When people talk about bitcoins or Cryptocurrencies along with that, you must have heard the word mining with it. But what does mining mean in context to Cryptocurrency? Crypto mining had just begun after 2009 when Bitcoin was first mined. But the question is, what is mining and how to mine Cryptocurrency?
How to Mine Cryptocurrency? What Is Crypto Mining?
How to Mine Cryptocurrency?
What is Crypto Mining?
It is a program in which the machine does a few chores to get a little bit of Cryptocurrency. This is one method through which new bitcoins get into the flow, although it is also a demanding segment of the maintenance and development of the blockchain ledger (public record). It would also include verifying data blocks and adding transaction records to the Blockchain.
Crypto mining can also be referred to as a process in which you get Cryptocurrency as a reward for your finished tasks. You get Cryptocurrency by solving cryptographic equations by using computers. This task is done by very sophisticated computers which can solve even the toughest computational math problems.
Crypto mining involves a lot of hard work and results in the slow accumulation of resources similar to mining for minerals.
Overview about Cryptocurrency Mining
- It is a detailed, expensive, and intermittently rewarding
- Anyone can become a miner, but mining is not for everyone
- Miners are remunerated for their work with crypto tokens
- It is about achieving even more financial freedom without governments or banks knocking in
- All cryptocurrency transactions are listed on a blockchain. A blockchain is a database shared and managed by a community, as opposed to a centralized entity
- The good part about it is that you can make money through it without putting money into it
- You would require a GPU (graphics processing unit) or an application-specific integrated circuit (ASIC) for setting up a mining rig.
Terms that are usually used in Cryptocurrency Mining
1. Blockchain- This term is used for numerous technologies which provide control across a large number of individual actors for security reasons.
2. Miners: They are the particular nodes whose role is to verify unconfirmed blocks in the Blockchain by verifying the hashes. Once the miner validates the block, it is attached to the Blockchain.
3. Hashing: This is the process of compressing data into an irreversible jumble of bits. Every set of data would possess a unique hash, and if you wish to change the data, you would have to compute a new hash.
4. Decentralized: Something that cannot be controlled by a single, central entity or a group.
5. Blocks: They are the individual section that includes each overall Blockchain. Every block comprises a list of transactions that are 6. completed. Once the blocks are confirmed after that, you cannot modify them.
6. Nodes: These are the tools that subsist within the Blockchain.
7. Transactions: The mining process starts with transactions, as it is the trade of cryptocurrencies between two parties. All the transactions get bundled and become a file that gets added to an unconfirmed block.
8. Nonces: It is a crypto-speak which states a number that is used just once. It can also be said to be a random or non-repeating value. Nonce gets added to hash in every blockchain block, and it is that distinct number that the miners are working for.
9. Consensus algorithm: This is a process within the Blockchain as it assists different notes within a distributed network come to an agreement for verifying the data. Proof of Work is said to be the foremost consensus algorithm.
Cryptocurrency Mining Methods
A lot of people have this question in mind that how does bitcoin mining work? There are several ways of doing cryptocurrency mining; let us understand some of the significant ones:
1. Cloud Mining: This is the most famous way of mining cryptocurrencies as it is pretty simple and user-friendly. In cloud mining, you would have to pay someone a precise amount of money and rent out their mining machine, termed as a rig.
This rent that you pay is for a specific period. After that, all the earnings that the rig makes are transferred to your cryptocurrency wallet, but the electricity and maintenance cost is deducted from that amount. The organizations that provide cloud mining services have huge mining facilities with numerous farms and know well how to mine Cryptocurrency.
The primary reason why this method has become so popular is that it provides an opportunity to enter the world of cryptocurrencies even if you do not have sufficient funds to buy rigs or people who are not keen on owning a rig.
The good part is that there are two options in cloud mining: the free version and the other is paid. Many people opt for the free version, but it has many cons, such as slow mining speed, extra conditions, and many more.
Process of cloud mining: First, you would have to search for a cloud mining host online and see the different plans they offer and choose one as per your requirements. Once you choose the plan, you need to pay the host, perform the transaction and register your cryptocurrency wallet code. The plan prices usually lie around $500-$5000, and the time starts from two years to a lifetime.
As per the market trends, people usually reach the break-even point at half or one year time, but the prices of cryptocurrencies are dynamic, so there is no surety of the profit or loss.
2. CPU Mining: This process is different from cloud mining as here they use processors for mining cryptocurrency. Initially, this method was used by many people, but now its usage has reduced because its process is pretty slow as it might take months to generate even a small amount of revenue.
There are times when people make no or very fewer profits through it as they spend a lot of money in paying electricity and cooling bills. The reason why people are still practicing it because anyone with a desktop can do it.
