What are Mining Pools?

Mining pools are simply a means for miners to combine their resources and share the rewards of mining, so that they can be guaranteed to earn at least some bitcoins rather than take their chances mining alone. There are many different pools available, and they each offer different advantages and terms for joining.

Bitcoin block rewards

The bitcoin network represents a huge amount of hashing power. With bitcoin difficulty passing 1,000,000,000 at the end of 2013 and 5,000,000,000 by the end of March 2014, miners need ever-faster rigs to compete for a limited share of coins. At the present rate, 25 bitcoins are released every 10 minutes, on average.

However, bitcoins are not evenly shared amongst the network. Every time a block is awarded, it is given to just one miner: the one who finds the hash that is used to verify that block. This all-or-nothing approach means that powerful miners have a better chance of gaining some rewards, whereas miners with lower-powered rigs stand practically no chance of ever receiving any bitcoins. This essentially means that a miner going it alone will be extremely lucky to see any return on their investment.

Pooling resources

The answer to this problem has been the development of mining pools. These allow miners to join together and form associations that can bring enormous collective hashing power to the network. Instead of being awarded to a single miner, any bitcoins received go to the pool. They are then shared amongst its members on a proportional basis, depending on how much hashing power each miner contributes. Lower-powered miners will receive less coins that those who contribute more hashing power. However, the benefit is clear: everyone will receivesomething.

Fees

There are many pools available, and each will have different terms. You should research these carefully as some may be more or less suitable for you. You can find a comprehensive list of pools here. As a broad rule, the amounts these pools pay out is roughly equal; however, there are slight differences and certain models appear to offer advantages at different stages of mining over the months. Others are better suited to newcomers.

Hashrates

The hashrate of a pool is the total amount of hashing power it brings to the network. This is not particularly important in itself, since the rewards you receive will be proportionate to the hashing power you bring, rather than the full pool. When it does become an issue is if a single pool collects enough miners that it represents more than 50 percent of the total mining power in the network. At this point there is a theoretical security issue, since that pool ‘decides’ what the official blockchain looks like. When this has come close to happening in the past, miners have left for other pools to prevent the potential for this to vulnerability to cause an issue.

Merged mining

Some pools allow mining on more than one blockchain using the same hashing. This only works on bitcoin derivatives which use SHA-256 (not on Litecoin and other Scrypt-based cryptocurrencies). It is a way of increasing your potential earnings.

Finally, you should check the reputation and track record of any mining pool you consider joining. Some pools have been subject to hacks and security issues.

Comparison of mining pools

What is Bitcoin Mining? (With 2 Other Sources)

Mining is the process of adding transaction records to Bitcoin's public ledger of past transactions. This ledger of past transactions is called the block chain as it is a chain of blocks. The block chain serves to confirm transactions to the rest of the network as having taken place. Bitcoin nodes use the block chain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere.

Mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady. Individual blocks must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses the hashcash proof-of-work function.

The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a "subsidy" of newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.

Bitcoin mining is so called because it resembles the mining of other commodities: it requires exertion and it slowly makes new currency available at a rate that resembles the rate at which commodities like gold are mined from the ground.

Difficulty

The Computationally-Difficult Problem

Mining a block is difficult because the SHA-256 hash of a block's header must be lower than or equal to the target in order for the block to be accepted by the network. This problem can be simplified for explanation purposes: The hash of a block must start with a certain number of zeros. The probability of calculating a hash that starts with many zeros is very low, therefore many attempts must be made. In order to generate a new hash each round, a nonce is incremented. See Proof of work for more information.

The Difficulty Metric

The difficulty is the measure of how difficult it is to find a new block compared to the easiest it can ever be. It is recalculated every 2016 blocks to a value such that the previous 2016 blocks would have been generated in exactly two weeks had everyone been mining at this difficulty. This will yield, on average, one block every ten minutes. As more miners join, the rate of block creation will go up. As the rate of block generation goes up, the difficulty rises to compensate which will push the rate of block creation back down. Any blocks released by malicious miners that do not meet the required difficulty target will simply be rejected by everyone on the network and thus will be worthless.

Reward

When a block is discovered, the discoverer may award themselves a certain number of bitcoins, which is agreed-upon by everyone in the network. Currently this bounty is 25 bitcoins; this value will halve every 210,000 blocks. See Controlled Currency Supply.

Additionally, the miner is awarded the fees paid by users sending transactions. The fee is an incentive for the miner to include the transaction in their block. In the future, as the number of new bitcoins miners are allowed to create in each block dwindles, the fees will make up a much more important percentage of mining income.

