Unlike paper money, there are more than a few options available for keeping your bitcoin secure.
Whether you’re trading cryptocurrencies on a daily basis or you’re a long-term bitcoin investor, cold storage can be a useful tool for keeping your crypto safe.
Understanding the Basics of the Bitcoin Wallet
In order to get a handle on what cold storage actually is, it’s important to review the fundamentals of the “bitcoin wallet.” In the same way that you can use a traditional wallet to store your paper currency, you can use a bitcoin wallet to store your bitcoin in digital form.
In other words, you can think of your bitcoin wallet as your personal bitcoin mailing address.
This might sound like having a bank account, but it’s actually quite different.
Instead of needing to trust a third party to keep your cryptocurrency secure, you can use a bitcoin wallet as your sole gateway to the decentralized network. There’s no need to ask a branch manager for permissions when you want to transfer bitcoin, there aren’t any annoying forms to fill out, and transfers happen within minutes.
Bitcoin wallets can be used to:
Pay for items with bitcoin by transferring your payment to merchants who accept cryptocurrency.
Receive bitcoin deposits from customers, friends, or relatives.
Maintain your financial privacy by making anonymous purchases.
What is Bitcoin cold storage?
As you can see, bitcoin wallets are incredibly useful. All of this begs the question, however, of how many different types of bitcoin wallets there actually are.
Generally speaking, Bitcoin wallets come in two main types:
The phrase “hot wallet” refers to any bitcoin wallet that requires the internet to function properly. Hot wallets derive their name from the fact that they need electricity to work. If the power goes out, then so does your hot wallet.
For example the popular mobile wallet BRD is an example of a hot wallet.BRD is a widely used mobile “hot” wallet
Not only do cold wallets work without an active internet connection, but many cold wallets don’t even need a computer. Cold wallets have several similarities to traditional physical wallets, but they also have a few differences.
For example, the Ledger Nano X and Nano S are the most popular cold wallets on the market.titans of the hardware wallet field
Is “Cold Storage” Different Than Using A Cold Wallet?
In general, “cold storage” refers to any bitcoin storage storage device that does not require an internet connection. A cold storage device can be a physical box, a piece of paper, a hardware wallet or a list of numbers and letters that you keep in your head.
“Hot storage,” are bitcoin storage devices that require an internet connection.
The Major Differences Between Cold Storage And Hot Storage
In contrast to hot storage, cold storage provides:
Increased security protections
A reliable way to keep your bitcoin offline
An easy way to transport your bitcoin between your various wallets
What are the different types of bitcoin cold storage wallets?
When it comes to choosing a cold storage wallet that can help keep your bitcoin secure, the most popular choices tend to be:
Hardware wallets include USB sticks and other digital storage devices that you can use offline. Typically the private key to coins is never exposed to the internet because the device itself is air gapped.
Ledger Nano X
Ledger Nano S
The steel wallet is a piece of nearly indestructible stainless steel that you can use to carry your bitcoin private keys or backups in by etching or tiling them into the steel. This makes it an excellent choice if you’re concerned about losing paper or live in an area with lots of flooding, fires or earthquakes.
Steel wallets are interesting because they can act as both a “paper wallet” or as a backup for any kind of Bitcoin wallet in case yours is lost, stolen, or destroyed. Almost any crypto holder can benefit from one of these steel wallets regardless of how they choose to store their coins.
This guide will help you to find the best hardware Bitcoin or crypto wallet for YOU!
There’s no “one size fits all” hardware wallet. Wallets come on different platforms with different features.
If you want the best possible, keep reading.
What is a Bitcoin & Cryptocurrency Wallet?
A Bitcoin/cryptocurrency wallet is the first step to using Bitcoin or crypto.
A “wallet” is basically the equivalent of a bank account. It allows you to receive bitcoins and other coins, store them, and then send them to others.
You can think of a wallet as your personal interface to the Bitcoin network, similar to how your online bank account is an interface to the regular monetary system.
