Blockchain is significantly changing the world we live in, and the crypto market comes with opportunities the world has never seen before. Therefore, we can’t help but wonder how to mine cryptocurrency.
There’s a lot to learn about cryptocurrencies, starting with their history, how they work, their potential impact on our society’s future, and many more.
But today, we’ll talk about one of the most critical aspects of their creation – cryptocurrency mining.
And to understand how cryptocurrencies come into existence, let’s see how traditional currencies enter circulation.
What is Bitcoin Mining?
Bitcoin mining is the process of solving complex mathematical equations to validate crypto transactions. In exchange, miners receive a fraction of a Bitcoin, releasing more coins on the market.
So, Bitcoin mining has two primary purposes:
- To release more Bitcoin into the market in the form of block rewards;
- To validate transactions and thus fix the double-spending problem.
SIDENOTE. The double-spending problem is the process through which a person manages to spend the same money more than once. In a traditional economy, money is issued by a central government (such as the US Federal Reserve). But cryptocurrencies are decentralized, and there are no companies that can validate transactions (such as Visa or Mastercard). Therefore, they are checked by miners.
One crucial aspect of Bitcoin is the fact that there is a predefined number of coins that can exist – 21 million. And close to 90% of them are already in circulation, with 900 new Bitcoin being mined daily. Once all the Bitcoins are released, nobody can create more of them.
However, mining gets more difficult as the number gets closer to the 21 – million max supply.
Every 4 years, the number of Bitcoins issued from mining a block is cut in half. That event is known in the crypto world as halving.
When Bitcoin was first released, the reward was 50 BTC. In 2012, the reward was cut to 25. In 2016, it dropped to 12.5, and in May 2020, the reward was halved to 6.25 BTC per block. The next halving is expected to take place in 2024, and the Bitcoin block-mining reward will halve to 3.175 BTC.
The halving is meant to lower the number of released BTC, as the demand remains steady, so the price can generally increase. Once every BTC is mined, miners will no longer receive block rewards but will be paid through the transaction fees.
But not every cryptocurrency requires transactions to be validated through mining.
What Bitcoin uses is known as a Proof-of-Work model. But that’s not the only consensus algorithm out there. Besides PoW, coins such as Ether, NEO, Tezos, Cosmos, Cardano, and EOS use another type of protocol (or a variation) called Proof-of-Stake. Therefore, they are not mineable cryptocurrencies but stakeable coins.
Understanding Proof-of-Work and Proof-of-Stake
The Proof of Work (PoW) system is one of the essential components of blockchain technology. It is used by most cryptocurrencies, including Bitcoin, Litecoin, and Ethereum Classic.
Not so long ago, Ethereum was available for mining, too. However, things changed in September 2022, as Ethereum switched from PoW to PoS through a process called The Merge.
How does PoW work?
Since Bitcoin is the most notable cryptocurrency using PoW, we will use it to explain the algorithm better.
All the transactions in the Bitcoin blockchain are grouped in a memory pool (known as a mempool). And all these transactions need validation.
This is where mining comes in.
Every block in the blockchain has an encrypted hash value of 64 characters, which the miner needs to discover. Only then can they verify the transaction and include it in the next available block.
SIDENOTE. A hash value is a numeric value of a fixed length that uniquely identifies data. Hash values represent large amounts of data as small numeric values.
To find the hash value of the last block, miners use pure computational power.
Their system tries one number after another until it finds the full hash value. Once found, the miner announces his discovery onto the network so that the other nodes can verify it and create a new block.
One of the main strengths of the PoW algorithm is its resistance to attacks. To effectively attack a major PoW system, you would have to own 51% of the network’s computational power.
And the costs of doing that would be higher than the actual reward you could get from the whole attack.
But the security provided by the PoW algorithm comes at a great cost. Literally. The Cambridge Bitcoin Electricity Consumption Index shows us that Bitcoin uses almost as much electricity as Sweden (around 103.40 TWh at the time of writing).
The ever-increasing need for computational power makes it difficult for individual miners to keep up. Upgrading their rigs requires large and constant investments. This resulted in an increase in mining rigs’ centralization, which goes against the blockchain’s fundamental principle – decentralization.
How does PoS work?
While in a PoW system, you need a more powerful rig to mine faster, the PoS system is different. Here, a person can validate block transactions based on how many coins they hold.
In PoS systems, there is no need to create new crypto coins as they are all already minted. This fixes the issue of solving complex puzzles and eliminates the substantial energy costs.