The mining ecosystem

Hardware

FPGA Module

Users have used various types of hardware over time to mine blocks. Hardware specifications and performance statistics are detailed on the Mining Hardware Comparison page.

CPU Mining

Early Bitcoin client versions allowed users to use their CPUs to mine. The advent of GPU mining made CPU mining financially unwise as the hashrate of the network grew to such a degree that the amount of bitcoins produced by CPU mining became lower than the cost of power to operate a CPU. The option was therefore removed from the core Bitcoin client's user interface.

GPU Mining

GPU Mining is drastically faster and more efficient than CPU mining. See the main article: Why a GPU mines faster than a CPU. A variety of popular mining rigs have been documented.

FPGA Mining

FPGA mining is a very efficient and fast way to mine, comparable to GPU mining and drastically outperforming CPU mining. FPGAs typically consume very small amounts of power with relatively high hash ratings, making them more viable and efficient than GPU mining. See Mining Hardware Comparison for FPGA hardware specifications and statistics.

ASIC Mining

An application-specific integrated circuit, or ASIC, is a microchip designed and manufactured for a very specific purpose. ASICs designed for Bitcoin mining were first released in 2013. For the amount of power they consume, they are vastly faster than all previous technologies and already has made GPU mining financially unwise in some countries and setups.

Mining services (Cloud mining)

Mining contractors provide mining services with performance specified by contract. They may, for example, rent out a specific level of mining capacity for a set price for a specific duration. Hosted mining services and Cloud Mining create systemic risk for Bitcoin because they undermine the security assumption that the control of mining power is well-distributed. If too much hashrate is consolidated in large hosting centres, an attacker is more-easily able to compromise a significant portion of it and could potentially disrupt Bitcoin or steal back their own spent money.

Pools

As more and more miners competed for the limited supply of blocks, individuals found that they were working for months without finding a block and receiving reward for their mining efforts. This made mining something of a gamble. To address the variance in their income miners started organizing themselves into pools so that they could share rewards more evenly. See Pooled mining and Comparison of mining pools.

History

Bitcoin's public ledger (the 'block chain') was started on January 3rd, 2009 at 18:15 UTC presumably by Satoshi Nakamoto. The first block is known as the genesis block. The first transaction recorded in the first block was a single transaction paying the reward of 50 new bitcoins to its creator.

Source 1 (Bitcoinminer.net)

Source 2 (whatis.techtarget.com)

How to Sell Bitcoin?

Selling bitcoin isn’t quite as straightforward as buying bitcoin, but fortunately CoinDesk is here to help. This guide will give you all the information you need to cash out your digital currency.

When deciding how to sell your bitcoin, you first need to consider which method best suits your situation: selling bitcoin online or selling bitcoin in person. Each option has its own advantages and disadvantages.

Selling bitcoin online

Selling bitcoin online is by far the more common way of trading your bitcoin. There are now three ways to go about selling bitcoin online.

1. The first way involves a direct trade with another person, an intermediary facilitating the connection.

2. The second way is through an online exchange, where your trade is with the exchange rather than another individual.

3. New peer-to-peer trading marketplaces that allow bitcoin owners to obtain discounted goods with their bitcoin via others that want to obtain the cryptocurrency with credit/debit cards. The two groups are brought together to solve both problems in a kind of peer-to-peer exchange.

1. Direct trades: Websites that offer this type of selling structure include Coinbase and LocalBitcoins in the US, and BitBargain UK andBittylicious in the UK.

On these sites, you will usually have to register as a seller. This involves verifying your identity, which we will discuss again later. Once you have registered, you can post an offer, signalling that you want to sell, and the website will alert you when a buyer wants to trade with you. From there, your interaction is solely with the buyer, but you use the website to complete your trade.

The process of selling on Bitbargain UK and (more so) Bittylicious can be quite involved and requires some patience. However, support at the former site has been great in our experience. Bitcoin users with bank accounts in the United States should consider using Coinbase, which has won many fans with its simplicity.

2. Exchange trades: The other way to sell bitcoins is to register with an online exchange. You will still have to verify your identity, but in this case you won’t have to do as much work when it comes to organizing the sale.

Exchanges act as an intermediary who holds everyone’s funds. You place a ‘sell order’ (just as you would place a buy order), stating the volume (amount) and type of currency you wish to sell (eg: bitcoin), and the price per unit you wish to sell for.