Wallets contain private keys; secret codes that allow you to spend your coins.
In reality, it’s not coins that need to be stored and secured, but the private keys that give you access to them.
A crypto or Bitcoin wallet is simply an app, website, or device that manages private keys for you.Ledger Live makes it easy to send and receive Bitcoins to your Ledger Nano X
This guide will show you how to create a wallet and pick the best one.
Types of Bitcoin Wallets
There are a few different types of Bitcoin wallets used today, and each of them come with their own tradeoffs between security and convenience:
We’ll cover this in full detail in chapter two (up next), but put simply there are wallets for holding your everyday spending money (hot wallets) and there are wallets for your long term savings (cold wallets). There are even several types of both hot and cold wallets.
An Exchange is Not a Wallet
Again, we will cover this is more detail in Chapter five below, but its worth stating here as well that your Bitcoin “bank” or exchange accounts that do hold Bitcoin are NOT wallets. Coinbase app does not let you hold you own keys, therefore it is not a wallet.
If that is confusing, don’t worry – it will all make sense by the time we are done here.
This is not to say that bitcoin banks are inherently bad.
It is simply important to remember that whoever controls the private keys controls the bitcoin attached to those keys. A misunderstanding of this point has led to hundreds of millions of US dollars being lost in the past, so it’s important to understand this key difference in how Bitcoin private keys can be stored.
For now, just know that private keys are what you need to protect if you want to keep your bitcoin safe from hackers, user error, and other possible issues.
ypes of Bitcoin & Crypto Wallets
Now let’s discuss the types of wallets and why you might want to use one kind over another.
By the end of this chapter, you should have a good idea of which wallet is right for you.
The Ledger Nano S is one example of a hardware wallet.
A hardware wallet is a physical electronic device, built for the sole purpose of securing crypto coins.
The core innovation is that the hardware wallet must be connected to your computer, phone, or tablet before coins may be spent.
The two most popular and best Bitcoin and cryptocurrency hardware wallets are:
Hardware wallets are a good choice if you’re serious about security, convenience, and reliable Bitcoin & crypto storage.
Hardware wallets keep private keys separate from vulnerable, internet-connected devices.
Your all-important private keys are maintained in a secure offline environment on the hardware wallet, fully protected even should the device be plugged into a malware-infected computer.Malware should be no match for your hardware wallet.
As bitcoins and cryptocurrencies are digital, cyber-criminals could, potentially, target your computer’s “software wallet” and steal them by accessing your private key.
Generating and storing private keys offline using a hardware wallet ensures that hackers have no way to reach your coins.
Hackers would have to steal the hardware wallet itself, but even then, it can be protected with a PIN code.
Don’t worry about your hardware wallet getting stolen, lost or damaged either; so long as you create a secret backup code, you can always retrieve your coins.
Think of a hardware wallet like your own underground steel vault. If you own a significant amount of bitcoin or crypto, you should strongly consider getting one!
Why are hardware wallets good?
Easiest way to securely store bitcoins and other coins
Easy to backup and secure
Less margin for error; setup is easy even for less technical users
Multiple hardware wallets can be used together for extra security
Why are hardware wallets bad?
They’re not free!
They can be challenging for new users to understand
Hot wallets are wallets that run on internet connected devices like a computer, mobile phone, or tablet.
Private keys are secret codes. Because hot wallets generate your private keys on an internet connected device, these private keys can’t be considered 100% secure.
Think of a hot wallet like your wallet today: you use it to store some cash, but not your life savings. Hot wallets are great if you make frequent payments, but not a good choice for the secure storage of bitcoins.
Why are hot wallets good?
Easiest way to store small amounts of bitcoin and crypto
Convenient; spending and receiving payments is easy and fast
Some hot wallets allow access to funds across multiple devices
Why are hot wallets bad?
