Introduction to Bitcoin MiningSolo Mining Mining is a chance endeavor and the probability of winning a blockwithin a given period of time can be calculated. Unfortunately formany systems, the time required to have a good chance at mining ablock can be in the months or years. If you have several machines running at high hash rates, you willfind blocks more often and may be able to absorb the variation inthe rate at which blocks are mined. On the other hand if you'rerunning with a lower hash rate and can stand running longer inhopes of getting lucky, solo mining can still make sense. If youwould prefer more certainty and evenness of payouts, you will wantto mine in a pool which will be covered in the next section. 21
Introduction to Bitcoin MiningPooled Mining Winning a block will most likely be quite infrequent so mining poolswere created as a way to even out the rewards. Those who join amining pool cooperate to mine blocks as a group and when a blockis solved by one of the members, the rewards are shared. The amount going to each contributor takes into account theirhashrate and time mining for the pool. Mining pool operators maytake a percentage of the Bitcoins as payment for creating andrunning the pool. There are many pools to choose from and miningclients can be easily switched from one pool to another. It is a good idea to join at least two pools in case the first onebecomes unavailable for some period of time. Without a backuppool, your hashrate will effectively drop to zero until your poolbecomes available again.22
Introduction to Bitcoin MiningManaging Your BitcoinsWhether you're mining solo or as part of a pool, with one computeror with many, eventually you will have some bitcoins. Once you getthem it is important to handle them properly. Let's go over thewallet and how your Bitcoins are stored in practice. When you run a Bitcoin client for the first time, it creates a Bitcoinwallet. The wallet contains your private keys, made of long blocks ofrandom letters and numbers, that are meant to be kept secret.These keys are what allows your Bitcoin client to spend and, you toeffectively own, your bitcoins. From each private key, a public key and corresponding Bitcoinaddress are created. When someone sends you some bitcoins, theirBitcoin client uses their private key to sign the bitcoins over to oneof your addresses. This transaction is broadcast to the bitcoinnetwork and later recorded in a block. The important point to know here is that bitcoins aren't actuallysent anywhere. They are instead assigned to addresses. To sendbitcoins to yet another address the private key of the address thatowns them will be required. This means you need to secure andbackup your wallet to protect it against theft, virus attack, or loss23
Introduction to Bitcoin Miningdue to hard drive failure or natural disaster. The simplest way to backup your wallet is to use the backup featureof your Bitcoin program. If no such facility exists or you would likean additional backkup, find your Bitcoin configuration folder andmake a full backup of it. Be sure to have turned off your Bitcoinprogram however before making this copy. Place this backup on one or more flash drives or CDs and put thosesomewhere safe. Depending on the number of Bitcoins you have,you may want to keep your backups in a safe or safe deposit boxuntil they need to be used. In regards to backup, it is a good idea to test the backup on anothersecure system. It is said that you do backup but what you reallywant is restore. So test your backups. Just be sure to test it onanother system because some people have lost bitcoins byrestoring a backup over a wallet that had private keys that were notin the backup. Next is protection from online threats. This means keeping thewallet either offline or on a computer that is disconnected from theinternet. If you'd like to have reasonable yet secure access to yourBitcoin wallet you can use a live CD with your computer to access24
Introduction to Bitcoin Miningand manipulate your bitcoins. The live CD would include all thesoftware needed to handle bitcoins. If you're going to be placing your backups where other people maybe able to access them, you can use encryption. Once encrypted, apotential thief would need your password to be able to access thewallet file and steal your bitcoins. As an example, and there aremany, a program like Truecrypt provides a simple way to encryptone or more files on any drive or computer you wish. The latestversion of the Bitcoin program from bitcoin.org also includes walletencryption.25
Introduction to Bitcoin MiningUsing BitcoinsBitcoins are money and can be used as such. You can send them tofriends to settle small debts. You can sell something or work forbitcoins. You can also buy products and services online with them.Currently there are hundreds of business that accept Bitcoin onlineand around the globe. For business that only accept dollars, Euros, yen and other nationalcurrencies you will need to exchange your bitcoins. This can bedone on one of the many online Bitcoin exchanges or by findingsomeone local who will to buy them from you. To sell bitcoins on an exchange you would create an account withthe exchange, send them your Bitcoins and place an order to sell.Then when a corresponding buy order appears, your bitcoins will betraded for the currency you prefer. Then you'll need to get yourmoney sent to you via a money transfer method that is compatiblewith Bitcoin. One very important feature of Bitcoin is irreversibility. Once bitcoinsare sent to an address, there is virtually no way to reverse thetransaction. I hesitate to even say virtually because doing sorequires either extremely fast timing or government-sized mining26
Introduction to Bitcoin Miningpower. No credit card company or bank can get them back. Themathematics behind Bitcoin are very strong. Bitcoin is therefore incompatible with financial services that allowpayments to be disputed or "charged back". Notable examplesinclude PayPal, credit card, check, and ACH. In the economy thatgrows around Bitcoin, refunds will need to be performed by thereceiver of the funds and buyers will be wise to use escrow serviceswith vendors they do not trust.27
Introduction to Bitcoin MiningAccountingAt this time there isn't much in the way of Bitcoin portfolio trackingor Bitcoin-based accounting software. It is wise however untilsomething good comes along, to save records of all yourtransactions. You will want to know how many bitcoins you have,how you got them, and in which wallets they are stored.28
Introduction to Bitcoin MiningConclusionBitcoin is a new Internet currency that anyone can get startedmining. There are a number of reasons you might mine: for profit, tohelp secure the network, to help found a new Internet currency, orjust to gain technical experience. Hopefully Introduction to BitcoinMining has proved informative and helps you get started mining!