As soon as someone places a matching buy order, the exchange will complete the transaction. The currency will then be credited to your account.

The downside that accompanies this ease of use is that, if you are selling bitcoin for fiat currencies, you will need to withdraw those funds to your bank. If the exchange is facing liquidity problems or issues with its banks, it can take an inordinate amount of time to receive your funds.

Mt. Gox became infamous for this problem before it went bankrupt, andBTC-e has recently been plagued with reports of similar difficulties. Therefore, you should carefully research the exchange you intend to use before committing funds.

Examples of other crypto-to-fiat currency exchanges include Kraken, Virtex and Bitstamp.

Alternatively, you could use a pure cryptocurrency exchange to change bitcoin for another cryptocurrency. It’s less likely that anyone would want to do this, but there are reasons such as arbitrage, or the rare occasion if a shop accepts something other than bitcoin (for example, Bitcoin Shop now accepts litecoin and dogeoin too, for a wide range of goods).

Examples of these types of sites are: BTER,CoinCorner and Cryptsy.

In addition, you’ll have to pay a fee to use some exchanges. BTC-e charges a flat 0.2%. For overviews of what fees are charged by the various cyrptocurrency markets and what volumes are being traded, see CoinCompare and Bitcoin Charts for up-to-date information.

Another consideration is that there will be some limit to the amount of money you are allowed to store (subject to change over time) on an exchange. Regardless, it is not wise to use exchanges to store your entire pot of coins, even though it can appear to be the easy option if all you are doing is speculating. You should take responsibility for your own funds, and store any unneeded amounts on your own devices or offline, rather than trusting an exchange that might one day be hacked.

3. Peer-to-peer trading marketplaces

A new development in the bitcoin space is the advent of sites likePurse.io, which set out to bring together two groups of people with specific and complementary needs. The first group are individuals who want to be able to use bitcoin to buy goods from sites which do not yet directly accept digital currencies. The second comprises of others who would like to buy bitcoin with a credit or debit card. The marketplace brings together individuals with matching requirements to effectively sell bitcoin to one and provide discounted goods for the other.

The marketplace acts as an intermediary, offering users the platform, bitcoin wallet and escrow for transactions.

How it works:

1. Alice posts her required Amazon wish list on the marketplace, stating the discount she would like (normally up to 25%).
2. Bob has a credit/debit card and wants to buy bitcoin matching the value of Alice’s purchase(s). He accepts the trade and, through the marketplace, buys the Amazon goods and requests they be delivered to Alice’s address.
3. Once the goods are delivered, Alice notifies the marketplace and Bob’s bitcoin are released from escrow and arrive in his wallet, minus Alice’s agreed discount and a small fee for the marketplace.

This system does mean that Bob will be paying a relatively high fee for the service, but also means he will be easily able to acquire bitcoin via bank card.

Concerns with withdrawing funds

The universal way to move money around the world is international wire transfers. Most (if not all) online bitcoin markets support this method of transferral.

Another way to transfer money to your bank after selling bitcoin is via the “Single European Payments Area” (SEPA) system. SEPA was designed to make international transfers between member states of the European Union more efficient. Some exchanges (such as Kraken and BTC-e) support these payments.

However, transfers take a very long time (around four days), and can incur large charges – potentially making trading prohibitively expensive. HSBC, for example, charges £4 per SEPA payment made via online banking and £9 per WorldPay transaction. Barclays charges £15 per SEPA payment and £25 for other international transactions.

If you are opening an account with the specific purpose of receiving funds from bitcoin trading, you may find high street banks refuse to do business with you. HSBC has explicitly refused the author of this guide accounts for bitcoin trading.

You can also use third-party payment processors to withdraw and receive fiat funds. The numbers of these services is dwindling, however. OKpay recently stopped engaging with bitcoin businesses, and PayPal has never officially dealt with bitcoin businesses. Note, though, that LocalBitcoins does show PayPal as a payment option.

Identity verification

While many of the bitcoin markets mentioned here require very little identification from buyers, they require a lot of proof of identity from sellers. There are few legal requirements from bitcoin markets to record who their users are, but most (if not all) are pre-emptively collecting identity data in anticipation of forthcoming regulations. To make becoming a seller easier, it is worth at least considering completing the identity verification process when you first join the site. Getting this step out of the way can remove barriers to selling if and when you’re ready to make the move.