Not safe for the secure storage of large amounts of bitcoins and crypto
You might forget about the application being installed on your phone
UK introduces new sanctions against Russia including ban on ships and fresh financial measures
Russian ships banned from UK ports, following fresh wave of sanctions
further UK individuals and entities are restricted from undertaking financial transactions with the Russian Central Bank
Russia’s state-owned sovereign wealth fund and its chief executive have been sanctioned
Russian ships have been banned from UK ports, following a fresh raft of UK sanctions against Russia today.
The ban includes any vessels owned or operated by anyone connected to Russia and authorities will also gain new powers to detain Russian vessels.
Additional economic measures, introduced by the Foreign Secretary today, including against the Russian Central Bank and the state’s sovereign wealth fund, also mean the majority of Russia’s financial system is now covered by UK sanctions.
The new measures prohibit UK individuals and entities from providing financial services to the Central Bank of the Russian Federation, as well as the Ministry of Finance and National Wealth Fund.
Foreign Secretary Liz Truss said:
We said Putin and those around him would pay the price for their unprovoked and illegal invasion of Ukraine, and we are being true to our word.
The ban on Russian ships from UK ports, and new economic sanctions against key Russian financial institutions including its central bank, in close coordination with our allies, will degrade Russia’s economy and help make sure Putin loses.
We stand with Ukraine, its people and its democracy, and will continue to support them diplomatically, economically, politically and defensively.
Secretary of State for Transport Grant Shapps said:
Putin and his allies must feel the full consequences of their vicious and illegal invasion of Ukraine.
That’s why from today, I’m instructing all UK ports to turn away any vessel that is flagged, registered, owned, or operated by Russia.
By banning Russian ships from our ports, we are further isolating Russia and crushing its economic capabilities, starving Putin’s war machine.
The UK has worked in close partnership with the United States and European Union on the sanctions introduced today to prevent the Russian Central Bank from using its foreign reserves in ways that allow it to lessen the financial impact.
The Russian Direct Investment Fund – the country’s sovereign wealth fund – and its chief executive, Kirill Dmitriev, have also been sanctioned today, with their assets frozen and a travel ban in place for Dmitriev. RDIF funds projects of strategic significance to Russia. This sanction will stop UK individuals or companies dealing with RDIF.Tags: Russia Ukraine war, Uk Sanctions On Russia
China was the undisputed world leader in Bitcoin mining until July 2021, when the Chinese government banned all mining operations in the country.
Chinese mining pools had control more than 60% of the Bitcoin network’s collective hashrate.
Not only did China manufacture most of the world’s mining equipment, but massive mining farms were located there to take advantage of extremely cheap electricity prices.
Estimated Hashing Power by Country
Here was the estimated mining hash power breakdown by country in July 2021 according to University of Cambridge Centre for Alternative Finance:China – 65%USA – 7%Russia – 7%Kazakhstan – 6%Malaysia – 4%Iran – 4%Canada – 1%Germany – 0.6%Norway – 0.5%
Other interesting stats are:
The UK has a very small share of mining (0.1% GB, and 0.03%)
The EU countries only own about 3.5% of all mining hash rate
As you can see, China was dominating Bitcoin mining by a very wide margin.
In this article, we are going to explain why China is such a mining powerhouse in Bitcoin and other cryptocurrencies. The answers may surprise you.
Electricity cost is the most important factor for a profitable mining operation. As mining difficulty increases, the least efficient miners are forced to shut down first.
Electricity in China is extremely cheap compared to most other countries. Chinese electricity in industrial regions is either supplied by hydro-electric facilities or subsidized by the state.
China’s cheap electricity keeps Chinese miners at peak efficiency and allows them to outlast their foreign competitors.
A very large portion (if not the majority) of Bitcoin’s energy comes from China, and most notably in “green” powered areas like Sichuan and Xinjiang where renewable sources like hydroelectric, solar, and geothermal are common.Map showing percentage of total Bitcoin mining in each provinceHere is an alternative view of that data if you aren’t familiar with China’s geography
In many cases, the energy produced by these wind farms and dams is higher than the local grid can take. This means that they are producing energy that would otherwise not be used by anyone since the local grid, which takes energy and distributes it across distances, cannot hold it.
