Bitcoin Essentials: Gain insights into Bitcoin, a cryptocurrency and a powerful technology, to optimize your Bitcoin mining techniques

A Bitcoin wallet (sometimes called a client) is a software that facilitates performing bitcoin transactions. Wallets come in different flavors. The most capable of them are called full clients. They can perform bitcoin transactions and act as a gateway to the Bitcoin network. Full clients also store a copy of the Bitcoin block chain locally. An example of a full client is the Bitcoin Core software application.

A wallet allows us to send (spend) and receive bitcoins. These are the main transactions that most users will perform. Most importantly, a wallet stores your secret private keys, so that you can access the bitcoins you own. The name "wallet" is slightly misleading. The wallet actually does not store bitcoins directly. All the bitcoins are stored on the block chain and the wallet software simply allows you to transact with the bitcoins that the private keys stored in the wallet have control over. In simpler terms, wallets store private keys. Those keys are tied to bitcoins on the block chain and therefore you can send them to another address.

A wallet also allows us to look into the Bitcoin network and see additional details. It allows us to see information about the Bitcoin network, the block chain, mining, and the wallet in general. We will go over these in later chapters.

As mentioned earlier, wallets facilitate Bitcoin transactions. Without them, moving bitcoins from one address to another would be impossible. It is worth noting that a wallet is a fundamental piece of Bitcoin software. A wallet is the required software in order for the Bitcoin network to exist.

Without the ability to transfer bitcoins, the system would not be very useful. In the original wallet called bitcoind, the transactions had to be put together manually. Later on, the wallet software was expanded and updated to make transaction creation seem like a breeze. Since wallets connect us to the Bitcoin network, they are also needed in mining operations. While mining, it is the wallet software that communicates with the Bitcoin network. It watches out for new blocks, so that if a new block is found by some other participant, our mining software can stop working on the now solved block and move on to the next.

The transactions that our mining software will put in a candidate block also come from the wallet. In addition, wallets verify found blocks and propagate transactions that come onto the network.

There are a variety of software wallets. For an up-to-date list of the most popular wallets, see https://bitcoin.org/en/choose-your-wallet. We will concentrate here on the Bitcoin Core software application. At the time of writing this book, the current version is 0.11.2. You can always check the latest version here: https://bitcoin.org/en/download.

If you do not have Bitcoin Core installed and you would like to mine solo (solo mining will be explained in Chapter 6, Solo Versus Pool Mining), it would be a good idea to download and install it. Make sure that you have sufficient space on your hard drive for the block chain, which currently (Feb 2016) is about 55 GB. Once you install Bitcoin Core, it will proceed to download the block chain, which may take a while. When you open the software, you will be greeted with the following screen:

Fig. 1.1: The Bitcoin Core wallet.

As you can see, the client is downloading the block chain by synchronizing with the Bitcoin network. There are tabs to send and receive bitcoins. There is also a Transactions tab, under which you can find a history of all transactions performed with the wallet.

Fig. 1.2: Send tab in the Bitcoin Core wallet.

The Send tab can be used to transfer the bitcoins you control to another address. It requires a destination Bitcoin address and the amount you wish to transfer. If your wallet is password-protected (more on securing your wallet later), you will be prompted to enter it.

Fig. 1.3: Receive tab in the Bitcoin Core wallet.

The Receive screen, on entering the relevant information and pressing Request payment, will generate a QR code and a URI that can be sent out or posted online.

Fig. 1.4: Request payment screen, generated by Bitcoin Core

The Transactions tab lists all the transactions tied to the private keys that the wallet is storing.

Fig. 1.5: The Transactions tab in Bitcoin Core

The functions described in the preceding section are the basic wallet transaction types, but what is more interesting is the information we can get about the network through the Bitcoin console. The console can be accessed by going to the Help menu and selecting Debug window.

Fig. 1.6: Debug window of Bitcoin Core

Select the Console tab and you will be able to obtain a trove of information about the Bitcoin network and about Bitcoin's block chain. To see a list of possible commands, type help into the console and press Enter. You will be presented with a long list of commands that have been grouped in categories. A complete overview of the commands is beyond the scope of this book. However, we will take a look at some of them.

