MODULE II

Bitcoin:

Bitcoin (BTC) is a cryptocurrency, a virtual currency designed to act as money

and a form of payment outside the control of any one person, group, or entity,
thus removing the need for third-party involvement in financial transactions. It
is rewarded to blockchain miners for the work done to verify transactions and
can be purchased on several exchanges.

Bitcoin was introduced to the public in 2009 by an anonymous developer or

group of developers using the name Satoshi Nakamoto.

It has since become the most well-known cryptocurrency in the world. Its
popularity has inspired the development of many other cryptocurrencies.
These competitors either attempt to replace it as a payment system or are
used as utility or security tokens in other blockchains and emerging financial
technologies.

Bitcoin is the first decentralized digital currency that allows peer-to-peer

transfers without any intermediaries such as banks, governments, agents, or
brokers, using the underlying technology of blockchain. Anyone around the
world on the network can transfer Bitcoins to someone else on the network
regardless of geographic location; you just need to just open an account on
the Bitcoin network and have some Bitcoins in it, and then you can transfer
those Bitcoins. How do you get Bitcoins in your account? You can either
purchase them online or mine them.
Bitcoin can be used for online purchases and or as an investment instrument.
Primarily it’s used to buy goods and services.

Bitcoin Mining:

Bitcoin mining refers to the process of validating and recording transactions

on the Bitcoin network. The primary purpose of Bitcoin mining is twofold:
validating transactions to prevent fraud and adding new blocks to the
blockchain, thereby creating new Bitcoins in a decentralized manner.

Key Takeaways:

● The process of bitcoin mining involves the verification of new

transactions against the Bitcoin network, which results in the
production of new bitcoins.
● Bitcoin mining is the process by which Bitcoin transactions are
validated digitally on the Bitcoin network and added to the
blockchain ledger.
● It is done by solving complex cryptographic hash puzzles to verify
blocks of transactions that are updated on the decentralized
blockchain ledger.

Solving these puzzles requires powerful computing power and sophisticated

equipment. In return, miners are rewarded with Bitcoin, which is then
released into circulation hence the name Bitcoin mining.

Bitcoin Advantages
Compared to traditional fiat currencies, assets can be transferred faster on
the bitcoin network. The system also has lower transaction fees, because it’s
decentralized and there are no intermediaries, and it is cryptographically
secure—the identities of the sender and the receiver are kept hidden, and it
is impossible to counterfeit or hack the transactions. Plus, all the information
is available on a public ledger, so anyone can view the transactions.

What Is Crypto Mining?

Cryptocurrency mining is a process of creating new digital "coins." However,

that is as far as simplicity goes. The process of recovering these coins
requires solving complex puzzles, validating cryptocurrency transactions on
a blockchain network and adding them to a distributed ledger to locate
them.
What Is Blockchain?

As mentioned, blockchain is the underlying technology of bitcoin. Blockchain

is a public distributed ledger in which transactions are recorded in
chronological order. Any record or transaction added to the blockchain
cannot be modified or altered, meaning transactions are safe from hacking.
A block is the smallest unit of a blockchain, and it is a container that holds all
the transaction details. A block has four fields, or primary attributes:

1. Previous hash: This attribute stores the value of the hash of the
previous block, and that's how the blocks are linked to one another.
2. Data: This is the aggregated set of transactions included in this
block—the set of transactions that were mined and validated and
included in the block.
3. Nonce: In a “proof of work” consensus algorithm, which bitcoin uses,
the nonce is a random value used to vary the output of the hash
value. Every block is supposed to generate a hash value, and the
nonce is the parameter that is used to generate that hash value. The
proof of work is the process of transaction verification done in
blockchain.
4. Hash: This is the value obtained by passing the previous hash value,
the data and the nonce through the SHA-256 algorithm; it is the
digital signature of the block.

SHA-256 is a cryptographic hash algorithm that produces a unique 256-bit

alphanumeric hash value for any given input, and that is the unique feature
of this cryptographic algorithm: Whatever input you give, it will always
produce a 256-bit hash.
3 Concepts of Blockchain

To understand bitcoin mining, you have to first understand the three major
concepts of blockchain.