Take Sichuan, for example:
Total hydropower reached more than 75 GW in 2017, greater than the total in most Asian countries. It was also more than double the capacity of the province’s power grid, meaning lots of wasted power.David Stanway, ReutersOne of Sichuan’s many hydroelectric dams
Computers mining for virtual coins? Is Bitcoin mining just free money?
Well, it’s much, much more than that!
If you want the full explanation on Bitcoin mining, keep reading…Jordan Tuwiner
CHAPTER 1. What is Bitcoin mining?
CHAPTER 2. How Does Mining Work?
CHAPTER 3. How to Mine Bitcoins
CHAPTER 4. What is Mining Hardware?
CHAPTER 5. What are Mining Pools?
CHAPTER 6. Inside the Mining Industry
What is Bitcoin Mining?
Bitcoin mining is the backbone of the Bitcoin network.
Miners provide security and confirm Bitcoin transactions.
Without Bitcoin miners, the network would be attacked and dysfunctional.
Bitcoin mining is done by specialized computers.
The role of miners is to secure the network and to process every Bitcoin transaction.
Miners achieve this by solving a computational problem which allows 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.
How Does Bitcoin Mining Work?
What is Bitcoin mining actually doing?
Miners are securing the network and confirming Bitcoin transactions.
Miners are paid rewards for their service every 10 minutes in the form of new bitcoins.
What is Bitcoin Mining Actually Doing?
What is the point of Bitcoin mining? This is something we’re asked everyday!
There are many aspects and functions of Bitcoin mining and we’ll go over them here. They are:
Issuance of new bitcoins
Mining Is Used to Issue new Bitcoins
Traditional currencies–like the dollar or euro–are issued by central banks. The central bank can issue new units of money at any time based on what they think will improve the economy.
Bitcoin is different.
With Bitcoin, miners are rewarded new bitcoins every 10 minutes.
The issuance rate is set in the code, so miners cannot cheat the system or create bitcoins out of thin air. They have to use their computing power to generate the new bitcoins.
Miners Confirm Transactions
Miners include transactions sent on the Bitcoin network in their blocks.
A transaction can only be considered secure and complete once it is included in a block.
Because only a when a transaction has been included in a block is it officially embedded into Bitcoin’s blockchain.
More confirmations are better for larger payments. Here is a visual so you have a better idea:0Payments with 0 confirmations can still be reversed! Wait for at least one.1One confirmation is enough for small Bitcoin payments less than $1,000.3Enough for payments $1,000 – $10,000. Most exchanges require 3 confirmations for deposits.6Enough for large payments between $10,000 – $1,000,000. Six is standard for most transactions to be considered secure.
Why Does Bitcoin Need Miners?
In short, miners secure the Bitcoin network.
They do this by making it difficult to attack, alter or stop the network.
The more miners that mine, the more secure the network.
The only way to reverse Bitcoin transactions is to have more than 51% of the network hash power. Distributed hash power spread among many different miners keeps Bitcoin secure and safe.
How to Mine Bitcoins
Actually want to try mining bitcoins?
Well, you can do it. However, it’s not profitable for most people as mining is a highly specialized industry.
Most Bitcoin mining is done in large warehouses where there is cheap electricity.
To be real:
Most people should NOT mine bitcoins today.
Most Bitcoin mining is specialized and the warehouses look something like this:Source ieee.org
That’s who you’re up against! It’s simply too expensive and you are unlikely to turn a profit.
For hobby mining, we’ll show you some steps you can take to get started mining bitcoins right now.
Step #1: Get Bitcoin Wallet
When earning bitcoins from mining, they go directly into a Bitcoin wallet.
