Crypto Mining Explained

Crypto mining is a popular topic in the cryptocurrency space. With cryptocurrencies gaining more ground every day, a lot of people are becoming interested in crypto mining. This is because most of these people heard that it is possible to make money from them. If you’re also thinking of considering crypto mining as a passive source of income, you’re at the right place. In this blog post, we will be teaching everything you need to know about crypto mining.

In this article, we will be discussing cryptocurrency mining in detail and how you can exploit this opportunity to make money. 

Let’s get started. 

What is Crypto Mining? 

Crypto mining is referred to as the process of gathering cryptocurrency as compensation for work that you complete. If you are talking about Bitcoin, it is often referred to as Bitcoin mining. It involves hard work (done by computers) and results in a slow accumulation of resources, like minerals mining. In mining, anyone can become a miner, but that doesn’t mean that it is for everybody. Over 70% of Bitcoin mining happens in China, where electricity is cheap, making mining very profitable.

Before we move forward, let us look into the simple crypto terms like Blockchain and decentralization. 

Blockchain: It is an umbrella term for various technologies that distribute control across an extensive network of individual actors for security purposes. 

Decentralized: It is anything that is not controlled by a single, central entity or group. 

Mining is a term that is associated with the process of validating and recording new transactions on a blockchain. 

Ways of Mining Cryptocurrency

There are various ways of mining cryptocurrency. 

Cloud Mining

This is one of the popular ways of mining cryptocurrencies without stress. Cloud mining is a process where you pay someone (like a big corporation) a specific amount of money and borrow their mining machine called a “rig” and the process of mining itself. The terms for borrowing the machine last for an agreed-upon period. All the earnings made by the machine (excluding the electricity and maintenance costs) are sent to your cryptocurrency wallet. 

Most of the companies that offer these cloud mining services typically have extensive mining facilities with multiple farms at their disposal and know how to mine cryptocurrency ideally. 

CPU Mining

This type of mining uses processors to mine cryptocurrencies. Back in the days, it was a viable option but has been relegated to the background these days. The reason is that CPU mining is relatively slow, as you can go for months without getting substantial revenue. So, why do people still use it? The reason is that anyone with a desktop computer can do it. With a computer and a couple of programs, you could mine cryptocurrency using this method. 

GPU Mining

This is the most popular and well-known cryptocurrency mining method. When you search for cryptocurrency mining online, GPU is the first to pop up. For example, Cloud miners use GPU rigs for their services. And these guys are professionals with thousands of rigs, which means that they certainly know what they are doing. GPU mining is popular because it is relatively efficient and cheap. What we mean is not that it is not costly. That is, it is excellent when it comes to hash speed and the general workforce. It utilizes graphics cards to mine cryptocurrencies. 

The price of a well-performing GPU mining rig is around the $3000 price range.

ASIC Mining

ASIC means Application-Specific Integrated Circuits. They are special devices developed explicitly to carry out a single task, which in this case is crypto mining. ASIC is popular and treasured because they produce insane amounts of cryptocurrency when compared to its competitors, such as CPU and GPU. But why are they not ranking first? That’s because of the controversy surrounding it. For instance, they rob other miners who are using GPU or CPU of the likelihood of catching up in both hash speed and earning because they are powerful. Also, they have monopolized the economy of specific cryptocurrencies – like the majority of earnings going to one miner with an ASIC farm. 

How does cryptocurrency mining work? 

The process of mining cryptocurrency is straightforward. However, without clear understanding, anyone could abuse it or it leads to financial loss. Therefore, only unconfirmed transactions can be mined. After the miners identify the transactions as legitimate, the nodes are spread out into a network similar to a peer 2 peer file-sharing network. 

For each transaction that is confirmed, which a miner creates, a node has to add it (the legit transaction) to its database, where it is then added as part of the Blockchain. 

Mining Properties 

Mining is painstaking, costly, and only sporadically rewarding. However, it has a magnetic appeal for many investors interested in cryptocurrency due to the fact that miners are rewarded for their work with a crypto token. There are various properties of mining. Let’s look into them. 

Proof of Work (PoW)

Proof of work (PoW) is the algorithm that secures many cryptocurrencies like BTC and ETH. Most of the cryptocurrencies have a central entity or leader which keeps track of every user and how much money they have. But there is no such in charge of Bitcoin. PoW is needed to ensure that online currency works without company or government interference. The goal of PoW is to prevent users from printing extra coins they didn’t earn or double-spending. That’s because if users are allowed to spend their coins more than once, it would invariably make the currency worthless. 

Rewards

The mining reward is an incentive received by miners as a reward for generating a new block through mining. Bitcoin is only issued via mining, and when it is newly issued, it is given to the successful miners as an incentive for their effort. The reward for mining a block started with 50 BTC per block and after three halving cycles it is currently at 6.25 BTC. The reward is halved every 210,000 blocks, with the 6,929,999th block as the last to reward mining. The total amount of BTC that can be issued is 21 million, which is also the maximum amount. The mining reward is one of the advantages of cryptocurrency mining and is the primary reason why investors are investing thousands in crypto mining.