1. Public distributed ledger: A distributed ledger is a record of all

transactions maintained in the blockchain network across the globe.
In the network, the validation of transactions is done by bitcoin
users.
2. SHA-256: Blockchain prevents unauthorized access by using a hash
function called SHA-256 to ensure that the blocks are kept secure.
They are digitally signed. Their hash value, once generated, cannot
be altered. SHA-256 takes an input string of any size and returns a
fixed 256-bit output, and it is a one-way function—you cannot derive
the reverse of the input reverse fully from the output (what you
have generated).
3. Proof of work: In blockchain mining, miners validate transactions by
solving a difficult mathematical puzzle called proof of work. To do
that, the primary objective of the miner is to determine the nonce
value, and that nonce value is the mathematical puzzle that miners
 are required to solve to generate a hash that is less than the target
defined by the network for a particular block.

Bitcoin Profit and Bitcoin Mining Profitability

Bitcoin Profit is an automated crypto robot that helps trade Bitcoins and
other cryptocurrencies to earn profit. It uses an AI algorithm to identify
trading opportunities in the crypto market that can automatically close and
open your trade, saving your time and manual intervention during trading. It
claims that around 85% of its trades produce profits in normal market
conditions. However, technical knowledge is required to calculate the profit
generated through the Bitcoin mining process.

Talking about the actual Bitcoin profit - the real money making - it depends
upon the cost of the AISC hardware, electricity consumption, and the
effectiveness of the mining software. Bitcoin Mining profitability has
decreased in recent times compared to the previous years because of the
rise in electricity costs, costlier hardware, difficulty in mining due to an
increase in competition, and a decrease in the Bitcoin prices. Earlier, Bitcoin
Mining was initiated using CPUs and easy AI Algorithms, making it profitable
and less costly.

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Bitcoin vs. Traditional Currencies

While both Bitcoin and traditional currency are similar in that both are a
store of value, they differ in many ways. First things first, Bitcoin is the first
and most recognized cryptocurrency - a digital currency that is secured by
cryptography. Traditional currency, also referred to as fiat money, is a
government-issued and regulated currency.

Some differences between Bitcoin and traditional currencies are illustrated in

the table below.

Bitcoin Traditional Currency

Tangibility It is a virtual currency It is a physical currency in the
and can only be used in form of notes and coins.
its digital form However, we can use it in both
physical and digital forms

Regulation Issued through mining Issued and controlled by central

and controlled by a government authorities, i.e.,
decentralized central banks. Owing to this, the
distributed network of traditional currency is the legal
computers tender in the country governed
by the issuing authority.

Governanc Governed by a Purely governed by the central

e consensus mechanism bank
in which the majority
rules

Value Value is backed by the Value is determined by forces of

trust of its users. The supply and demand and is thus
more users are willing vulnerable to inflation
to transact with Bitcoin,
the more stable it
becomes.
 Supply Capped at 21 million Fiat currency has no supply limit
bitcoin

Validation Bitcoin transactions are Transactions involve an

of validated using intermediary such as a bank or
transaction blockchain technology a payment provider
s and so do not require an
intermediary for
validation

Transactio Minimal or no Transactions attract

n fees associated fees as considerable charges
intermediaries have
been eliminated

Transactio The transaction is Transactions may take time

n time and almost always before verification or before
speed instantaneous or greatly they reflect on the system
depends on the network
speed
 Security The concepts of Less secure as it can be
decentralization, negatively affected by
cryptography, and fluctuations in government
consensus guarantee a policies
secure network and
security of bitcoin
transactions

Reversals Bitcoin transactions Chargebacks, reversals, and

cannot be charged cancellations are commonplace
back, reversed, or with traditional currency
canceled transactions

How Does Bitcoin Mining Work: Public Distributed

Network, POW, The 64-Digit Hexadecimal Number
(SHA-256 Algorithm)

Blockchain is a decentralized peer-to-peer network that has been hailed as

highly secure and transparent, hence trustworthy. This is because records in
the blockchain network are secured using timestamps and cryptographic
hash functions in such a way that after being added to the ledger, it is
almost impossible and impractical to alter the transactions. At the core of
blockchain security is the absence of centralized control.
Here is a breakdown of what happens during bitcoin mining

● The Mining Requirements

A bitcoin miner will first select their tools of the trade and set them up. These
include:

● Hardware GPU (graphics processing unit), SSD for crypto mining, or

ASIC (application-specific integrated circuit)
● Mining software
● A wallet
● Preferred mining pool (if one chooses pool mining option instead of
solo mining)

Once all these are set up and the system fired up, it performs the mining
process autonomously. Any other human involvement comes in the event of
system or network failure, power outage, or regular system maintenance.