Process of CPU Mining: You should own a desktop and several programs. It is advised not to use laptops for this as they might overheat in just a couple of hours. Beginners usually opt for this process as it is easy and can be done without seeking any help.
3. GPU Mining: Usually, all modern computers have a CPU and GPU. Like the CPU is the computer’s brain, GPU is referred to as the muscle for mining. Nowadays, GPU mining has become one of the most well-known methods. Normally, all the cloud miners have started using GPU rigs for their services.
People are most inclined towards this method because it is very efficient and comparatively economical. GPU mining rig is great as it has hash speed and a general workforce. GPU rigs use graphic cards for mining cryptocurrencies.
Many things are used for making a standard rig, such as a motherboard, processor, rig frame, cooling, and graphic cards. The price of a nicely built GPU is usually around $3000. This might sound a lot, but it will pay off very fast.
4. ASIC Mining: ASIC stands for Application-Specific Integrated Circuits. They are devices that are particularly created to do a single task that is crypto mining. These have become pretty popular as they produce a hefty amount of Cryptocurrency as compared to other methods.
There is a big debate about ASIC, as when they announced its new version, people demanded to ban these machines because they are very powerful and can rob the miners using CPU or GPU.
These were some of the cryptocurrency mining methods now; let us understand the crypto mining process in detail to make it easier for you to start with it.
How Cryptocurrency Mining Works
Here is a step by step guide for you to know the cryptocurrency process:
1. Nodes verify transactions are legitimate
A cryptocurrency blockchain is built upon the basis of transactions. But for completing a transaction, it is essential for it to undergo a verification process.
2. Separate transactions are combined with a list of other transactions to make a block
The second step would be to put all the transactions in a list added to an unconfirmed block of data. The best part of this data is that it can neither be manipulated nor altered. In fact, it keeps a permanent public record.
3. A hash and other kinds of data are attached to the unconfirmed block
Once adequate transactions are added in the blog, a few more information such as header data and hash from the previous block in the chain and a new block are added. After that, the header of the most current block and nonce are merged for making a fresh hash.
Now, this hash would be added to an unconfirmed block to get approved by the miner node.
4. Miners validate the block’s hash to assure the block is genuine
This step is crucial as the miners in the network check the probity of the unconfirmed block by inspecting the hash.
5. Once the block is validated, the block gets published in the Blockchain
This can be a great step for miners as now the proof of work is complete. It is a time-consuming method of solving hash and telling others that you have duly done it in a way that they can verify it.
Also Read: 11 Best Cryptocurrency to Mine
Which Cryptocurrency to mine?
The choice of gear would majorly rely on cryptocurrency mining that you have decided to do. In today’s time, the most trending and people’s favorite are Bitcoins, Dash, Monero, and Ethereum.
The fact is that there are thousands of different cryptocurrencies that exist. As per the reports, as of Oct 2020, there were 7433 cryptocurrencies, and the global crypto market was worth $356 billion.
Remember that mining Bitcoin is the trickiest of all as all the miners try and snatch a small bit of Bitcoin. This means that you would have to wait a lot to get even a small bit of Bitcoin to start coming in.
That is why it is recommended to bet on Ethereum or other currencies that are relatively less popular. Also, the Cryptocurrency you mine would depend on your budget, ROI, and your method of choice.
Therefore, you need to understand and analyze what suits you the best and then opt for it.
Should you mine Cryptocurrency?
Doing mining yourself is not as tough as you might think. If you have a desktop with a modern GPU, then you can easily do it yourself. Although doing mining through ASIC is not that simple and is not for everyone. Yet, there are various ways to make a profit from your newfound mining knowledge:
1) Proof-of-stake: If you invest in Ethereum 2.0, you will not need expensive mining equipment.
2) Rent mining power: One of the largest mining pools in the world is NiceHash. They provide you a service to rent mining power produced by machines in the countries where the electricity costs are low. Thus, by using this method, you would be able to miner without getting technical.
3) Invest in the industry: This would be possible when companies like Bitmain, Antiminer, NiceHash, etc., become publicly traded.
Mining and Bitcoin Circulation
By now, you very well know about how to mine Cryptocurrency, but the other question that comes to the mind of a lot of people is how does the circulation of Bitcoin works? Here is the answer for you in brief:
Mining serves various significant purposes other than lining the pockets of miners and supporting the bitcoin system. One of the major roles is to release new currency into circulation; in fact, it can also be said that it is the only way of getting new Cryptocurrency in the market. This process is called minting by the miners.
There is a small calculation and a fixed amount up to which the Bitcoin would be made. Let us understand this with the help of an example; as per the reports, there were almost 18.5 million Bitcoins in circulation as of Nov 2020. Aside from the coins minted via the genesis block, every single one of those Bitcoin came into being because of miners.