Fig. 1.7: A listing of all available commands

Perhaps, the most interesting to us will be the getmininginfo command. Typing it into the console yields the following:

Fig. 1.8: The getmininginfo command

As we can see, the command returns the last block number, current mining difficulty, network hashing speed, and some other information as well. There are websites that check this information for each block and offer graphs to visualize the data. They are called block explorers and there are many of them. The most popular perhaps is http://blockchain.info.

You can find out more information about any command by typing help followed by the command name. For example, to find out more about the getmininginfo command, we will type help getmininginfo:

Fig. 1.9: Getting more information about a command: help getmininginfo

Another interesting command from a mining point of view is the getblockchaininfo command. The following screenshot shows us the output and the help data on that command:

Fig. 1.10: Output of the getblockchain info command and help getblockchain info

Hardware wallets are a relatively new addition to the array of Bitcoin wallets available. They are not required for mining purposes, but are great for keeping your bitcoins safe. The two most popular solutions on the market are Trezor and Ledger wallets. We encourage you to take a look at their respective websites, if you think you can benefit from a hardware wallet.

The major advantage of hardware wallets over software ones is their security. They are not affected by computer viruses designed to attack software wallets. They are offline for a majority of the time (online only to compose a transaction). They also enjoy an advantage over paper wallets, as a result of being interactive versus importing the whole wallet, as in the case of a paper wallet.

Any wallet that stores the entire block chain database is regarded as a full wallet, Bitcoin Core is one example. Sometimes there just aren't enough resources available to download and store the complete block chain. This could be due to bandwidth restrictions, storage limitations, or perhaps just an unwillingness to run the full wallet.

There are wallets available that do not download the entire block chain. This is obviously required for mobile computers with limited storage, such as smart phones and tablets and other Internet-of-things devices. These types of wallets are called thin clients. They use a procedure called Simplified Payment Verification (SPV) to avoid having a full copy of the block chain. SPV is not important for mining purposes, but every miner should at least know that the security of an SPV wallet is not as tight as the security of a full wallet.

There are a number of companies that offer hosted wallet services. This means that you do not need to download or install any software and of course downloading the block chain is also not required. There is a trade-off when you use a hosted wallet. You are giving away a part of the security that comes with running your own wallet in exchange for convenience.

However, as these hosted wallet companies are maturing and becoming big, their ways of securing bitcoins may be better than that of a single user. The risk of insolvency is then the biggest risk to a hosted wallet user. If the company goes bankrupt, then the funds stored in their hosted wallets will most likely not be recoverable. Just like with a traditional bank, deposits are liabilities of the bank and in the case of failure, depositors would only be able to recover the portion of their deposits that is insured by the government. We are not aware of any such insurance schemes available to hosted wallet providers.

Securing your wallet is a serious matter. With Bitcoin being deflationary, the value of the cryptocurrency is expected to rise in the long term. Therefore, making sure that your funds are only accessible to you is a worthwhile undertaking. Your online wallet should be encrypted and password-protected. Furthermore, you should back-up your password protected wallet to multiple locations.

To encrypt your wallet, select Encrypt Wallet from the Settings menu in Bitcoin Core and then follow the rest of the instructions. Please remember to choose a very strong password.

As mentioned earlier, mining software coordinates and manages the work of different mining devices. In order for mining to move beyond utilizing a single core of a CPU, software was needed that could manage the work that multiple cores perform. This is to make sure that they do not do redundant work; hence, mining software was born. Later on, mining moved onto a multitude of devices and the need for a management software became even more apparent.

Bitcoin mining is basically a guessing game. The software constructs a candidate block. A candidate block includes the hash of the previous (last) block and it also includes transactions taken from the pending transaction pool. Finally, it includes the most important piece, called a nonce. A nonce is basically a counter. The software constructs the candidate block and then hashes it. If the result does not meet the difficulty criteria, then the nonce is incremented and another hash is taken.

