Introduction to Cryptocurrency Mining
What is Cryptocurrency Mining?
To put it into very simple terms, crypto mining is a process in which a machine performs certain tasks to obtain a little bit of cryptocurrency.
Imagine that you have a machine that mines crypto coins. We’ll talk about the specific types of machines later on in the tutorial, but for example’s sake, let’s just say that it’s your own personal computer.
Your PC would perform specific tasks which are required to be able to obtain even the slightest amounts of cryptocurrency. These tasks are called “Proof of Work”, and they are designed to create a fair playing field for all the different miners out there.
The tasks themselves are math equations. The more miners want to mine one, specific mining pool – the tougher the equations become. This brings balance to the pool, but it also motivates bigger and stronger machinery usage.
There are many more subtle factors that come into play while the mining process is happening, but the general idea is that if your device contributes to the “mining”, you’ll get a share of the spoils.
At the dawn of the development of the cryptocurrency, there were several major problems, including the ‘Emission’ issue. The fundamental concept of cryptocurrencies is that there is a total decentralization and the lack of a “central bank”, or a single body responsible for issuing and controlling the currency.
At first glance, an analogue of the central bank is necessary for emission, but the entire meaning of the existence of the cryptocurrency is lost if a single monitoring body appears in the system. In this case, digital currencies turn into a kind of classic money with some affiliated shortcomings. The decision was to transfer the functions of the issuing authority to miners – ordinary participants in the system.
‘Verification’ issue played another important role in the development of cryptocurrencies, associated with the need to maintain the operation of the entire network and establish the authenticity of each transaction. It is clear that the existence of a single center responsible for transactions is contrary to the principles of decentralization, as it would otherwise have received excess power and could interfere with the operation of the system. Yet, there must be someone accountable for the process of verifying transactions and it must be decentralized.
This need is the basis of the verification issue, the second theoretical feature of the cryptocurrency system. The solution lied in mining: the computing powers of the miners are used to verify and confirm transactions. In this case, the motivating factor is remuneration.
Types of Mining?
Technically speaking, the world knows several types of mining that are distinguished depending on the configuration and cost of equipment connected to the network:
- Using the CPU
- Using graphics cards (GPU)
- Using Application-specific integrated circuit (ASIC)
In CPU mining, a central PC processor is involved. Now it is obsolete due to the low efficiency compared to the more modern approaches. Extraction with the help of the CPU does not bring profit since 2010, when it was replaced by mining with the help of video cards.
Mining with GPU (graphics processing unit) is based on the calculations performed by video cards. It gives high speed due to its ability to perform parallel calculations and solve several tasks simultaneously.
The transition to mining using the GPU was a real discovery compared to CPU-mining. The video card can calculate much more hashes than the CPU. In addition, it became possible to place four cards on one motherboard (later their number increased to six, and the theoretical limit is eight), which allowed users to create relatively cheap mining farms from video cards.
Another type of mining is based on ASIC (Application-Specific Integrated Circuits) chips. They are special devices that are designed explicitly to perform a single task, which in this case is crypto mining. They are much more efficient because they produce insane amounts of cryptocurrency when compared to its competitors GPU and CPU. The difference in the performance of devices of the same price level can reach thousands of percent.
ASIC, However, are a big subject of controversy, many people have called for an outright ban on these machines. Why? Because ASICS are so powerful, they rob other miners who are using GPU or CPU rigs of the possibility to keep up both in hash speeds and in earnings. Also, ASICS have twisted the economy of certain specific cryptocurrencies – imagine if the majority of earnings would go to one miner with an ASIC farm, what kind of chaos that would ensue.
Mining is also subdivided depending on the number of participants. There are:
- Solo mining
- Pool mining
- Cloud mining
It is important to remember that this type is suitable only for new cryptocurrencies, where large computational power is not required for calculations. In this case, the block search is done by one miner independently of its equipment. The major benefit of this type of mining is that the miner keeps all the coins. However, there is a significant drawback – the search for blocks can take quite a long time. Everything depends on the complexity of calculations and luck.
A mining pool is the pooling of resources by miners, who share their processing power over a network, to split the reward equally, according to the amount of work they contributed to the probability of finding a block. A “share” is awarded to members of the mining pool who present a valid partial proof-of-work.