Another difference between the two algorithms is the way people earn crypto coins. While in a PoW system, miners receive fragments of their mined block and transaction fees, in a PoS system, the users are rewarded through transaction fees solely.
Running a node in a Proof of Stake environment requires you to have a minimum stake and a device.
The minimum stake depends from one network to another, especially on its cryptocurrency’s value. For example, opening up an Ethereum staking node requires 32 ETH, and Tezos requires 8,000 TZX.
And for devices, generally, a laptop could handle the task, but the setting up may be troublesome, and running a node implies maintaining your uptime.
Those that don’t want to bother setting up the staking node by themselves can just order a hardware device with a pre-installed node from vendors like AVADO.
Also, some staking environments allow you to delegate your stake instead of running your own node. This way, you don’t have to worry about up-time either.
Which one is better?
While the POW algorithm is generally considered a more secure system, PoS is a more scalable alternative with a better long-term plan.
And even though some consider PoS systems to be more susceptible to a 51% attack, this will cause major fluctuations in the price of the cryptocurrency. And considering the stake necessary to successfully attack the network, it might not even be worth it.
Even so, it’s hard to pick a winner.
But with Ethereum transitioning from PoW to PoS and the energy efficiency trend, Proof of Stake has become increasingly popular.
However, this doesn’t seem to be the end of Proof of Work. Bitcoin is still the dominant cryptocurrency, and figures like Elon Musk are looking to sponsor energy-efficient solutions that can improve BTC mining’s resource consumption.
Types of cryptocurrency mining
Currently, there are 5 methods to mine cryptocurrency.
Cloud Mining
Cloud mining is the easiest and perhaps the most efficient method of mining cryptocurrencies.
You can rent a mining rig for an agreed-upon period through cloud mining and receive all the earnings of that specific rig minus the electricity and maintenance costs.
In theory, this sounds like a great approach to mining. However, cloud mining is also one of the riskiest types of mining. Ponzi schemes are widespread in cloud mining services, with OneCoin and Bitcoin Savings & Trust being just two of the many examples.
These companies would use the initial investment from new users to pay older users. After a while, all the payments to users would stop, and the company would go dark. And with every user losing only a few hundred dollars, most don’t even press charges.
While legit cloud mining services may exist, most professionals advise against using them.
Pool Mining
Pool mining implies mining crypto through a mining pool, and it is a process developed due to the increasing size of the crypto market. It works through a server that combines the computational power of all the pool members, this way increasing the chances of being rewarded.
However, crypto enthusiasts who choose to mine through a mining pool are not free from downsides. The reward for each unlocked coin is shared with all the pool members. Thus, miners get a smaller reward. The investment is much lower, though, and this can be a significant advantage.
CPU Mining
CPU mining uses a computer’s or smartphone’s processor to mine cryptocurrencies.
When cryptocurrencies were a new concept, CPU mining used to be a viable and efficient solution. But right now, few people opt for CPU mining. And of those who do, most do it because they haven’t done proper research.
First of all, CPU mining is extremely slow. It could take you several months to start earning a little revenue.
Secondly, your electricity bill will skyrocket, and your earnings won’t even get close to covering it. And finally, CPU mining requires serious cooling, which adds another cost to the necessary investment.
Not to mention that your CPU could get fried. Especially if you’re attempting to mine from a laptop.
But that doesn’t mean CPU mining isn’t an option worth considering.
There are several crypto coins that you can mine using a CPU, such as Monero or Dogecoin. Just make sure you do your research before trying CPU mining so that you won’t find yourself in a situation where you need to buy a new CPU.
GPU Mining
GPU mining is by far the most popular method of mining cryptocurrency because it is both reliable and cheap (-er than the other methods).
While buying the actual rig will require a decent investment, you’ll slowly start making a profit once you get it. GPU mining uses graphics cards to mine cryptocurrencies, and you can generally start with between 2 and 8 graphics cards.
Additionally, you will need a CPU, a motherboard, a rig frame, and a cooling system.
GPU mining is very popular because it’s both efficient and relatively cheap. Don’t get me wrong, the construction of the rig itself tends to be costly – but when it comes to its hash speed and the general workforce, the GPU mining rig is excellent.
But you don’t have to build your own GPU mining rig if you don’t want to. You can just buy a pre-built one. They generally run around the $3,000 price range.
ASIC Mining
Application-Specific Integrated Circuits (ASICs) are devices built for a single purpose – in this case, to mine cryptocurrency.
When compared to any other type of mining, ASICs are beasts. They are very affordable, and they can mine much faster than GPUs or CPUs.