ASIC stands for “Application Specific Integrated Circuit”. In plain English, that just means it is a chip designed to do one very specific kind of calculation. In the case of a Bitcoin ASIC miner, the chip in the miner is designed to solve problems using the SHA256 hashing algorithm.
The pie chart below displays the current distribution of total mining power by pools:
While pools are desirable to the average miner as they smooth out rewards and make them more predictable, they unfortunately concentrate power to the mining pool’s owner.
Inside the Bitcoin Mining Industry
The mining industry has come a long way since the early days of graphics card mining.
Today there are very professional industrial mining operations. Let’s take a look at how they work.
What does a mining farm look like?
Let’s take a look inside a real Bitcoin mining farm in Washington state.
Mining farms look very similar to a data center. They contain rows of hardware with powerful fans to keep the miners from over heating.
Mining farms are typically very industrial looking – they aren’t flashy or sleek. Usually, its just a warehouse with great temperature control.
Bitcoin mining farms exclusively use ASIC miners to mine various coins. Many of these farms are minting several Bitcoins per day.
How much do crypto mining farms make?
How much a mining farm makes depends on many factors:
The price it pays for electricity
How old its mining hardware is
The scale of its operation
The price of Bitcoin when the miner sells it
The level of difficulty when the Bitcoin is mined
By far, the biggest factor affecting how much money a mining farm makes is how much it pays for electricity. Nearly all mining farms are using the same hardware.
Since the reward for finding a block is fixed, and the difficulty is adjusted based on total processing power working on finding blocks at any given time, then electricity is the only cost that is variable. If you can find cheaper power than other miners, you can afford to either increase the size of your mining operation, or spend less on your mining for the same output.
How much electricity do mining farms use?
As previously mentioned, mining farms use a lot of electricity. How much they consume depends on how big their operation is. However the latest Bitmain ASIC miner consumes about 1350 watts.
In total, it is estimated that all mining farms will use about 127 Terawatt hours of electricity in the year 2021. That is roughly the equivalent to the yearly energy consumption of Norway.
Where are mining farms located?
Mining farms are located all over the world. We don’t know where every mining farm in the world is, but we have some educated guesses.
Most of the mining has been and still is located in China.
Why is so much Mining happening in China? Samson Mow of Blockstream and former CTO of BTCC mining pool explains.
The main advantages of mining in China are faster setup times and lower initial CapEx which, along with closer proximity to where ASICs are assembled, have driven industry growth thereSamson Mow CSO, Blockstream
Bonus Chapter 1
In this bonus chapter, we will learn about colocation bitcoin mining and its differences from cloudmining.
If you were interested in cloud mining, but are worried about falling victim to a scam, then this is the closest thing to it.
What is Colocation Mining?
Colocation mining is a business arrangement between a bitcoin mining management company and a customer.
The management company establishes a location to mine the bitcoins at and strikes a deal with a power company to get favorable prices on electricity. Compass Mining, a colocation company, offers many options on where you can host your miners.
The management company also has relationships with ASIC producers in order to get favorable prices on mining ASICs.
Finally, the management company employs workers to make sure the ASICs run smoothely while keeping the location safe from theives.
Something very unique about colocation miners is that the management company may not own any of the ASICs itself.
Who owns the miners?
Well, you, the customer, do.
You contact the management company running the colocation mine, and purchase ASICs through them. The management company acts as a kind of ASIC broker. The hardware purchase page on Compass Mining’s Website
Once you have purchased your ASICs, the management company receives them at their mining location and installs them for you
How Does the Colocation Company Make Money?
The colocation management company makes money in several ways. Each management company is different, but they all make money using one or more of the following ways:
They charge you a monthly hosting fee for maintaining the miners and keeping them safe in their mine.
They make a commission for arranging the sale of the ASICs to you.
They take a cut of the mining profits from all the miners in the mine.
They add a surcharge onto the electricity that your ASICs consume in their mine.
ASIC repair services in case your miners ever needs to be repaired.