Don’t worry; even if the miners don’t exist in the future, Bitcoin as a network would be there and be usable; the only difference would be that no additional Bitcoin would be generated. As per the Bitcoin rules, there would be a time when Bitcoin mining would cease as its limit is capped at 21 million.
Don’t fret; there is a lot of time as the final Bitcoin as per the calculation would be mined in 2140, but yes, this is true that over time the rate of Bitcoin mined would be lessened. Also, do not think that the transactions that you do would be ceased to be verified. Miners would be paid to check the transactions to keep the uprightness of Bitcoin’s network.
The major benefit to the miners is that when there are any changes done in the Bitcoins’ protocol, they are given voting power. This means that they have a say and authority in the decision-making process.
Cryptocurrencies Use Decentralized, Distributed Systems
As per the traditional banking system, it was the central authority that used to control, update, verify and maintain the centralized record. But this is not the case with Cryptocurrency as there is no central authority that controls it as a decentralized system operates them with a distributed ledger that is called Blockchain.
The reason why it is decentralized is because of the ease of transactions, as anyone can straight away connect and participate in the cryptocurrency system. You need not go to the central bank for sending or receiving payments; that is the reason it is also called decentralized digital currency.
It is also a distributed and transparent system as all the transactions are available publicly and saved on various computers. The verification of all the transactions is done via cryptographic algorithms. Here is where the role of miners pop in as they use their computers for doing the cryptographic work that is needed to be done for adding new transactions to the record.
Who updates the Blockchain?
As you know, there is no centralized banking to manage and control exchanges, then who will update the Blockchain and how frequently? The process of updating the Blockchain is done by the computers that mine a particular type of Cryptocurrency and are also responsible for keeping the ledger up-to-date. The updates on the Blockchain are done quite frequently.
The good part is that everyone can view and refresh the ledger because it’s public, and it is possible because of the cryptocurrency blockchain. In fact, anyone can do that by using their computer when you try to solve an equation that the Blockchain represents and if it gets accepted, your transaction would be automatically added to the next data block for approval.
Is crypto mining legal?
Many people think that crypto mining is illegal, but the answer to it is that it is legal. The legitimacy of crypto mining would rely mainly on two factors:
a) Geographical Location
b) Whether you mine crypto by legal means or not
The mining of Cryptocurrency is seen differently by different governments worldwide. As per the reports, U.S. feels mining Bitcoin as fulfilling a service that is the heart of the Bitcoin cryptocurrency system. On the other hand, in China, the local governments are cracking down on Bitcoin mining, and therefore they are to stop mining Bitcoin.
Many countries consider the profit from Bitcoin to be taxable, whereas, in few countries, it is a non-taxable income.
Risks of Mining
Cryptocurrency mining comes with a lot of benefits, but along with that, there are a lot of risks as well that are important to analyze before getting into it. Usually, there are two types of risk involved with mining which are financial and regulatory. There have been many people who spent thousands of dollars on buying mining equipment yet had no return on their investment.
To mitigate the risk or increase the profit, it is always advisable to join the mining pools. The next important thing is that you should always read the terms and conditions of your country regarding Cryptocurrency and then only invest in it.
The next thing that impacts the growth of Bitcoins the most is the increased energy used by the computer while running the mining algorithms. Although the efficiency of a microchip has increased immensely for ASIC chips, the network’s growth is beating the technological process.
Because of this, there is are concerns about the environmental impact and carbon footprint of Bitcoin mining. Still, efforts are being made to lessen this negative externality by searching for clean and green sources for mining operations. Another great alternative is to shift to a mechanism that is less energy-intensive.
Also Read: Top 15 Cryptocurrencies to Invest other than Bitcoin
What are Coin Mining Pools?
Along with the detailed knowledge of how Bitcoin mining works, you need to understand the concept of mining pools and how you can benefit from it.
The miner who searches for the solution to the puzzle first gets the mining rewards, but the chances of becoming number one to find the solution are equal to the portion of the total mining power on the network. Miners who have a small percentage of mining power have less probability of finding the next block independently.
For example, one could purchase a mining card for a couple of thousand dollars would show less than 0.001% of the network’s mining power. Therefore, the chances of finding the next block in such cases are very less and would take a lot of time plus, when the difficulty increases, it makes things even worse. Hence, it would become tough for the person even to recover the money they have invested.
This is where the mining pools come into effect as they help you in various ways. They are operated by third parties and coordinated by a group of miners. If you work together in a pool and share the payout amongst all the participants, miners would get a constant flow of Bitcoins beginning from the day they activate their miners.
What do you mean by the statement ‘the right answer to a numeric problem?’
For solving the numeric problem, you do not need any advanced math or computation. These numeric problems are not that tough to solve, but the miners wish to become the first to solve them and develop a 64-digit hexadecimal number less than or equal to the target hash.
