Many people are interested in cryptocurrencies and an increasing number of them are investing. But even among those who regularly trade crypto, few truly understand the technology behind them. And that's because cryptocurrencies are currently largely used as a speculative tool. Many people chase profits without being interested in anything else. Only minimal technical knowledge is required to get involved in trading, but we think it's useful to know the basics. Education will remove the uncertainty and doubt that largely represents the general public's view of cryptocurrencies.
What Is Cryptocurrency Mining?
Mining is basically a distributed consensus system. It is a mechanism by which many people around the world are involved in the maintenance of crypto networks. "Mining" is a term used to describe the process of validating transactions waiting to be added to the blockchain database. Mining is essential in Proof of Work blockchains like Bitcoin. Newer blockchains tend to use Proof of Stake and other consensus mechanisms and do not require or allow mining. On Proof-of-Work blockchains, mining establishes the chronological order of transactions, which is essential to ensure that previous entries in the crypto "open ledger" cannot be altered. If a transaction is to be successfully confirmed and included, it must be packaged in a block that must adhere to strict cryptographic rules. They are verified and validated by the miners in the network and there is no involvement of any government authority. This protects the neutrality of the Bitcoin network.
We can make a quick comparison with the use of credit cards in the traditional electronic money system. Each payment must be verified and recorded by the credit card company (eg MasterCard or Visa). We could say that the entire cash flow of the contemporary banking system is recorded in centralized systems, and these are highly susceptible to manipulation.
Cryptocurrencies like Bitcoin do not have centralized organizations that confirm transactions. In the case of Bitcoin this work is done by miners and they create new Bitcoins in the process.
The process is called mining because of the many similarities with gold mining. Both scenarios involve a lot of work and energy to produce a high value asset.
What is cryptocurrency mining? It is a way to reward those who validate blocks of transactions so they can be added to the blockchain.
Cryptocurrency Mining Basics
What is crypto mining? We will use an analogy for this explanation.
You are probably already familiar with the basics of gold mining. You have to be willing to do a certain level of work to get the raw material that has value in people's eyes. Bitcoin is not too different in this respect, except that it is an entirely digital resource, so the mining process takes place in the virtual world.
Getting gold is easy and simple, but the process can be volatile and unpredictable. Cryptocurrency mining is much the same.
For gold mining you get an economic incentive when the costs of mining an ounce of gold (labor, payments, equipment) are lower than the value of an ounce of gold.
It is the same with Bitcoin, but with some differences. Miners discover new Bitcoins and pre-determined increasing levels of difficulty and with an increased level of energy consumption.
There is an economic incentive for Bitcoin mining when the costs of mining Bitcoin (electricity, processing power) are lower than the value of the mining rewards.
What rewards are we talking about?
The most successful miners are rewarded with new Bitcoins if they successively add a new block to the blockchain.
Now the price is never received by a single person because no one in the world has enough computational processing power at their disposal to solve the complex mathematical operations required to validate a block. So miners team up, and create so-called "mining pools" to be able to join forces. The award is then distributed in proportion to the work done by each individual member. Those with more computing power get a bigger prize.
The reward is halved every 210,000 blocks. At the time of writing, Bitcoin's block height is 567,000. That means the entire Bitcoin blockchain contains 567,000 blocks. Each block is linked to the previous one in the chain and all the way back to the Genesis Block.
Miners were initially rewarded with 50 Bitcoins, and in 2013 the reward was halved to 25 Bitcoins. Halving occurs every four years. You can track the countdown here.
Security and Difficulty
The more miners there are, the more secure the network is. A large pool of miners means it is virtually impossible for anyone to tamper with the network and its assets.
The downside is that an increase in the number of miners also increases the difficulty of mining (and decreases profitability). Broadly speaking, the difficulty is adjusted based on the amount of computing power distributed across the mining networks. This adjustment causes a block to always be added to the blockchain approximately every 10 minutes (and not earlier or later due to a variable number of miners).
Higher difficulty, in theory, means less profit for miners. This is because the reward is distributed to a larger number of miners, so each of them gets a smaller share. This is not a big problem if the price of Bitcoin is high or if miners have access to cheap or free electricity.
It may happen that the mining reward does not cover the mining costs. In this case, many people continue their mining operations, mainly because of their belief that Bitcoin will be worth more in the future.
What is cryptocurrency mining? And what is Bitcoin mining specifically? The process of crypto mining involves verifying transactions and creating new coins.
How to Mine Cryptocurrencies
What is cryptocurrency mining? Now you know. You're probably eager to try it yourself. Let's see now what kind of hardware equipment and what procedures are needed to organize a mining operation at home.
The first step to start mining is to invest in the right Antminer ASIC computing hardware. A faster and more powerful computer increases the chances of success. The most widespread and recommended Antminer equipment are those from Bitmain with a fairly high computing power on the global market. In principle, anyone can mine cryptocurrencies with these Antminer machines. You just need to run the mining software on your computer. But you're unlikely to get useful returns without doing some research.
In the first few years of Bitcoin's existence, it was sufficient to use ordinary home computers and graphics processing cards for ordinary consumers, but in recent years this has become quite inefficient. An important factor has been the growth of application-specific integrated circuits designed for mining. ASICS performs only the specific types of computing operations that are required for cryptocurrency mining. These noisy and hot devices are not suitable for domestic environments. Is crypto mining profitable? It can be. But if you want to get rich from Bitcoin mining, you should be prepared to pay a lot of money for custom hardware.