● Elements of a Bitcoin Transaction

When a transaction is initiated in the bitcoin network, three elements are

involved:

● A transaction input
● A transaction output
● The transaction amount

For every transaction input, a bitcoin mining software generates a unique

cryptographic hash puzzle that is difficult to decode. The software then
groups the number of transactions required to form a block into a Merkle
tree.

● The Merkle Tree and the SHA-256 Algorithm

A Merkle tree is a data structure of the hashes in a block and acts as a

summary of all the transactions in the block. In the Merkle tree, hashes of
individual transactions known as transaction IDs are paired repeatedly using
the SHA-256 algorithm until only one hash identifies the entire tree. This
hash is known as the Merkle root or root hash.

The Merkle tree enables the efficient verification of transactions in the

bitcoin network.

● The Block Header

The Merkle root, the identifier of a Merkle tree, is stored in the block header.
The block header contains information about the block and includes the
following components:

● The version number of the bitcoin software

● The hash of the previous block
● The Merkle root (root hash)
● Timestamp
● Cryptographic nonce
● The target

This is the information miners will use to solve the hash puzzle and add a
block transaction.
 ● Solving the Hash Puzzle

Miners must solve the hash puzzle by finding the hash below a given target
through the difficulty requirement. The target, stored in the header, is
expressed as a 67-digit number that will determine the mining difficulty
based on the number of miners competing to solve a hash function. It is
important to note that this difficulty adjusts after every 2016 blocks are
created depending on how much time it took miners in the previous 2016
blocks to solve an equation. This also helps to maintain the rate at which
transactions are appended in the blockchain at 10 minutes.

To solve the hash puzzle, miners will try to calculate the hash of a block by
adding a nonce to the block header repeatedly until the hash value yielded is
less than the target. Once a mining computer solves the puzzle, a new block
is successfully created that is validated in the Bitcoin network after a
consensus between the nodes has been reached. When a block is validated,
the transactions bundled in it are verified and the block is added to the
chain. As indicated above, this happens every 10 minutes.

As there will be many miners (systems) competing to solve the puzzle, the
first miner to get the correct hash value earns a reward in Bitcoin. This
process allows more Bitcoins in circulation.

Mining and Bitcoin Circulation

Bitcoin’s upper supply limit of 21 million bitcoin set by its source code by
Satoshi Nakamoto, its inventor, is puzzling. However, experts have seen it as
a huge advantage because the scarcity of supply breeds value and a stable
price for the oldest crypto.

From the genesis Bitcoin block mined in 2009 with 50 bitcoins, more bitcoins
have since been mined and released into circulation. Bitcoin mining ensures
that blocks of transactions are created and stacked in the right order in a
way that can be traced and proven mathematically. With the creation of
blocks comes bitcoins as a reward, which increases the number of bitcoins in
circulation.

Bitcoin architecture was structured ingeniously such that every 10 minutes,

a block is discovered, and a fixed bitcoin award is offered for every block that
is mined.

Prevention of Hacking

What if someone tries to hack the data? Blockchain, as the name implies, is a
chain of blocks—let’s call the blocks A, B and C. Each block has solved a
puzzle and generated a hash value of its own, which is its identifier. Now
suppose a person tries to tamper with block B and change the data. The data
is aggregated in the block, so if the data of the block changes, then the hash
value that is the digital signature of the block will also change. It will
therefore corrupt the chain after it—the blocks ahead of block B will all get
delinked, because the previous hash value of block C will not remain valid.

For a hacker to make the entire blockchain valid for the block B that has
been changed, he or she would have to change the hash value of all the
blocks ahead of block B. This would require a huge amount of computing
power and is next to impossible. With this method, blockchain is non-
hackable and prevents data modification.

Why Mine Bitcoin?