It is basically the guesswork, but the numbers of guesses for every problem are trillions, making it a pretty tough job. For solving the problem, miners require a lot of computing power. For successful mining, you would have to have a high hash rate that is measured in terms of megahashes per second (MH/s), gigahashes per second (GH/s), and terahashes per second (TH/s).
What is a 64 digit hexadecimal number?
Let us understand about the 64 digit hexadecimal number by an example, below is the number-
The above code has 64 digits, and it comprises both numbers and alphabets. First, let us break down the word hexadecimal; almost everyone knows a decimal means; it is the number whose base is 10. In this case, it means that every digit of a multi-digit number has 10 possibilities, zero through nine.
Hexadecimal means that its base is 16. Thus, every digit would have 16 possibilities, but as per our numeric system, there are only 10 ways of representing numbers, i.e., from 0-9; therefore, they use alphabets a, b, c, d, e, and f.
Also Read: How To Get Bitcoins In India For Free
In today’s time, many people have started investing in cryptocurrencies because of the various benefits that it offers. The maximum population has started using money digitally, such as credit & debit cards, PayPal, Amazon Pay, etc., for buying online items or sending and receiving money from your friends and family.
In a world where eCommerce has taken control over other things, people do not want the hassle of paper cash and coin currencies. Therefore people got inclined towards Cryptocurrency, and here are the major reasons why:
1) More privacy and control over finance: Various people want to have more command and privacy when it comes to their finances. The idea behind it is that no one is your friend or relative, would get to know when you bought the play station or how much you spent on the new speakers.
People wanted to eliminate the traditional centralized banking system where people hide money in the suitcase or pantries. This new system of cryptocurrency mining helped them come out of the traditional system. Using Cryptocurrency renders anonymity to users as it involves the usage of public-key encryption and hashing functions.
2) It’s all about the Benjamins: As per the research, it was found that by 2025, the global cryptocurrency market is expected to outstrip $38 billion. There have been various people in the past for whom crypto mining was immensely profitable, and it ought to be one of the best investments of their life.
On the contrary, there have been many people for whom it did not turn out to be profitable because there are many factors and resources that go into mining them and usually not a high profit.
3) The concept is still fresh and shiny: The good part about Cryptocurrency is that its concept is still new and exciting. Hence, several people want to be a part of the wave of new technology and want to experience it. Every day new people are becoming a part of it as they want to be a part of the next best thing in the market.
Why does everyone not invest in Cryptocurrency?
Although various people in the country know how to mine Cryptocurrency, everyone does not get involved in it; why? This is an interesting question as there are so many advantages attached to crypto mining but still, the percentage of people getting involved in it less. Here are the reasons why:
1) It is resource-intensive: For mining even one Cryptocurrency, you would need numerous resources in terms of both computing power and electricity. Cryptocurrency mining needs a lot of computing power for generating new guesses persistently. If you become successful, you would be able to generate new Bitcoin, plus you would also be able to update the Blockchain by adding information to the end of the ledger.
2) Costly: Along with the processing power and electricity to power your operation, you would also need to analyze the costs associated with such a big initiative. Gone are those days when it was possible to crypto mine by just using one computer.
If you wish to beat other cryptocurrency miners, you would require tech and processing capacity to compete.
3) Returns on Investment: Several people have made money through Cryptocurrency, but it is not the same for everyone. The more people are getting involved in it, the return on investment has started to decrease. Let us understand this with the help of an example; every four years, Bitcoin experienced an event called halving. In this, the number of Bitcoins that people get as a reward reduces by half. Therefore, when people started mining back in 2009, they got 50 BTCs per block. The last halving was done in 2020, and the rate was reduced to 6.25 BC per block. Breakdown of the number of BTCs:
|BTC Received Per Block
|Original BTC Mining Rate
|First Halving Event
|Second Halving Event
|Third Halving Event
4) Geographical location: There are many areas or places where cryptocurrency mining is not legal; hence it is one of the foremost things to check before you start doing it. Governments worldwide have different opinions about crypto mining, and there are various countries where they prohibit investing or using Cryptocurrency as a payment method.
By reading this article, it must be very clear to you about how to mine Cryptocurrency, the risks involved with it, cryptocurrency mining methods, and much more. Remember that Cryptocurrencies are a viable area of investment for technophiles, investors, and cybercriminals alike.
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This trade is still very young, and mining has a very long way to go before arriving at maturation. It totally depends on you whether you should continue an investment related to mining or not as it relies primarily upon your risk-taking capacity.
Like any other industry, this new and underdeveloped is prone to have a lot of uncertainty, but with uncertainty comes the potential for a huge profit. Just be careful.