Assuming the bitcoin mining industry doesn't change dramatically, it looks like we won't hit the 21 million-bitcoin limit until the year 2140.
Image source: Getty Images.
How to mine bitcoins
During the early days of bitcoin mining, miners would often download a software package designed to allow their computers to process bitcoin transactions in the background. Unfortunately, that's no longer practical, because solving bitcoin transactions has become too difficult for your average computer to manage.
The bitcoin network is designed to produce a certain number of new bitcoins every 10 minutes. If only a few people are bitcoin mining at any given time, then the network will be generous and share bitcoins readily in order to reach the predetermined number. But now that bitcoin mining has become so widespread, the network has become much stingier about handing out bitcoins to miners. In order to control how frequently bitcoins are generated, the network requires miners to solve more and more difficult problems to confirm transactions -- which means that miners must have more and more powerful equipment just to keep up. These days, in order to have a chance at being profitable, miners need to adopt one of two approaches: 1) buy specialized hardware (aka a bitcoin mining rig) or 2) join a cloud mining pool.
Bitcoin mining hardware
To get started with your own mining rig, you buy hardware designed for mining bitcoin (or some other virtual currency), set it up, and let it run 24/7 solving bitcoin transactions. Ideally, this will result in a steady flow of payments without your needing to get involved.
While it's fairly easy to set up and use a bitcoin mining rig, actually making money on the process is something of a challenge. Because more and more people are signing up to mine bitcoins, the mining process continues to get more difficult and will likely keep doing so for some time. That means the hardware you bought last year to mine bitcoins probably won't be up to the job a year from now. And because bitcoin mining rigs aren't cheap -- expect to pay at least $1,000 for the hardware, or several times that for a top-quality rig -- having to replace it every year or two takes a huge bite out of any profits you make from mining. Plus, most mining rigs consume enormous amounts of electricity, so you also have to subtract that expense from the bitcoins you earn to determine your profits.
If buying and maintaining your own mining hardware doesn't appeal to you, then cloud mining may be the way to go. Cloud mining companies invest in huge mining rigs, often filling entire data centers with the hardware, and then sell subscriptions to individuals interested in dipping a toe into bitcoin mining. Your subscription to a cloud mining company earns you a small percentage of the bitcoins that those mining rigs yield.
The biggest challenge facing cloud mining subscribers is avoiding fraud. The field is rife with pseudo-companies that sell thousands of multiyear subscriptions, pay out for a few months, and then disappear into the sunset. If you decide to try cloud mining, do your homework in advance and confirm that the company you're dealing with is a real cloud miner and not a scheme. Preferably, you'd pick a cloud mining company that's been around for several years and has a decent reputation. Avoid companies with anonymous domain registration (you can look up their registration info at Network Solutions), as well as any mining company that "guarantees" profits or offers huge incentives for referring new customers; anything above a 10% referral commission is deeply suspicious, because legitimate mining pools simply don't generate a high enough profit margin to pay big commissions.
If you find a legitimate cloud mining company, you'll still lose out on a portion of the bitcoins the company generates, as said company will take its cut from whatever profits it generates. Many cloud mining companies also charge a fee or deduct a percentage of your take to pay for maintenance, electricity, and other costs of doing business. And as bitcoin mining becomes more and more competitive, the returns you make from that multiyear subscription may sink to an unprofitable level.
Bitcoin may or may not be at the top of a bubble, but bitcoin mining has definitely become much less profitable as more and more people get involved. You can help predict your profitability by using a bitcoin mining calculator to crunch the numbers, but even the best calculator can't tell you what the situation will be like in a few months or years. In short, getting involved in bitcoin mining today is a risky business. You might be able to make a fortune, but you're more likely to lose big.
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