Cryptocurrencies are both fascinating and mysterious. But cryptocurrency mining goes a step further in giving people headaches. Don’t worry. In this article, we will explain everything about cryptocurrency mining and related terminology.
Crypto comes from the Greek word kurptos, meaning hidden.
In fact, a certain degree of technical knowledge is guaranteed in the world of cryptocurrencies, so it remains hidden from the general public.
So, let’s take a deep dive into the crypto world and uncover its subtle details.
What is cryptocurrency?
This is where it all started, Bitcoin, the largest of all cryptocurrencies.
It is a type of digital (or virtual) coin that is currently valued at USD 45,597 per coin, down from USD 63,569 on April 14, 2021.
According to Statista , there were 5,840 cryptocurrencies as of August 2021. The most popular ones are Bitcoin, Ethereum, Cardano, Tether, Binance Coin, XRP, etc.
You can see the complete list with details such as market cap, current price, etc. on CoinMarketCap .
For clarity, we sometimes use Bitcoin when referring to cryptocurrencies in general and Bitcoin when referring to individual currencies. Bitcoin is a digital coin managed on a distributed digital ledger called a blockchain. These are distributed (mined) and used without central control by public or private institutions.
It’s like the people’s money. Ordinary people like us have a responsibility to make that happen.
Its underlying technology, blockchain, ensures secure operation. This same technology also powers non-fungible tokens.
Blockchain is a digital database that keeps a permanent and immutable record of all transactions.
Additionally, blockchain validates transactions through network consensus.
Nodes perform this validation process to validate ongoing transactions. This operation also mines new Bitcoins for circulation.
Interestingly, unlike fiat currencies, most cryptocurrencies have circulation restrictions. For example, you can only mine 21 million Bitcoins. This fact makes cryptocurrencies a powerful hedge against inflation.
The only factor that can shake up the value of digital coins is public speculation. Sometimes it plummets because it’s sold out, and sometimes it spikes because people are lining up to take advantage of it.
Let’s take a look at Bitcoin price fluctuations since 2013.
Nowadays, it is used more as an investment opportunity than regular currency. But it is maturing. More and more platforms are pledging to support cryptocurrencies by accepting them.
From Microsoft to Paypal to Overstock to Burger King, more and more people are paying with these online currencies. So it’s about time we understand it thoroughly.
Let’s take a look at them one by one and move on to the core of this article: crypto mining.
What is cryptocurrency mining?
There are many cryptocurrencies in the world, each with slightly different mining protocols. Therefore, we stick to Bitcoin and in this segment we will discuss Bitcoin mining in more detail.
Crypto mining puts new coins into circulation and authenticates ongoing transactions. Uses encryption to check forgery and double spending.
To understand mining, you first need to know how blockchain works.
Let’s say you’re using Bitcoin to buy dinnerware at Overstock.
what will you do? It’s simple. Add products to your cart and checkout using Bitcoin as your preferred payment method.
In the background, the transaction enters the validation queue along with other entries waiting for validation and is added to the next block. This modern block will continue to receive entries until it is full. Currently, each block is limited to 1 MB of data.
Formation of blocks and validation of transactions within them yields rewards to miners. After all, they use resources (reading power, equipment, etc.) to solve complex math problems and capture transactions into the blockchain.
This “complex math problem” refers to finding a 64-digit hexadecimal number called a hash.
Incentives are usually paid in the cryptocurrency itself. But not all miners get paid. Only the first person to come up with the correct hash receives the reward. Some people only receive their electricity bill.
Therefore, this process is fraught with risks, but it can also be rewarding at times. And if you don’t have powerful computing at your disposal, it can be a waste of time.
Now that you have an overview of the cryptocurrency mining process, it’s time to reveal some hidden technical details.
First comes hashing, the foundation of blockchain security.
What is a cryptographic hash?
As mentioned above, we need to find the hash to complete a block’s worth of transactions.
The hash looks like this:
00000000000000000004b79b7874718f022311e5194547644b119d30220ca18fEvery block has a unique hash associated with it.
Always a 64-digit number, regardless of transaction data.
Modifying a single transaction will generate a different hash. Therefore, once a transaction is recorded, it cannot be tampered with.
Furthermore, the hash of every block is related to the hash of the block before it. This increases the immutability of the blockchain.
Any attempt to change something within a single block changes the hash of all subsequent blocks, ultimately starting a fork, or another blockchain, starting from that change.
Depending on the length of the chain, it may require significant computing power. This process can be very tedious (and expensive) and ultimately pointless to getting anything out of it.