However, they are also highly controversial. ASIC mining rigs allow entrepreneurs to build massive mining farms at a relatively low cost, thus centralizing their operations. This also allows them to generate massive profit margins and control, to some degree, the development of the cryptocurrency.
A large enough mining farm would allow a single individual to generate the majority of the profits from a specific currency, thus making the whole mining process unfair. It is, essentially, just like a pay-to-win game.
To combat this, developers plan to alter the codes of various cryptocurrencies to make ASIC miners less effective, while others plan to ban ASIC miners altogether.
Is cryptocurrency mining profitable?
To successfully mine cryptocurrencies, you first need substantial computational resources.
In the early days, Bitcoin mining was simple. All you needed was a laptop or a computer. Anyone could do it, but few people mined any coins since they held no real value.
But as block difficulty increased, the mining process became so resource-dependent that it required high-performance GPUs.
Not long after, as the block difficulty kept increasing, the only way to profitably mine Bitcoin was with the help of ASICs miners.
Of course, various cryptocurrencies can still be mined using simple computers. Some of them have even made it their mission to ban mining with ASICs equipment altogether.
But before deciding if mining cryptocurrency is worthy and profitable, you have to consider various aspects.
If you were to ask most miners back in 2019 if Bitcoin mining is worth it, they would have probably said it is not. However, it strongly depends on cryptocurrencies’ prices, and this is why many miners check them constantly and adapt their mining activity to a cryptocurrency’s price evolution.
When the prices are high, the difficulty is just as high. So, even within such market conditions, if your setup isn’t powerful enough and efficient, you can still be on the losing side.
Efficiency is a must because of the mining difficulty. It determines the algorithm’s complexity you need to solve as a miner when creating a new transaction block.
Also, mining other newly launched cryptocurrencies can bring you some extra income, and the difficulty can be much lower.
Once you pick a cryptocurrency, you’ll want to look toward buying the right rig because there are plenty of options in the ASIC market. You can always use various online multicurrency calculators to determine the parameters involved, such as the hash rate.
SIDENOTE. The hash rate is the speed at which a cryptocurrency mining rig can solve the algorithm required to mine a new cryptocurrency block.
If you decide that the operational costs are too high, but you still want to try your luck in the game, not all hope is lost. You can always join a mining pool and work together with other miners to mine blocks (and share profits, of course).
As a general rule, the profitability of the mining process is determined by four main components:
- Difficulty;
- Rewards;
- Hash Rate;
- Operational Costs.
Last but not least, don’t forget to set reasonable expectations.
Today, crypto mining is a business.
People and companies alike are investing resources to mine. As time passes, crypto mining should become even more popular and profitable, especially if specialized cryptocurrency mining rigs will get cheaper.
And keep in mind that prices and transaction fees may change unexpectedly.
What cryptocurrencies can be mined?
As mentioned before, most cryptocurrencies that use the “Proof-of-Work” algorithm are mineable.
Some of the best cryptocurrencies to mine are:
- Sia (SC) – a reward of 30,000 SC/block;
- ZCash (ZEC) – a reward of 2.5 ZEC/block;
- Kadena (KDA) – a reward of 1.04 KDA/block;
- Komodo (KMD) – a reward of 3 KMD/block;
- RavenCoin (RVN) – a reward of 2,500 RVN/block.
But if you are willing to invest in some severe ASICs, you can very well try to mine Bitcoin as well.
What do I need to start crypto mining?
Before starting to mine, there are a few things that you need to check off your list.
First off, you’ll need a wallet compatible with the cryptocurrency you plan on mining. This will help you securely store your coins. There are many types of wallets to choose from, such as hardware, desktop, mobile, and online wallets.
Then, based on the cryptocurrency you are opting for, you will also need an official or a third-party cryptocurrency mining software.
Next, if you’re opting to join a mining pool, you’ll need an online membership. A membership at an online cryptocurrency exchange will also help you exchange your virtual coins.
Finally, the most important thing is ensuring that you have a reliable, full-time internet connection.
It’s recommended that your hardware mining rig (be it composed of ASICs equipment or simple CPU/GPU-based) is stored in a well-vented, cool location.
Thus, investing in a series of specialized cooling devices might also be an excellent idea.
* The information in this article and the links provided are for general information purposes only and should not constitute any financial or investment advice. We advise you to do your own research or consult a professional before making financial decisions. Please acknowledge that we are not responsible for any loss caused by any information present on this website.
Source: https://coindoo.com/cryptocurrency-mining/