So to summarize: in a colocation mining operation, you own, control, and monitor your own ASICs. The colocation mine custodies them and lets you know if there are any issues with them. They also keep them safe by securing and maintaining the mining site.
So now you may be wondering, how is this different from cloud mining?
First, we need to define what Cloud Mining is.
What is Cloud Mining?
Cloud mining is a business arrangement where a miner owns all of the ASICs in his mine.
He offers to sell some of his hashing power to you, the customer and you get any bitcoin mined using that hashing power.
In a cloud mining arrangement, you do not own anything.
You are effectively renting the hashing power from the miner in exchange for potential profits in bitcoin.
The Big Problem with Cloud Mining
There’s just one problem with this arrangement.
Since you do not own the ASICs, you have no control over what they mine, when they mine, how they mine, etc.
And because of this, cloud mining attracts lots of scammers. An old screenshot of Hash Ocean’s website promising free bitcoin rewards for life for early sign ups. They ended up being a scam.
In most cases, in a cloud mining operation…there are no miners.
They don’t exist. At all.
The only reason you ever make money is because someone else signed up and paid the cloud miner money to get started.
which means that cloud mining operations are almost always ponzi scams. New customers pay off the old ones until there are no new people to sign up.
At that point, the founders run away with as much money as they can. Mining City, another famous cloud miner, was running a ponzi scheme where the founders ran away with the money.
And since no one actually owns any ASICs (including the cloud miner himself), there are no assets to liquidate to pay back the victims.
It’s all fictitious.
How is Colocation Mining different from Cloud Mining?
Aside from the fact that one of these models is typically legitimate and the other is typically a scam, there are some other differences even if you assume the cloud miner is running an honest operation.
First, in colocation mining, you own the ASICs. In cloud mining, you don’t.
Second, because you own the ASICs in colocation mining, you get to decide which coins you want to mine and how you want to mine them. In cloud mining, you just pay money to a miner and hope you get more back than you put in. It’s up to him to decide how and what to mine.
Is Colocation Mining a Good Alternative to Cloud Mining
If you want to mine, but don’t think you have enough money or experience to start your own mining farm, then colocation can be a great way to start mining.
It allows you to leverage the bargaining power on electricity and ASICs of a big mining operation without having to put up millions of dollars to start mining. In exchange for this, you pay a small fee and don’t need lots of expertise to get going.
You can get started with colocation mining right now by setting up an account over at compass mining.
They make it super simple to get started, and you’ll be mining in no time! Just pick a piece of hardware below (subject to availability) and you’ll be sent to Compass’s site.
Approximately every 4 years, the block reward gets cut in half. The first block reward ever mined was in 2008 and it it was for 50 Bitcoins. That block reward lasted for four years, where in 2012, the first reward halving occurred and it dropped to 25 Bitcoins.
In 2016, a second halving occurred where the reward was reduced to 12.5 Bitcoins. And as of the time of this writing, we are on the cusp of the third halving (ETA May 11th), where the reward will be cut down to 6.25 Bitcoins. You can find the most up to date estimation of exactly when the next halving will occur on our bitcoin block reward halving clock.
Hashing Power (or Hash Rate)
How many calculations (hashes) a miner can perform per second.
Or it can refer to the total amount of hashing done on a chain by all miners put together – also known as “Net Hash”.
You can learn more about Hash Rate by reading our article about it.
Measured in Trillions, mining difficulty refers to how hard it is to find a block. The current level of difficulty on the Bitcoin blockchain is the primary reason why it is not profitable to mine for most people.
Bitcoin was designed to produce block reliably every 10 minutes. Because total hashing power (or Net Hash) is constantly changing, the difficulty of finding a block needs to adjust proportional to the amount of total hashing power on the network.
In very simple terms, if you have four miners on the network, all with equal hashing power, and two stop mining, blocks would happen ever 20 minutes instead of every ten. Therefore, the difficulty of finding blocks also needs to cut in half, so that blocks can continue to be found every 10 minutes.
