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The Beginner’s Guide to Cryptocurrency Mining

Basics of Cryptocurrency | Last updated November 14, 2018

There is no doubt that cryptocurrencies and the blockchain, are but changing the world we live in.

There’s a lot to learn about cryptocurrencies. Their history, the way they work, their potential impact on the future of our society, and more.

But today, we’ll talk about one of the most important aspects of their creation – mining.

1. What is cryptocurrency mining (and how does it work)?

cryptocurrency mining

Many people refer to it as Bitcoin mining, but Bitcoin isn’t the only crypto coin that can be mined.

The best way to explain cryptocurrency mining (or crypto mining) would be to associate it with gold mining. Even though this association is not perfect, the two processes are somewhat similar.

Mineable crypto coins exist inside a protocol, in a similar way that gold exists in the ground. The “miners” are the ones responsible for bringing it into the light.

This mining process has two main functions – to add transactions to the blockchain network and to release new crypto coins into the market.

In this process, any involved party uses powerful computers or to solve complex mathematical equations. The end goal is to validate blocks of transactions. The first who manages to solve these equations and validate the block receives a “block reward”.

In the Proof-of-Work model, these rewards are paid out in the cryptocurrency that is being validated. Each transaction processed over any blockchain network needs to be verified by miners to ensure that the same virtual token was not spent twice.

But not every cryptocurrency requires transaction validation through mining.

Coins such as Ripple, Stellar, Cardano, EOS, and NEO are non-mineable cryptocurrencies. These cryptocurrencies use a “Proof-of-Stake” protocol, as opposed to the “Proof-of-Work” which is used by most mineable cryptocurrencies.

2. Proof-of-Work vs. Proof-of-Stake

The Proof of Work (PoW) system is one of the most important algorithms in blockchain technology. It’s used by most of the cryptocurrencies, including Bitcoin and Ethereum.

But Ethereum is approaching a hard fork, with its developers having announced a change from PoW to PoS several months ago. In May 2018, Ethereum released its much-anticipated Casper update, a hybrid PoW/PoS mechanism that will help make the transition to PoS smoother.

How does PoW work?

proof of work explained

Since Bitcoin is the most notable cryptocurrency using PoW, we will use it to better explain the algorithm.

All the transaction in the Bitcoin blockchain are grouped in a memory pool (known as mempool). And all these transactions need validation

Which is where mining comes in.

Every block in the blockchain has an encrypted hash value, which the miner needs to discover. Only then he can 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 much smaller 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 complete hash value. Once found, the miner announces his discovery on to the network so that the other nodes can verify it and create a new block. He is then rewarded with a fraction of the Bitcoin he mined, and the whole process starts from scratch.

One of the main strengths of the PoW algorithm is its resistance to attacks. Too effectively attack a major PoW system, you would have to own 51% of the computational power of the network. And the costs of doing that would be higher than the actual reward you could get off of the whole attack.

But the security provided by the PoW algorithm comes at a great cost. Literally. Research shows that in 2017, Bitcoin mining around the world used more electricity than the world’s smallest 159 countries.

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 the centralization of mining rigs, which goes against the blockchains fundamental principle – decentralization.

How is PoS different?

proof of stake system explained

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 he or she holds.

In PoS systems there is no need to create new crypto coins, as they are all already created. This fixes the issue of having to solve complex puzzles and eliminates the huge 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, in a PoS system the users are rewarded through transaction fees.

Which one is better?

While the POW algorithm is a more secure system, PoS is a more scalable alternative, with a better long-term plan.

And even though a PoS system is more susceptible to a 51% attack, this will cause major fluctuations in the price of the cryptocurrency. This will cause a spike in the coin’s price, and make it hard to buy in large quantities or even lose its value.

Even so, for now, it’s hard to pick a winner.

But if Ethereum will manage to transition from PoW to PoS, there is no doubt that others will follow. And this might make a PoS system more popular in the industry.

3. Is cryptocurrency mining still 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 since it held no real value, few people actually mined any coins.

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.

SIDENOTE. An Application-Specific Integrated Circuit (ASIC) Miner is a circuit created for a specific use. This helps them outperform CPUs and GPUs in terms of mining power.

Of course, there are various cryptocurrencies that 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 take various aspects into consideration.

If you were to ask most miners if Bitcoin mining is worth it, they would probably say that it is not. But mining other newly launched cryptocurrencies might bring you some extra income. Mining difficulty is the name of the game. It determines the complexity of the algorithm you need to solve as a miner when creating a new block of transactions.

Once you picked a cryptocurrency, you’ll want to look towards 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 block of cryptocurrency.

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:

advantages of crypto mining
  1. Difficulty
  2. Rewards
  3. Hash Rate
  4. Operational Costs.

Last but not least, don’t forget to set reasonable expectations.

Today, crypto mining is considered somewhat of a business. People and companies alike are investing resources to mine. As time passes, crypto mining should become even more popular and even more profitable. Especially if specialized cryptocurrency mining rigs will get cheaper).

4. What cryptocurrencies can be mined?

As mentioned before, most cryptocurrencies that use the “Proof-of-Work” algorithm are mineable.

altcoins

Some of the best cryptocurrencies to mine with are Dash, Steem, Litecoin, Monero, and Dogecoin. That is because they require low to medium equipment. If you are willing to invest in some severe ASICs equipment, you can very well try to mine Bitcoin.

5. What do I need in order 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.

Depending on the cryptocurrency you are opting for, you will also need an official or a third-party cryptocurrency mining software. If you’re opting to join a mining pool, then you’ll need an online membership. A membership at an online cryptocurrency exchange will also help you exchange your virtual coins.

Finally, and the most important of all is to ensure that you have a reliable, full-time internet connection.

It’s recommended that your hardware mining rig (be it comprised out of ASICs equipment or simple CPU/GPU-based) is stored in a well-vented, cool location. So investing in a series of specialized cooling devices might also be an excellent idea.

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