Let’s be straight: people primarily mine Bitcoin to earn profits. Other than
that, people who are curious about this technology and how it works enjoy
experimenting with this relatively new technology.

How to Mine Bitcoin?

The Bitcoin miners are suggested to use mining hardware, such as Ebang,
Antminer, Minedollars, AvalonMiner, or more that generates new Bitcoins
after every 10 minutes. To mine Bitcoin, the miner is advised to invest in a
powerful setup designed specifically for mining cryptos. Excessive or
advanced computer knowledge must be possessed to operate the hardware
system. The user then has to create at least one Bitcoin wallet for Bitcoin
Mining that is secured and convenient.

Once the mining hardware is set up and the Bitcoin wallet is created, the
miner must adopt strategies to install and configure the mining software. The
miner has to apply technical knowledge to improve the mining capacity. The
mining process then begins after the miner downloads a soft copy of the
blockchain of Bitcoin and clicks on the start button. The miner needs to
monitor the progress regularly to ensure that the mining application runs
smoothly. However, the miner does not need to do anything manually and
can rely on the mining hardware after the mining process is started. Because
of the Bitcoin Mining process, new blocks are added to the blockchain.

Also Read: 10 Things You Didn’t Know About Bitcoin

How to Mine Bitcoin at Home?

Mining Bitcoins at home is challenging and requires certain steps to achieve

good results. The first step is to set up the hardware properly and search for
a strong power connection. The person then can create a mining wallet in
any trading platform of their choice and join a mining pool to proceed
further. The most important step is installing an effective mining software
such as Awesome Miner, Easy Miner, and Pionex and then inserting the
wallet details and the information about the mining pool.
However, the hardware needed for mining is expensive, and everyone
cannot afford it. Moreover, mining Bitcoins requires a lot of electricity
consumption. Only people who have access to low-cost electricity can afford
to mine Bitcoins at home. Therefore, Bitcoin Mining at home can be
profitable but needs resources and efforts whose costs are huge.

How to Calculate Bitcoin profit?

Keeping aside the actual Bitcoin profit earned by mining, miners have to
perform a cost-benefit analysis to understand their break-even price before
purchasing costly hardware or other mining equipment.

To calculate the Bitcoin profit, one must analyze the amount spent
purchasing Bitcoin currencies. The next step is to check how much 1 Bitcoin
costs at the purchase and compare it with the current value. The differences
between the current and old values will provide a clear idea about the
amount of profit earned.

Several factors that hinder Bitcoin's profit are:

Cost of Power

The price of electricity changes every season. Electricity is consumed not

only to mine Bitcoins but also to prevent them from overheating and cooling
them down.

Time
There is no time length for mining. Many miners mine 24x7 as they can
afford the mining cost.

Bitcoin value

Changes in the Bitcoin value are ascertainable, affecting your Bitcoin profit
and return on investment.

Efficiency

Difficulty in mining can arise due to slow computers, low voltage, or any
other factor, affecting efficiency.

How Much Does a Miner Earn - Bitcoin Halving

Bitcoin halving refers to the splitting of block rewards into half to mean that
miners’ reward for discovering a block is reduced by half. Halving exists to
lower Bitcoin’s inflation rate and the rate at which new Bitcoins are released
into circulation, keeping the price of Bitcoin stable. The halving event
happens after every 210,000 blocks have been mined, which is roughly after
every four years. The number of Bitcoins in circulation is calculated by the
halving theory laid out by Satoshi Nakamoto in the Bitcoin protocol.

When Bitcoin was first launched, the reward for every block mined started at
50 Bitcoins. To date, three halving events have taken place, and the block
reward went from 50 from 2009, 25 from 2012, 12.5 from 2016, to the
current 6.25 BTC from 2020. The last Bitcoin halving event took place on
May 11th, 2020.

By September 2021, 18.828 million of the 21 million Bitcoin cap had been
mined and released into circulation, accounting for roughly 89.7% of all the
Bitcoins to be mined.

The next Bitcoin halving event is expected to take place in the early months
of the year 2024. Halving should continue until all blocks are mined, and the
21 million Bitcoin supply cap is attained sometime in 2140. After this, the
Bitcoin miners will only earn from transaction fees.

