A Beginners Guide To Bitcoin Mining

Before you read anything written here that may be a beginners guide to Bitcoin mining, please understand the following caveat… This has proved to be too intensive a topic for me to make it worth trying to mine Bitcoin myself. Therefore, I have read, researched and spoken to two people that do mine Bitcoins and alt coins, but I am not doing this myself.

The bottom line is that there are so many professional operations with very significant hardware in use that are already in play and the competition is so fierce, that you will probably decide not to start mining Bitcoin just as I did. Therefore, think of this as an information page to help you understand and not an instruction guide.

There really is a global technological arms race under way to use the best mining software and hardware to achieve the highest possible hash rate performance. Mining Bitcoins is no longer a place for amateurs. However, since there are more than 100 alt coins now available, there are opportunities to mine coins that are not BTC.

For example, in early 2015, Vice published this short film about an operation located in China. As you’ll see, the owners have six different operations! This is what it really takes to make it…

With all that said, how are alt coins mined?

What Is Bitcoin Mining And How Does It Work?

As has been discussed elsewhere on this site, crypto currencies are protected by strong cryptography to prevent fraud. This cryptography takes the form of a very strong mathematical calculation. To authenticate groups of transactions, mathematical puzzles need to be solved. Each time a puzzle is solved a block of transactions is authenticated. The record of these blocks is known as the blockchain1.

So far, so easy.

The blockchain is actually a public record. This means that unlike cash, it is possible for anyone to see a record of any transaction (if they know what they are doing). It isn’t possible to see the whole transaction, because there is no record of what was bought, sold or traded, and there is no name and address record of ownership. Transactions are therefore semi-anonymous.

Why semi-anonymous? There are some instances where very large wallets can be traced back to one or more people because of the transactions involved. This has been the case with the person(s) operating the TOR website called the Silk Road. While American law enforcement were able to arrest someone and confiscate the related Bitcoin wallet, it is going to be very hard for them to prove that two are actually connected. (This is being written in early 2014, before the trial).

Another example is the wallet believed to be owned by Satoshi Nakamoto. There are roughly 1 million BTC contained in the earliest wallets and while nobody knows for sure that they are his wallets, the alt community is quite convinced that they are. He was, of course, able to mine his coins right at the start when the calculations were easiest.

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When a miner solves a puzzle to authenticate a group of transactions they receive 25BTC. As the price per BTC has risen, this has created quite an incentive to solve the problems.

The math bit is known as a hash. This area becomes very complicated very quickly and a serious amount of implied mathematical knowledge is required.

The hardware needed to mine a Bitcoin started out as virtually any home pc or laptop. However, as the computing power required has increased, it has become less and less possible to use standard equipment. In fact, all coins that are SHA-256 (BTC and derivatives) are uneconomical to mine on home computers.

The set up typically used is known as a mining rig and is quite specialised. A mining rig revolved around the quality of it’s graphics card(s). The graphics card is where most of the computational effort goes on. The fastest graphics cards are also the most expensive.

This is a problem since a good graphics card is expensive and if you run one permanently it will burn out at some point. This means that for most alt coin miners, cooling is a very big issue. Somehow, the rig needs to run 24 hours per day and so do the fans that keep the room cool. The power required starts to get serious when you are running so much hardware constantly.

Since there has been an arms race in the technology of mining Bitcoins, there have been a few firms that have launched to sell rigs into this growing market. Unfortunately, there are many horror stories of dealing with these firms. Stories of companies charging upfront (because of a limited supply) and then not delivering upon their orders for more than one year. In the world of BTC, one year is forever… Other firms have charged upfront and then gone out of business, delivering nothing. The cost for a good mining rig can start at perhaps US$5,000 but can be much more expensive as the tech improves. In other words, you are better off buying the parts individually and building your own rig if you can.

For a beginner, this is about as far as it gets though. For example, I recently found this in a forum about mining:

Once you sort out which card(s) to use, the next challenge is power supply. Figure around 250-300w per card plus say 100 for overhead. I generally use 300 for the 290x and 250 for the 280x/7970. I’m running one of each off of a 750w PSU right now. My Kill-A-Watt shows that it’s actually drawing around 570 from the wall, but I’m expecting that to go up a bit after I sort my driver problems and get overclocking going.”

Or try this:

The inner loop of the mining process is a double SHA-256 hash of data where only one 32-bit word, essentially a counter or “nonce”, changes. It looks for a specific result where there are enough zeros in the right place after the second SHA-256 and only needs to output that counter value for which this is the case (if it is for any).”2

Essentially, either you understood that or you didn’t. Now you know why I am not doing this myself…

For the more sophisticated miner, an ASIC rig is the next step. ASIC means Application Specific Integrated Circuit and relates to the processor hardware in use. ASIC processors were designed specifically for Bitcoin mining and run faster than other chips. Their goal is to work through the hashes faster than other processors can.

If you are still interested, or want to see what this really entails, this entertaining video explains everything in hard to understand phrases:

After all of that monkeying around, the ultimate goal is to mine coins profitably at their current price. To do this, a miner needs to be able to compare the rate at which his or her equipment can solve problems and create new coins (known as the hash rate) with the cost of equipment and electricity to do so. Therefore, how many coins and at what price in a specific time period compared to the cost to operate in that time period plus some amortizing of the cost of equipment. Got it…?

Can Bitcoin Mining Be Profitable?

It is possible to make money doing this, but you need to be quite careful and the easy days where people became really wealthy are long gone.

BTC mining is now so difficult3 that most people join a group to do it.

What Is A Bitcoin Mining Pool?

These are known as Bitcoin mining pools and there is some competition to join the best mining pools. A pool combines the computing power of multiple people to solve problems faster. The group joins by using the same software (known as GUI) to help them combine their efforts.

If you imagine that there are 100 miners in a pool and that your machine does 1% of the work, then when coins are distributed, you receive 1% of the value of the coins. Most pools are much larger than 100 users, but you get the idea.

What Is A Bitcoin Cloud Mining Pool?

There are also cloud hashing services4 where spare capacity in the cloud is used to solve problems. These are known as Bitcoin Mining Contracts and there are already specialist firms offering these services5.

It is worth remembering that this is a space where development is coming very quickly. It is evolving in front of our eyes. Therefore, if you want to be involved you really need to do some more research of your own.

If after all that you are keen, perhaps you should create your own alt coins!5

Hopefully, that beginners guide to Bitcoin mining was helpful, if only in making you not want to try it yourself…