Expect markets to ask you to upload scans of two utility bills displaying your name and address, along with a photo ID (such as a passport or driving licence). Some (such as BitBargain UK) may even ask you to take a selfie including your photo ID and the name of the market on a piece of paper! If you are not comfortable uploading such personal documents to an (effectively) untrusted business, then you will have a difficult time finding somewhere to sell bitcoin online.

2. Selling bitcoin in person

Selling bitcoin in person can, in many ways, be the easiest way to pass on your digital currency. Simply scanning a QR code on another person’s phone and accepting cash-in-hand is about as easy as a bitcoin transaction can get.

If you have friends or family who want to buy bitcoin, the process is simple. Set them up with a bitcoin wallet, send them the bitcoins and collect your cash.

There are several things to be aware of when selling bitcoin in person.

Agree a price: Decide on a rate works for you.

• Many use a price from a prominent bitcoin exchange, or the CoinDesk Bitcoin Price Index.
• Some sellers apply a percentage on top of these rates to cover costs and as a convenience/anonymity premium.
• You could use a mobile app to calculate prices. Popular apps include Zeroblock and BTCreport.
• It helps to be aware of local fluctuations in price. Price can vary from country to country, often due to difficulties in obtaining bitcoin with the local national currency.
• There are many bitcoin meetups around the world where people are happy to trade bitcoin and other cryptocurrencies.

Stay safe 

• It is always wise when carrying a large amount of cash to meet in a public place and/or go with a friend.

LocalBitcoins

• Alternatively, you could advertise yourself as a bitcoin seller to a wider audience. The definitive site for this is LocalBitcoins. This website allows users to rate each other, so one may assess the trustworthiness of a potential trade partner. You may be able to sell with a premium attached once you have a reliable reputation.
• You do not need to verify your identity as on other sites.
• Again, if you are setting yourself up for an in-person meeting using LocalBitcoins, you must always think about the general safety rules for meeting a stranger from the Internet.
• LocalBitcoins also supports escrow transactions, however, these are for online transactions, not face-to-face deals. Therefore, do not comply with requests for someone who asks for escrow for a face-to-face transaction.

What is Bitcoin?

Bitcoin is an open source, peer-to-peer digital payment system that only exists in cyberspace and does not use physical bank notes or coins. The concept of Bitcoins arose in 2008, after an anonymous user published a paper on a cryptographic digital currency and released the Bitcoin software the following year.

The Bitcoin system is not controlled by any central bank, institution, or country, but operates as a digital currency where users are able to connect directly to each other and transfer Bitcoins anonymously using digital “wallets”.

How are Bitcoins created?

Bitcoins are created in a process known as “mining” which uses the processing power of users’ computers to verify the transfer of Bitcoins between users and create new Bitcoins. Miners verify transactions by using their computers to solve complex mathematical problems. The computer that solves the problem is rewarded with Bitcoins, thereby creating an incentive for others to assist in verifying transactions and support the system.

The Bitcoin system is setup so that as more people mine Bitcoins, the odds of successfully mining one goes down, making it more difficult to mine coins and increasing their value.

Once Bitcoins are created, then what?

Bitcoins can be used to buy goods and services both online and in person with hundreds of Canadian businesses already accepting Bitcoin as a form of payment. Bitcoin Exchange services have also been created to give users the ability to convert their Bitcoins both to and from traditional currencies. In Canada, some cities now have Bitcoin ATMs to make it even easier to buy/sell Bitcoins.

The value of a Bitcoin has recently experienced some volatility, subject largely to demand, world events and businesses activities. As of June 2014, one Bitcoin is equal to $574 US dollars. Over 12 million Bitcoins have been created.

Are Bitcoins considered a real currency?

In Canada, the Currency Act, Royal Canadian Mint Act and the Bank of Canada Act contain provisions governing legal tender and currency. Only Canadian bank notes and coins are recognized as currency and eligible to be used as legal tender in Canada. Barter transaction rules apply where Bitcoins are used to purchase goods or services. Other Governments and their respective financial institutions are still in the process of determining how they view Bitcoin.

Are there risks with using Bitcoin?

Yes, there are risks. Criminal organizations have gravitated to Bitcoin because of the anonymity it offers and the fact that governments are not involved in monitoring transactions. As a result, there have been several underground community websites setup to trade in illegal goods and services exclusively using Bitcoins.

You should also know that hackers have been infecting computer networks to install Bitcoin mining software as well as compromising several high profile Bitcoin exchanges causing numerous companies to go bankrupt, leaving their users with major losses.

You may never need to use Bitcoin, but now you know what it is and some of the risks associated with using this relatively new digital currency.