Not all forks are initiated by malicious actors. There are also very few system-generated forks that can be considered upgrades. For example, the London hard fork of Ethereum was legal. It occurred on August 5, 2021 at 12:33:42 PM +UTC, block number 2. 12,965,000. The history of all forks on the Ethereum blockchain can be found here .
This robust process of using hashes to secure blockchain transactions is called encryption .
How do crypto miners find their target hashes?
The target hash is a number determined by the network every 2,016 blocks. The goal is to maintain mining difficulty such that a block is mined on average every 10 minutes.
This is the value that is the subject of the hashed block header.
A block header is an 80-byte data string that serves as an ID for an individual block. It contains block-specific information such as the Bitcoin version number, the hash of the previous block, and a timestamp.
Therefore, the mining process is nothing but running an algorithm ( SHA-256 hashing algorithm for Bitcoin mining) that hashes the block header to a lower value than the target.
And the first person to do it will get the block reward. It’s like winning the lottery.
Back in 2009, mining was easy. You could also mine using a computer.
Interestingly, as Bitcoin’s popularity grew, its value skyrocketed and more people jumped into mining professionally.
This increases the difficulty of mining, and currently requires a dedicated machine with high processing power to obtain block rewards.
However, if you don’t want to invest a lot of money in mining equipment, you still have options. To understand this better, let’s discuss the different types of mining.
Type of mining
Based on the number of participants, mining can be divided into solo and pool . This is called CPU mining or GPU mining , depending on the primary equipment used in the process. However, if you are using rented infrastructure, it is called cloud mining .
Let’s examine each one.
#1.Solo mining
Solo mining, as the name suggests, is mining independently. This is the most expensive thing to do, but at the same time you can get special rewards for your efforts. In particular, you also cannot share profits with other miners.
Mining equipment consumes a lot of electricity. They generate a continuous hum of hundreds of chips that run to find the required hash faster than any other miner (solo or pool) on the planet.
Therefore, setting up a cool, well-ventilated, large, and secluded space to set up a mining farm requires a significant investment. Add to this the exorbitant cost of mining rigs, and your wallet may already feel lighter.
Check out this video to get an idea of the forces you’ll face when searching for valuable block rewards.
The good news is that this harsh mining environment only works for Bitcoin and some other established currencies. However, with a small investment you can mine other (new) crypto coins very profitably.
Profitability of solo mining
For purposes of explanation, let’s assume you live in California, USA. Location is essential when calculating electricity costs and determining the general feasibility of mining as a profession.
Now you have two options for equipment. Use common cryptocurrency mining equipment or purchase an application-specific integrated circuit (ASIC) miner.
Cryptocurrency mining equipment is great and is like a regular personal computer with more power. A large number of graphics cards are introduced to complete the work. You can do your daily digital chores and the mining will happen in the background.
However, they are not as fast as ASIC units.
Anyway, check out this video about building a mining rig with a lot of GPUs.
Additionally, you should read this article before starting your mining rig.
The next option for professionals is the ASIC miner. They have specialized machinery invented (built) for one purpose: mining.
Therefore, in this example we will take the aforementioned Antminer S19j Pro 100TH/s.
It has an impressive hash rate (mining speed) of 100 TH/s and costs $9,300 USD at the time of writing.
The power consumption of this ASIC miner is 2950w. Also, since we are mining solo, we set the pool fee to zero percent. To calculate the profit here we will use CryptoCompare.
This is the output:
Well, the average income in California in 2019 was approximately $32,000.
According to this analysis, 74 such ASIC units (32000 divided by 435 monthly profits) are required to reach the average standard of living in California, USA.
The ASIC miner invoice will be approximately 74*9300 = USD 688,200. Note that costs such as real estate, fans, and cooling have not yet been added.
This means that mining Bitcoin is very expensive.
Let’s take a look at this calculation again, this time for Dash, another cryptocurrency that uses the X11 algorithm.
In this case, that one ASIC unit generated more than $100,000 in monthly profits.
Yes, mining can make you a millionaire only if you choose the coins correctly. Additionally, include overhead expenses to understand your overall financial situation.
Solo mining technical setup
These are the tasks to start mining solo. Please be careful. This is a bit technical. But if you take it one step at a time, you will definitely get there.
a) Configure Full Nodes : Full nodes are the main stakeholders in the Bitcoin blockchain. These help validate transactions along with other complete nodes in the network.
b) Create bitcoin.conf file : This file will help you modify the complete node according to your details. Then save it to the default bitcoin directory.
c) Install Bitcoin mining software. Options include CGMiner , BFGMiner, MultiMiner, and EasyMiner.
d) Launch the mining software according to the details entered in the Bitcoin configuration file .