Difficulty adjustments happen every 2,016 blocks. This should mean that if a new block is added every 10 minutes, then a difficulty adjustment would occur every two weeks. The 10 minute block rule is just a goal though. Some blocks are added after more than 10 minutes. Some are added after less. Its a law of averages and a lot if left up to chance. That doesn’t mean that for the most part, blocks are added reliably every 10 minutes.
A measurement of energy consumption per hour. Most ASIC miners will tell you how much energy they consume using this metric.
Bonus Chapter 3
Is Bitcoin Mining a Waste of Electricity?
The media constantly says Bitcoin mining is a waste of electricity.
But, there are some problems with their theories as we’ll discuss.
Isn’t Mining a Waste of Electricity?
Certain orthodox economists have criticized mining as wasteful.
It must be kept in mind however that this electricity is expended on useful work:
Enabling a monetary network worth billions (and potentially trillions) of dollars!
As Bitcoin could easily replace 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 electricity, but of money, time and human resources!
If only 21 million Bitcoins will ever 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 in accordance with how quickly blocks are solved within a certain time frame (roughly every 2 weeks or 2016 blocks).
Difficulty rises and falls with deployed hashing power to keep the average time between blocks at around 10 minutes.
For most of Bitcoin’s history, the average block time has been about 9.7 minutes. Because the price is always rising, mining power does come onto the network at a fast speed which creates faster blocks. However, for most of 2019 the block time has been around 10 minutes. This is because Bitcoin’s price has remained steady for most of 2019.
Block Reward Halving
Satoshi designed Bitcoin such that the block reward, which miners automatically receive for solving a block, is halved every 210,000 blocks (or roughly 4 years).
As Bitcoin’s price has risen substantially (and is expected to keep rising over 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 electricity.
Honest 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 as to maintain the longest chain.
This is known as a 51% attack and it allows an attacker to spend the same coins multiple times and to blockade the transactions of other users at will.
To achieve it, an attacker needs to own mining hardware than all other honest 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… although it’s unclear what net benefit, if any, such actors would gain from degrading or destroying Bitcoin.
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 in Bitcoin’s credibility would dramatically reduce its exchange rate, undermining the value of the miner’s hardware investment and their held coins.
As the community could then decide to reject the dishonest chain and revert to the last honest block, a 51% attack probably offers a poor risk-reward ratio to miners.
Bitcoin mining is certainly not perfect 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 Red user. Green sends 1 bitcoin to Red.
Green’s wallet announces a 1 bitcoin payment to Red’s wallet. This information, known as transaction (and sometimes abbreviated as “ tx”) is broadcast to as many Full Nodes as connect with Green’s wallet – typically 8. A full node is a special, transaction-relaying wallet which maintains a current copy of the entire blockchain.
Full Nodes then check Green’s spend against other pending transactions. If there are no conflicts (e.g. Green didn’t try to cheat by sending the exact same coins to Red and a third user), full nodes broadcast the transaction across the Bitcoin network. At this point, the transaction has not yet entered the Blockchain. Red 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 enter the picture.
4) Processing by Miners
Miners, like full nodes, maintain a complete copy of the blockchain and monitor the network for newly-announced transactions. Green’s transaction may in fact reach a miner directly, without being relayed through a full node. In either case, a miner then performs work in an attempt to fit all new, valid transactions into the current block.
Miners race each other to complete the work, which is to “package” the current block so that it’s acceptable to the rest of the network. Acceptable blocks include a solution to a Proof of Work computational problem, known as 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 in expensive computing hardware and race each other to solve blocks? Because, as a reward for verifying and recording everyone’s transactions, miners receive a substantial Bitcoin reward for every solved block!
And what is a hash? Well, try entering all the characters in the above paragraph, from “But” to “block!” into this hashing utility. If you pasted correctly – as a string hash with no spaces after the exclamation mark – the SHA-256 algorithm used in 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 data is accurate. To solve a block, miners modify non-transaction data in the current block such that their hash result begins with a certain number (according to the current Difficulty, covered below) of zeroes. If you manually modify the string until you get a 0… result, you’ll soon see why this is considered “Proof of Work!”