Mining in pools began when the difficulty for mining increased to the point where it could take centuries for slower miners to generate a block. The solution to this problem was for miners to pool their resources so they could generate blocks more quickly and therefore receive a portion of the block reward on a consistent basis, rather than randomly once every few years.
If you’re looking how to mine cryptocurrency, cloud mining is probably the most popular way to mine cryptocurrencies without having to lift a finger.
Cloud mining is a process where you pay someone (most often it’s a big corporation) a specific amount of money and “rent out” their mining machine called a “rig”, and the process of mining itself. This rent lasts for an agreed upon period of time, through which all of the earnings that the rig makes (minus the electricity and maintenance costs) are transferred to your cryptocurrency wallet.
Keep in mind that there are no guarantees that suppliers will consciously fulfill their obligations, and the miner will receive a reward for the calculated units.
Mining is very attractive, but like in all profitable investments all risks must be taken into account
Mining is experiencing a boom – people who were not even associated with the world of cryptocurrency are now active miners. Unfortunately their attention is often escaped by risks associated with the specifics of the process. It should be kept in mind that it is impossible to predict the profitability of mining in advance. It depends on such factors as price and total computing power of the network.
Cryptocurrency exchange rates are very volatile and they can drastically change without any preconditions, on which it would be possible to react in advance. A novice miner should take into account the risk of negative changes in quotes, because of which equipment costs may not pay off – the profits obtained during the production of the cryptocurrency will be much lower than expected. A drastic collapse of prices (flash crash) can be caused by the following reasons:
- Vulnerability in the programming code of cryptocurrency. It can be used by hackers, undermining confidence in a certain currency and, accordingly, the demand for it (and the lower the demand, the lower the price);
- High uneven distribution of the cryptocurrency in the society. A significant collapse in value can occur in the event that a certain cryptomonopolist suddenly decides to sell all of his savings. This will lead to an excessive supply in the market and a drop in prices;
- The actions of state authorities and international organizations directed at banning or limiting the anonymous use of cryptocurrency. Such actions can harm the status of the currency and form a negative image, reducing the number of those who want to buy it.
Furthermore, inexperienced miners should take into account that the amount of compensation, received at equal intervals on the same equipment, may vary depending on the complexity inversely proportional to the total processing power of the network.
The mining hype around the production of cryptocurrency has become so high that some people are ready to sell their properties and other commodities to invest their money in equipment, being completely confident in future incomes. Just remember that the more people are involved, the less income each earns, provided that the exchange rate does not change.
Which Cryptocurrency to Mine?
Your choice of gear should also depend on the type of cryptocurrency that you’ve decided to mine.
Some of the obvious favorites would be Bitcoin, Ethereum or Dash. Keep in mind, though, that Bitcoin mining is probably the trickiest of them all – since the coin is so popular, there are many miners around the world tuning into the few pools that there are and trying to snatch at least a small bit of Bitcoin. This might result in you waiting for countless hours until the first drops of Bitcoin start coming in.
Keeping that in mind, your best bet would probably be to stick with Ethereum or some other less-popular cryptocurrency. Depending on your method of choice, check out the prices, calculate when your return on investment would happen, do some math and you’ll figure it out in no time!
As you’ve probably noticed, there are many different ways on how to mine cryptocurrency. These are simply the main methods – if you’d like, you could even forget about mining and jump into Bitcoin faucets – but that’s a whole different story for a whole different day. But it’s an option!
One thing that you should not only remember, but also do right away is to create a cryptocurrency wallet. Decide on the type of cryptocurrency that you want to mine and simply look up the wallet options for that currency. You’ll have no problems finding one for coins like Bitcoin, Ethereum or Litecoin, but if you want to mine the less-known currencies, then you might need to search for a bit until you find a reputable wallet.
Getting a secure and reputable wallet is the most important task when you’re starting out with cryptocurrency mining. Imagine if you’d be mining for a year and all of your savings would be stolen only because you didn’t pay enough attention while choosing the wallet and picked a fishy one that got hacked into.
If you’re serious and are really looking for ways on how to mine cryptocurrency, I would suggest buying a hardware wallet – they are the safest and most trustworthy cryptocurrency wallets out there.
Well, this is the end of my tutorial on how to mine cryptocurrency. We’ve covered a few different topics and explored the different varieties of cryptocurrency mining methods. Remember – the method that suits you the most will depend solemnly on what you want and what kind of resources you have, so choose carefully! If you do decide on giving mining a chance, I wish you the best of luck!