Please note that mining also depends on luck. This is not a clear milestone that can be achieved with powerful hardware. Even with sophisticated machinery buzzing by your side, you might still go home empty-handed. This is especially true for solo minor.
However, such large investments are not always possible. With this fact in mind, let’s move on to an economical alternative: pool mining.
#2.Pool mining
A pool is like a group that contributes to the mining process. You participate using your limited computing power and receive rewards according to your hashrate.
For example, you can join F2Pool, which is currently the largest mining pool.
Let’s take a look at some of the profits of miners using the lowest hashrate on F2Pool.
This miner “JASMINER X4-1U” has a hashrate of 520 M/s and earns $31.7 per day. But even then, it uses an ASIC miner, although it is not very powerful.
Therefore, if you use your graphics card only for mining, your profits will be even lower. However, if you are using multiple GPUs like the following miner, you can generate quite a few.
Keep in mind that you know the electricity costs in your location, as the electricity costs alone can exceed your mining profits and incur losses. Check this:
To start pool mining, you must first select a pool to join.
Important factors to consider when weighing your options include pool fees, reputation, payment cycle, and pool size. It is important to consider everything and make the right choice .
Some of the largest pools (over the past year) by percentage of blocks mined are:
After you select your pool, you will need to visit the website for detailed setup instructions.
You can use CryptoCompare for pool mining as well as solo mining. The only thing you need to change is the pool fee (usually 1% to 3%) depending on the pool you use for mining.
#3. CPU and GPU mining
The only difference between them is the hardware used for cryptocurrency mining.
CPUs are cheaper than GPUs. However, mining doesn’t work out that well.
Image credit: Hashrate
Therefore, CPU mining is not recommended if you are concerned about earning block rewards. Currently, having multiple GPUs lined up in a cryptocurrency mining rig is the minimum requirement for a profitable mining operation.
However, new entrants to the world of cryptocurrencies can try it out without a huge upfront investment.
The setup is similar for both CPU and GPU mining.
First, select and set up your cryptocurrency wallet. Next, download and configure the mining software for your desired cryptocurrency and you’re good to go.
#4.Cloud mining
Cloud mining involves signing a contract with a cloud miner (such as ECOS or Genesis Mining ) and renting out their mining infrastructure. No need to worry about hardware, software, or maintenance issues.
Pay a recurring fee and mine the coins of your choice based on cloud miner availability.
It’s like using paid Gmail.
In other words, cloud mining is a no-brainer for wealthy, non-tech savvy individuals who wish to invest in the crypto mining field.
Essentially, you invest in a mining operation that is completely controlled by someone else and receive rewards based on the hashrate you purchase in the contract.
The point is to pay your dues upfront, even if you don’t make a profit. Because cryptocurrencies are a volatile market and the contract does not take that into account at all.
virtual currency trading
Mining is not the only way to own cryptocurrencies. You can also exchange fiat currency for these.
To trade, you must register on a cryptocurrency exchange and purchase your chosen cryptocurrency with government-issued currency. Some exchange portals also allow exchange between crypto coins.
But mining is different from others and is appealing to cryptocurrency enthusiasts. They not only earn Bitcoin in this way, but also contribute to the sustainability of the network. These make the blockchain more secure and allow transactions to continue.
Without mining, new coins cannot be created. Additionally, they have a say in changes to network protocols.
Bitcoin mining FAQ
It depends on the mining pool. Detailed guides on software and hardware setup can be found on reputable pool websites. You can also check out these best cryptocurrency mining platforms to easily see some of the options available.
No, because mining costs real money. In most cases, without custom hardware, you won’t be able to run it profitably due to the apparent electricity costs.
The cost is proportional to the profit you want to obtain. If you have the necessary hardware and real estate, you only need to pay for electricity. Otherwise, there is the cost of mining equipment, associated cooling equipment, and required real estate. Moreover, when you factor in the fees of mining services, you can see that a large investment is required.
Last words 👨💻
In short, crypto mining is for technically skilled people. It’s an unpredictable market. So, test thoroughly before diving into your hard-earned money.
In conclusion, try mining small coins before going after big fish.
Also, do not attempt to mine Bitcoin (or similar coins) using a single GPU or CPU. Not only does it take the equipment out of its life cycle, but it also wastes time and energy.
Before you start this strange world of computer currencies, consider all the factors: land, power, atmosphere, hardware, software, etc.
Many people are making fortunes by mining cryptocurrencies. And with the right knowledge base and resources, you should be able to achieve success.
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