What Do I Need to Mine Bitcoins?

Mining must have been a lot easier in the early days of its launch. As bitcoin
and the blockchain concept were relatively new, mining was left to hobbyists
on a discovery path. In fact, bitcoin’s inventor Nakamoto mined the genesis
block on a basic CPU. As bitcoin continues to gain wider adoption, it has also
succeeded in drawing keen interest from investors, miners, and companies
harnessing cryptocurrency as a mode of payment for products and services.
With this, mining has become a very competitive undertaking, and the
hardware and software demands for bitcoin mining are also more
sophisticated.

Today, bitcoin mining requires specialized tools, including:

● Hardware such as GPU (graphics processing unit), SSD for crypto

mining, ASIC (application-specific integrated circuit), or the latest
 FPGA (Field Programmable Gate Array) chips. When purchasing
mining hardware, it is important to consider two factors, their hash
rate (performance) and electricity consumption.
● Mining software such as ECOS, BeMine, and Kryptex Miner
● A bitcoin wallet from which an individual performs bitcoin
transactions
● Preferred mining pool (if one chooses pool mining option instead of
solo mining)

Is Bitcoin Mining Profitable?

Bitcoin Mining is not profitable for all individual miners except a few due to
the complicated mining process and high costs. All the miners cannot spend
huge amounts of dollars setting up the hardware. A cost-benefit analysis is
performed to ascertain the profitability. The amount of electricity
consumption in kWh, efficiency, difficulty, time taken to complete the mining
process, and the Bitcoin value are deciding factors.

The cost of setting up the hardware is very high, and it requires an

application of a high level of technical expertise. All the miners are not well
equipped with these applications, resulting in low profits for these individual
miners. Because of this, miners are recommended to join mining pools where
a group of miners can work together. By following this approach, Bitcoin
miners will be able to increase their chances of earning more rewards in
more Bitcoins.
Bitcoin Mining Calculator, a Bitcoin Profitability
Calculator

Calculating the Bitcoin Mining profitability helps evaluate the mining rewards
and mining costs. That can be done with the help of a Bitcoin Mining
calculator, which requires the user to fill in details, including Bitcoin mining
hashrate, consumption of power in Watts, cost of electricity in $/kWh, and
maintenance fees. The hashrate values are adjusted, and an appropriate
mining hardware device is selected from the ASIC Bitcoin miners list.

The Bitcoin profitability calculator uses strategies for providing reliable and
accurate profitability information about Bitcoins. This information is crucial
for the miners as they make decisions about Bitcoin Mining based on such
information. The miners continue the mining process only if a high profit is
earned and the cost of electricity consumption is low.

What Does It Take to Run a Profitable Bitcoin

Mining Venture?

● Choice of Hardware

Bitcoin mining hardware performance is measured in terms of hash rate.

Current new-generation ASIC miners produce 100 TH/s (trillion hashes per
second) and cost somewhere between $8,000 - $10,000. Ordinary CPUs do
not have the capacity to produce such fast hash rates.
 ● Location

Developed nations may well have an edge when it comes to location

because of the low cost of power. Bitcoin is quite power-intensive. It was
estimated that one bitcoin transaction requires approximately 1,544 kWh of
power to complete, which is equivalent to around 53 days of normal power
consumed in an average American household which translates to an average
of $200 in cost for a single transaction at 13 cents per kWh.

Thus finding the right location with lower electricity costs of less than 10
cents per kWh will help maintain a profitable bitcoin mining venture.

Profit From Bitcoin Mining

In essence, earnings from bitcoin mining should be able to recover the cost
of the mining requirements purchased as well as the running costs of
electricity. This is possible with efficient hardware, lower electricity costs,
and joining a reliable mining pool which we shall see below.

Is Bitcoin Mining Legal?

No and Yes.

Even though bitcoin has gained wide acceptance across the globe, it still
remains highly contested in some countries because of its decentralized
nature and volatility and its exorbitantly high power consumption.
In countries like China, Russia, Bolivia, Algeria, and Ecuador, bitcoin trading
is either restricted or outright illegal thanks to its decentralized nature,
volatile value, association with criminal activities, and several other reasons.
In other countries, the legal status of bitcoin is unknown.

