Bitcoin Mining: The Basics

One of the more misunderstood or outright confusing aspects of virtual currencies such as Bitcoin is the process called “mining.” The term conjures up images of resource extraction, when in reality the process is more akin to maintaining a decentralized digital network. The coins received during this process are paid out as an incentive for maintaining the network.

Bitcoin mining has been in the news in recent weeks, as the U.S. Treasury Department’s Financial Crimes Enforcement Network ruled that miners would not be subject to federal regulation as money transmitters for the time being. The New York Times published a special report on mining, exploring what went from the hobby of computer-building enthusiasts to a global, multi-million technology boom.

But how does mining work exactly? What hardware components are required to mine? Do you need specialized software? Read on to find out more!

A Bitcoin ‘Rig’

There are several key computer elements necessary to mine bitcoins. If you look at the photo below, you’ll see a cross-section of a typical bitcoin-mining computer, known popularly within the community as a “rig.”

Behind the jumble of wires you’ll see the central processing unit, or CPU. This is the component that actually mines the bitcoins, albeit at a slow pace due to its size and capacity. To mine variants of Bitcoin, you need a graphics processing unit, or GPU. The circuit board you see at the bottom of the image is this computer’s GPU.

You’ll also need a way to actually power the computer. See the picture below for an example of a power source unit, or PSU. This unit provides electricity to the CPU, the hard drive, the CD drive, even the fans that keep everything cool.

Once you’ve got power, you’ll need a motherboard. The motherboard holds the major components in place, such as the computer’s memory cards, the CPU, the GPU and connections for all exterior components such as the hard drive and CD drive. The fans you saw in the first picture? They get plugged in there, too.

Speaking of memory, don’t forget to plug these cards in. Coin mining requires a tremendous amount of memory to process, and without the minimum amount, your computer is likely to crash.

The hard drive is a key element, as you’ll need to install mining software, computer temperature and processing monitoring systems, and your coin wallets. Hard drives come in all shapes and sizes. The one below is a standard 500 GB model.

You’ll also need to keep everything cool. As noted earlier, Bitcoin mining requires a substantial degree of processing power. Ever notice how your computer gets real loud when you start doing several things at once? That’s the fan kicking in. The image below is an added case fan designed to pull air out of the case. The more you mine, the more fans you’ll need.

A Basic Look At Bitcoin Mining

And last, and certainly not least, there’s the software itself. There are many programs available on the Internet for mining, but for this guide, we’ll look at CGMiner. CGMiner uses a command-line interface that, despite the seemingly complex look, is actually quite simple to operate. In the example below, you’ll notice the program is called “vertminer.” This is a variant of CGMiner designed for certain memory-intensive coins such as Vertcoin and Pandacoin.

There are several key features of your average mining software. At the top left of the program is the unit “Kh/s, which stands for kilohash per second. Coin mining uses a hashing system, so the more hashes you produce, the more coins you stand to mine. The largest Bitcoin mining rigs of their kind can produce hundreds of thousands of hashes per second.

On the line that says “GPU 0” you’ll notice several important numbers to monitor. The first one is the temperature. In the image, it says “63.6C.” Because computers are very sensitive to high temperatures, miners must watch this number closely. Anything about 80C runs the risk of burning out your system, and vaporizing any profit you might have earned from the day’s mining.

There are two ways to mine bitcoins: by yourself, or within a pool. Coins are generated whenever a “block” is discovered. You might have heard of the concept of the “blockchain.” This is the structure of the Bitcoin system, and each new block “discovered” is added to the chain. Whoever discovers that block, either a solo miner or a pool of miners, receives the payout. Bitcoin miners receive 25 bitcoins per block, while other coins have varying reward structures.

For the purposes of this guide, we’ll look at pool mining, as this constitutes the majority of mining activities. Pool miners use special software called the Mining Portal Open Source (MPOS) to channel the pool’s collective processing power. This increases those miners’ chances of discovering a block and receiving coins. The more miners in a pool, the smaller the payout per miner.

When you mine in a pool, you generate shares in the next discovered block. If you refer to the image above, you’ll see an “A.” This is the number of accepted shares in the current “round.” “R” refers to rejected shares, or shares that the system does not recognize. These happen from time to time. “HW” means Hardware Errors, which signify problems in the software’s configuration that need to be addressed. “WU” refers to Work Utility, or the estimated number of shares being generated per minute. The “I” means Intensity, which is a power adjustment that alters the processing power of the rig. Another key number is “Diff”, which sets the difficulty level for discovering a block. The higher the difficulty, the tougher it is to actually find one.

Let’s start from scratch and see what happens. We set our parameters, adjust the Intensity and double-check the temperature to see if we are in the right range.

Now we wait…hold on…

Success! The rig has accepted 116 shares within the pool, as shown on the new line that appeared in the mining interface. Each line represents a new block of shares accepted – as well as a few more coins that have been generated When a block is discovered, the miner will receive a payout based on his total number of shares divided by the pool’s total of shares at the end of the round.

At this stage, it’s difficult to tell where Bitcoin is headed, and how miners will figure in the future of the virtual currency, given the increasingly high entry cost for miners as demand for computer hardware grows. In a recent commentary, economist David S. Evans explored the implications of Mt. Gox’s meltdown as it relates to Bitcoin as a successful payment system and currency. Read what he had to say by clicking here.