CNBC Explains: How to mine bitcoins on your own
Bitcoins act like cash, but they are mined like gold. So how does someone get into the current bitcoin rush?
If properly done and willing to take the investment risk, you could wind up with a few bitcoins of your own—which currently have an average weekly price of $945 on the largest bitcoin exchange.
Here's how it's done.
How many bitcoins are there?
When the algorithm was created under the pseudonym Satoshi Nakamoto—which in Japanese is as common a name as Steve Smith—the individual(s) set a finite limit on the number of bitcoins that will ever exist: 21 million. Currently, more than 12 million are in circulation. That means that a little less than 9 million bitcoins are waiting to be discovered.
Since 2009, the number of bitcoins mined has skyrocketed. That's the way the system was set up—easy to mine in the beginning, and harder as we approach that 21 millionth bitcoin. At the current rate of creation, the final bitcoin will be mined in the year 2140.
(Read more: What is bitcoin?)
What exactly is mining?
There are three primary ways to obtain bitcoins: buying on an exchange, accepting them for goods and services, and mining new ones. "Mining" is lingo for the discovery of new bitcoins—just like finding gold. In reality, it's simply the verification of bitcoin transactions.
For example, Eric buys a TV from Nicole with a bitcoin. In order to make sure his bitcoin is a genuine bitcoin, miners begin to verify the transaction.
It's not just one transaction individuals are trying to verify; it's many. All the transactions are gathered into boxes with a virtual padlock on them—called "block chains."
Miners run software to find the key that will open that padlock.
Once their computer finds it, the box pops open and the transactions are verified. For finding that "needle in a haystack" key, the miner gets a reward of 25 newly generated bitcoins.
The current number of attempts it takes to find the correct key is around 1,789,546,951.05, according to Blockchain.info—a top site for the latest real-time bitcoin transactions.
Despite that many attempts, the 25-bitcoin reward is given out about every 10 minutes. In 2017, the bitcoin reward for verifying transactions will halve to 12.5 new bitcoins and will continue to do so every four years.
(Read more: Why the Internet may never be the same again)
How do you mine on a budget?
Bitcoin mining can be done by a computer novice—requiring basic software and specialized hardware.
The software required to mine is straightforward to use and open source—meaning free to download and run.
A prospective miner needs a bitcoin wallet—an encrypted online bank account—to hold what is earned. The problem is, as in most bitcoin scenarios, wallets are unregulated and prone to attacks. Late last year, hackers staged a bitcoin heist in which they stole some $1.2 million worth of the currency from the site Inputs.io. When bitcoins are lost or stolen they are completely gone, just like cash. With no central bank backing your bitcoins, there is no possible way to recoup your loses.
The second piece of software needed is the mining software itself—the most popular is called GUIMiner. When launched, the program begins to mine on its own—looking for the magic combination that will open that padlock to the block of transactions. The program keeps running and the faster and more powerful a miner's PC is, the faster the miner will start generating bitcoins.