Mining Pool

A mining pool refers to a group of people who combine their computing power to solve a complex math problem on the Blockchain for a reward. The primary goal while people join the mining pool is to increase their chances of solving the blockchain math problem so that they can earn an incentive of transaction fees and new coins. Once they have won the reward, they split it among all the members of the team. In a mining pool, you can frequently win the reward, but since it is shared among the members, the pay-out is smaller. 

Energy Cost

Cryptocurrency mining consumes more energy than some countries put together, like Argentina. Mining of cryptocurrency is power-hungry, involving heavy computer calculations to verify transactions. Also, just as the cryptocurrency price is increasing, so are miners increasing their mining capacity. In order to “mine” BTC, computers that are often specialized are connected to the cryptocurrency network. And to increase profits, people often connect large numbers of miners to the network. This uses a lot of electricity because the computers are more or less constantly working on completing the puzzles. Energy cost is one of the significant barriers in cryptocurrency mining. 

Benefits of Cryptocurrency Mining

There are many benefits of mining mechanisms. Unlike the traditional banks that can close a customer’s account, you have complete control over your coins at all times. However, it can be lost if you misplace your private keys. Below are some of the benefits of cryptocurrency mining. 

Network Security

As more and more miners are working together to contribute hash power to the network, it becomes less vulnerable to attacks. That is because cybercriminals would have to gain access to more than half of the bitcoin mining equipment simultaneously in order to temper with the BTC network, which the probability of such a thing happening is almost equal to zero. The participation of miners helps to stabilize the network. 

Fair Asset Distribution

Mining of cryptocurrency gives equal access to anyone with the tools to mine a cryptocurrency. It is not monopolized like a business where a particular individual will have a monopoly over a specific product. There is a fair asset distribution of resources. Even in a mining pool, the reward is distributed equally to the team. 

The potential of cryptocurrency

The more the mainstream adopts cryptocurrency, the more the value increases, which will benefit you as a miner. The cryptocurrency you mine today might be worth a lot of money in the future or could also be used instead of fiat (USD, etc.) in the future to buy goods and services. Although mining is risky, no one can predict what would happen in the future. 

You become your own boss.

If you can manage to set up your own tool and start a mining operation, you can become your own boss. However, you will need to scale up your mining operation and make it profitable. Also, this could become a difficult task due to a lot of skill, expertise, upfront costs, and experience that is required. 

Energy Consumption in Mining 

Energy is one of the significant factors that determine how profitable mining could be. It is while miners are seeking for cheap energy/ renewable energy that can be stored. Energy prices vary from country to country. Most countries charge a low price for industrial electricity in order to encourage economic growth. It means that a mining farm in China will pay half for electricity than someone in the USA. It is why miners prefer China for cryptocurrency mining. 

Proof of Work VS Proof of Stake in Energy Consumption

For starters, the Bitcoin blockchain uses something called a proof of work (PoW) consensus algorithm. In the proof of work (PoW) mechanism, nodes validate new transactions by solving a complex cryptographic puzzle to reach consensus between all other nodes on the network. 

Thus verifying the authenticity of the transactions. These nodes are simply called miners as they mine rewards in exchange for using their computational power and resources to facilitate transactions on the blockchain network. 

However, proof of work mechanism has its downsides such as consuming enormous amounts of electricity, vulnerability to 51% attacks, a rise of centralized mining farms, etc. Therefore, a new consensus algorithm was introduced to tackle these problems – proof of stake (PoS). 

First introduced in 2011 by a BitcoinTalk forum user called QuantumMechanic, this new technique randomly chooses a node to validate a new block. In the proof of stake (PoS) mechanism, these nodes are called validators instead of miners. 

To become a validator, a node has to deposit a certain amount of coins on the network as a safety deposit. This deposit is called staking, and the size of their stake determines the probability of being chosen to validate a transaction or forge a new block. In exchange, these validators receive the transaction fees associated with each transaction as their rewards.

Furthermore, 

On the other hand, PoW consensus algorithm encourages people to buy powerful hardware devices to increase their chances of winning the mining reward. This has led to centralized organizations buying thousands of mining devices that generate the highest mining power- which people call a mining pool. This gives more types of actors to participate in the mining pool. 

Whereas Proof of Stake (PoS) doesn’t require highly complex sums to be solved, which means that the required electricity to verify a transaction is substantially lower. Thus preventing a group of people from joining together to dominate or manipulate the network.

Risk Involved in Cryptocurrency Mining

The primary risk that is involved in mining is financial risk and regulatory risks. As stated above, cryptocurrency mining, in general, is a financial risk. One can purchase all the hundreds or thousands of dollars worth of mining tools and have no return on investment. However, to reduce this risk is by joining mining pools. So, it is very imperative to research very well before diving into cryptocurrency mining. 

Final Thought

As you have seen, there are many ways to mine cryptocurrency; it is left for you to find the suitable one for you. Cryptocurrency mining is an alternative to the current traditional centralized systems that operate all over the world. However, it is time-consuming, and it is costly in terms of computer and power resources, which makes it not suitable for everybody. So, remember to always do due diligence and proper research before starting cryptocurrency mining. 

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Written by:  Narender Charan

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