5) Blockchain Confirmation
The first miner to solve the block containing Green’s payment to Red announces the newly-solved block to the network. If other full nodes agree the block is valid, the new block is added to the blockchain and the entire process begins afresh. Once recorded in the blockchain, Green’s payment goes from pending to confirmed status.
Red may now consider sending the goods to Green. However, the more new blocks are layered atop the one containing Green’s payment, the harder to reverse that transaction becomes. For significant sums of money, it’s recommended to wait for at least 6 confirmations. Given new 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 answer is somewhat complex and requires a solid understanding of the above mining process:
Let’s imagine two miners, A in China and B in Iceland, who solve the current block at roughly the same time. A’s block (A1) propagates through the internet from Beijing, reaching nodes in the East. B’s block (B1) is first to reach nodes in the West. There are now two competing versions of the blockchain!
Which blockchain prevails? Quite 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 reward and fees, which only exist on the invalidated A -chain.
Going back to the example of Green’s payment to Red, let’s say this transaction was included by A but rejected by B, who demands a higher fee than was included by Green. If B’s chain wins then Green’s transaction won’t appear in the B chain – it will be as if the funds never left Green’s wallet.
Although such blockchain splits are rare, they’re a credible risk. The more confirmations have passed, the safer a transaction is considered. This is why what is known as ‘0-conf’ or “0 confirmations” on the Bitcoin Cash blockchain is so dangerous.
Since it’s now impossible to profitably mine Bitcoin with a standard computer or laptop, you’ll need specialized hardware called ASICs.
Here’s what an ASIC miner looks like up close:
The Dragonmint 16T miner.
Originally, Bitcoin’s creator intended for Bitcoin to be mined on CPUs (like your laptop or desktop computer). However, Bitcoin miners discovered they could get more hashing power from graphic cards. Graphic cards were then surpassed by ASICs (Application Specific Integrated Circuits).
Think of a Bitcoin ASIC as specialized Bitcoin mining computers, Bitcoin mining machines, or “bitcoin generators”.
Nowadays all serious Bitcoin mining is performed on dedicated Bitcoin mining hardware ASICs, usually in thermally-regulated data-centers with low-cost electricity.
Don’t Get Confused
There is Bitcoin mining hardware, which mines bitcoins.
There are also Bitcoin hardware wallets like the Ledger Nano X, which secure bitcoins.
You can use our calculator below to check the mining hardware above. Input your expected electricity price and the hash rate of the miner for an estimate.Hash Rate: GH/s TH/s Bitcoin Price ($): Power consumption (watts): Cost per KW/h in $: 0 Profit / day$0 Mined per day0 BTC Mined per day$0 Electricity costs per day0 Profit / month$0 Mined per month0 BTC Mined per month$0 Electricity costs / month0 Profit / year$0 Mined per year0 BTC Mined per year$0 Electricity costs / year
The Bitcoin price and the total network hash rate are the two main factors that will affect your profitability.
Our calculator is more accurate than most others because ours assumes the 0.4527678% daily increase in network hash rate. This has been the average daily increase over the past 6 months.
Most other calculators do NOT include this metric which makes mining appear way more profitable than it actually is.
The Bitcoin Price
Bitcoin mining is a booming industry with an estimated 1,000,000 unique individuals mining bitcoins. The major driver of this increase is the rising price of Bitcoin.
The Bitcoin price increased in 2021 from around $30,000 on January 2021 to around $46,000 on January 2022. There were many times over the year that the price exceeded $50,000 even reaching a high of about $67,000. Try messing with the calculator using different prices.
Know your Competition
It may seem easy to just spin up a miner.
But you NEED to take a look at just how serious mining is.
The video below offers an inside look at what was one of China’s largest mines.