Mining devices can make billions and even trillions of these hashes per second. When a successful hash is found, the software submits the solved block to the network for verification. We call this guessing rather than solving because solving implies a method other than repeated guessing and checking if it is correct.

There are a variety of different software miners. A good comprehensive list can be found at: https://en.bitcoin.it/wiki/Mining_software. The two most popular miners are cgminer and bfgminer; both are open source and can be downloaded from GitHub. Here, we will concentrate on cgminer.

Cgminer can be downloaded from a variety of sources on the Internet. We recommend going directly to the developer's website: http://ck.kolivas.org/apps/cgminer/.

Cgminer is available for Windows and Linux systems and it can also be built from source for Mac OS; there are also third party providers that host a compiled Mac OS version on their websites. Download the appropriate version for your system. Installation on Windows systems is straightforward. As an example, we are going to use cgminer version 3.7.2. This is the last version to support GPU mining; keep this in mind if you want to mine with your GPUs. (We will further discuss the versions of cgminer in the chapters on mining with specific devices.)

Once you have cgminer installed, you may want to verify it by running the cgminer -n command in your terminal (also called command prompt in Windows). The output will look similar to this:

Fig. 1.11: Output from the cgminer -n command

It lists the required software (OpenCL in our case) and confirms that cgminer found some hardware in your system that it can use to mine. In our case, it is an AMD R9 Radeon GPU.

Now would be a good time to start cgminer and familiarize ourselves with the basic features. In order to run cgminer, we need to tell it where to get work from. This means a mining pool or your local wallet if you are mining solo (more on this will follow in the chapters on mining solo or with a pool).

If you are already registered with a pool, run the following command to start mining:

cgminer -o <http://pool:port> -u <username> -p <password>

This tells cgminer to connect to the specified pool with the specified credentials (of course, replace the values in the angle brackets with your own pool information).

If successful, cgminer will start and display the following screen:

Fig. 1.12: Starting cgminer

As we can see, cgminer is running and it is connected to the pool we specified.

We will now briefly review the options that cgminer offers while it's running.

There are menu items for: Pool management, GPU management, Settings, and Display options. Let's examine them a little more closely. To get into a menu item, simply press the letter that corresponds to the item in question. The letters are wrapped in square brackets to indicate that they can be selected.

The following is the screenshot of Pool management:

Fig. 1.13: Pool management in cgminer

Here we can add more pools, remove ones we no longer need, disable, enable pools, or change the mining quota. We can also change our management strategy.

Fig. 1.14: Pool management strategy

As we can see, there are five options for pool management. We usually use the default option: Failover, which switches to the next pool in the case of the current pool's outage. These options are best explained in the README file that is included with cgminer.

The next option is GPU management—pressing G will bring up the following screen:

Fig. 1.15: GPU management screen

Here we can see the current statistics about our GPUs. The read-out shows temperature, fan speed, GPU clock, memory clock, and other information that maybe available for the particular hardware at hand. We can also manage our GPUs, in case we have multiple ones. We can disable or enable additional GPUs, change the intensity setting on each GPU, and change other settings as well.

Let's exit this menu (press space to exit) and go back to the main screen. Let's now look at the Settings menu. Pressing S will bring up the following screen:

Fig. 1.16: Settings options in cgminer

Here, the most interesting option is Write config file. Pressing W will save a config file that we can use in the future to start cgminer with the appropriate settings. We will go into details in a later chapter – right now we want you to be aware that such an option exists, as it will prove useful.

Finally, the Display option from the main screen of cgminer will let us control what we want to see on the screen while cgminer is working. Pressing D will bring us to the following screen:

Fig. 1.17: Display options

We find that the default display options are sufficient for most miners. If you are interested in additional details, you may want to delve into the options by reading the README file that is shipped with cgminer. We do recommend everyone to at least skim through that file, as it is filled with useful information. We will touch upon the most important functions of the software later on, but a full description and explanation of all the features is beyond the scope of this book.

Finally, we should note that exiting cgminer, for whatever reason, can be accomplished by pressing Q.