EU countries like Finland, Germany, France, and others as well as the United
States, Canada, Australia, and the UAE, welcome bitcoin and is widely
transacted.

Risks and Limitations

To hear some people describing Bitcoin mining, you’d think that all you need
to do is solve a few puzzles and you’ll be rolling in easy money. But
remember, if something sounds too good to be true, then it probably is.
Bitcoin has its share of limitations and risks, such as:

● It can leave security vulnerabilities that hackers can exploit

● There is no guarantee of success; you could wind up investing a
huge amount of money in the necessary equipment and have
virtually no ROI (Return on Investment).
● It’s responsible for boosting utility and computing costs.
● Since Bitcoin and other cryptocurrencies are volatile, even if you
manage to successfully mine a respectable amount of
cryptocurrency, you’ll still be underwater if the value suddenly
plummets.
● Cryptocurrency is decentralized, so there are no government
regulations. Consequently, there are no legal protections.
 ● Bitcoin transactions are irreversible. If you send the wrong amount
or give the right amount to the wrong person, well, your options to
correct things are limited.
● And finally, regardless of the huge buzz that cryptocurrencies
generate, at the end of the day, it’s not widely accepted.

Bitcoin Mining Electricity Cost Calculator

The profitability of Bitcoin Mining is a complicated process as numerous

factors affect the profitability of Bitcoin Mining. Electricity consumption is
one of the major factors affecting profitability. An electricity cost calculator is
used for finding the amount of electricity consumption in kWh. The calculator
estimates the amount of kW used in the whole day. After this, the kWh cost
is estimated based on the user's location energy prices and then multiplied
by 30 to find the monthly electricity expense. Based on these results, many
miners shifted to locations where electricity prices were not very high.

FAQs

Why do bitcoins need to be mined?

Bitcoins risk getting copied, counterfeited, or double-spent by the same coin

more than once. The mining process reduces these risks by making them
expensive and resource-intensive.

How does mining confirm transactions?

Mining transactions are validated digitally on the bitcoin network you use
and add to the blockchain ledger. It is done by solving complex
cryptographic hash puzzles to verify blocks of transactions updated on the
decentralized blockchain ledger.

Why does mining use so much electricity?

Bitcoin's decentralized structure drives its huge carbon footprint. It requires

computers to solve more complex mathematical problems, which consumes
more electricity than people realize.

Is bitcoin mining legal?

According to TheStreet, reporting on a November 2021 Law Library of

Congress report, bitcoin mining is banned in various countries, such as
Bangladesh, China, Egypt, Iraq, Morocco, Nepal, Qatar, and more. However,
it is legal in the US, and most countries, but not all US states allow the same.

Does crypto mining damage your GPU/computer?

Not necessarily. Most GPUs rely on auxiliary fans that prevent degradation
during longer periods. Hence, crypto mining doesn't harm the GPU/computer
until it's cleaned to prevent damage.

Can you mine bitcoin on your iPhone?

It is possible to mine bitcoin on your iPhone. However, you need to have

authentic apps without any leaks in the app store. It takes around 10
minutes to mine one block with the reward of 6.25 bitcoins per block from
the iPhone.

How much money can you make mining bitcoin?

By mining one bitcoin block, you get a reward of 6.25 bitcoins, roughly
$143,000. Moreover, the power required to mine one bitcoin is extremely
high. However, the overall process turns out to be profitable.

How do you join a bitcoin mining pool?

The bitcoin pool process is simple and free to join. The first step is to have
bitcoin mining hardware. Then download bitcoin mining software. If you are
unsure whether you want a free pool, you can go for paid pools that charge
around a significant percentage of pool fees.
 Energy consumption
Energy Energy consumption rate
rate of bitcoin mining
Consumptio of bitcoin mining system
system 3.2 Million
n rate 1.2 Million household.
household.

Structure of bitcoin is Structure of Ethereum is

Structure
simple and robust. complex and feature rich

Miner got nearly 5 BTC

Miner got nearly 6.25
along with same
BTC on successfully
Rewards additional rewards on
adding new block in
successfully adding new
network.
block in network.

Assets of Ethereum is
Assets Assets of Bitcoin is BTC.
Ether.