There is no doubt that cryptocurrencies and the blockchain are 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.
Table of Contents
1. What is cryptocurrency mining (and how does it work)?
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 to solve complex mathematical equations.
The end goal is to validate blocks of transactions. The first miner who solves these equations and validates the block receives a “block reward”.
As of October 2nd, 2019, there are 17,968,962 Bitcoins in existence. For now, a new block is mined approximately every 10 minutes, and each block adds 12.5 Bitcoins on the market.
You can check live updates on the numbers here.
But as the number gets closer to the 21 million gap, mining gets more difficult.
The above graph, showcased on BTC Direct, estimates that all Bitcoins will be mined by 2033.
In the Proof-of-Work model, the rewards for mining 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 is used by most 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?
Since Bitcoin is the most notable cryptocurrency using PoW, we will use it to better explain the algorithm.
All the transactions 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 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 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. To 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 blockchain’s fundamental principle – decentralization.
How is PoS different?
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.
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. Types of cryptocurrency mining
Currently, there are 4 methods to mine cryptocurrency.
1. Cloud Mining
Cloud mining is the easiest and perhaps the most efficient method of mining cryptocurrencies.
Through cloud mining, you can rent a mining rig for an agreed-upon period, 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 very common 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 towards the 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 it.
2. CPU Mining
CPU mining uses a computer’s processor to mine cryptocurrencies.
In the early days, 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 a viable option.
There are several crypto coins which you can mine using a CPU, such as Monero or Dogecoin. Just make sure you do your research before you try CPU mining, just so you won’t find yourself in a situation where you need to buy a new CPU.
3. 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, once you got it, you’ll slowly start making a profit. GPU mining uses graphics cards (duh) to mine cryptocurrencies, and you generally need 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 great.
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.
4. 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 give entrepreneurs the chance 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.
4. 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:
- 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 even more profitable. Especially if specialized cryptocurrency mining rigs will get cheaper).
5. 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 with are:
- Ethereum (ETH)
- Ethereum Classic (ETC)
- Monero (XMR)
- Litecoin (LTC)
- Bitcoin Gold (BTG)
- Dash (DASH)
- Zcash (ZEC)
But if you are willing to invest in some severe ASICs equipment, you can very well try to mine Bitcoin.
6. 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.