Bitcoins, cryptocurrencies, and ICOs have been the talk of the town, and for those of you who are thinking of ways to make some money on the side, cryptocurrency mining is the next big thing. In this article, we walk you through exactly what is cryptocurrency mining, and answer the question: How do you mine cryptocurrency? Read on to find out more!
What is Cryptocurrency mining?
Cryptocurrency mining involves using computing power to solve complex calculations within the blockchain. When mining cryptocurrency, you receive either cryptocurrency or transaction fees in return.
That’s the basic definition of cryptocurrency mining, but in order to understand this process on a deeper level, you’ll first have to learn how a blockchain works. We’ll explain this in the next section!
What is a blockchain?
In a nutshell, a blockchain is a public record of every transaction made using a cryptocurrency. Bitcoin’s blockchain, for example, shows a complete list of records of every single transaction involving Bitcoin. Ethereum’s blockchain does the same, but for Ethereum instead.
If you’re wondering how a blockchain works, it’s basically made up of “blocks”, or folders of transaction data. Any information that’s stored on a blockchain exists as a shared database — one that’s continually reconciled. It’s as though you have an online document — such as Google Docs — that’s duplicated hundreds of thousands of times across a network of computers, with the network regularly updating the spreadsheet as you go along.
The beauty of a blockchain database lies in the fact that it isn’t stored in any single location; this means that the records that it keeps are both public and easily verifiable. Because there’s no centralized version of these records, it’s tough for a hacker to gain access to and corrupt the information. They’d have to hack into millions of computers simultaneously, which is a near-impossible feat!
Back to mining a blockchain…
We’ve already established that a blockchain records every transaction made using a cryptocurrency. In order to process and cryptographically sign these transactions, the blockchain network relies on the combined hashing power of all the computers that are linked up within the network. Here’s where mining comes in: mining is the process of solving the equations that allow these transactions to be processed and secured cryptographically.
How cryptocurrency mining works
Now that you understand how mining fits into the bigger picture of blockchain, let’s look at an example of how mining works.
Say you’re trading cryptocurrencies with a friend, and you want to send your friend Bitcoin in exchange for some Ethereum. Doing this is easy — you’d get your friend’s public key (this is the equivalent of a bank number), then create a new transaction within your wallet to send the Bitcoin to their wallet. After you make your transaction, this information is sent to the blockchain.
Once your transaction appears on the Bitcoin blockchain, here’s what happens: a miner will use their computer’s hashing power to process and order the transaction. The information that you’ve sent to the blockchain is then verified, signed and completed, and the Bitcoin that you’ve sent to your friend will appear in their wallet. On the flip side, if there aren’t any miners to help you process your transaction on the blockchain, your Bitcoin wouldn’t be able to get through to your friend. Make sense, right?
Cryptocurrency mining and how miners are compensated
Cryptocurrency mining involves two things. First and foremost, miners add transactions to the blockchain (ie: they secure and verify transactions); on top of that, they also release new currency. Looking at the larger picture, the goal is for miners to solve a block of transaction data using cryptographic hash functions, which are numeric values that uniquely identify data. Once a new block is completed, miners are compensated in Bitcoin and transaction fees.
Each cryptocurrency has their own way of compensating their miners, but since Bitcoin mining is so popular, let’s take a look at how Bitcoin miners are compensated. When a new block is completed, all the miners who have worked on that block will receive a specific amount of Bitcoin. The system is structured such that the amount of Bitcoin released when each block is solved is reduced by 50% after every 210,000 blocks. The initial block reward for miners was 50 bitcoins, but it has since been depleted to 12.5 bitcoins.
Now, given that there are a fixed amount of blocks to solve, and each block takes an average of ten minutes to solve, the rough estimates are that the final bitcoin will be mined in year 2140. When that happens, all 21,000,000 bitcoins will be in circulation, and miners who choose to go on mining will only be earning transaction fees (instead of both Bitcoin and transaction fees).
On a separate note: back in the days when cryptocurrency was less mainstream, the bulk of miners were cryptography experts and enthusiasts. Now that cryptocurrency is very much in the public eye, though, there’s been an influx of people getting into cryptocurrency mining.
Today, the public perception of cryptocurrency mining is that it’s a highly lucrative business. Bearing this in mind, everyone from working professionals to students are now jumping on the bandwagon, and attempting to mine cryptocurrency.
How do you mine Cryptocurrency?
Here’s the million dollar question… how do you mine Cryptocurrency? If you’re keen to explore cryptocurrency mining, the good news is that pretty much anyone and everyone can mine digital currencies. In order to get started, you’ll need a desktop or laptop (those in the community refer to this as their rig), a mining software, and a cryptocurrency wallet where you can store any cryptocurrency that you earn.
That said, it’s important to note that you may or may not make a profit from mining cryptocurrency. How much cryptocurrency you’ll earn from your mining efforts depends on a number of things, including the speed and volume at which you’re able to mine, the difficulty of the cryptocurrency you’ve chosen to mine, your electricity costs, and more.
For people who are mining to turn a serious profit, the key is to choose the right cryptocurrency, as well as to utilize a rig that’s sufficiently powerful. Most people find that it’s almost always unprofitable to mine cryptocurrency using a personal laptop or desktop computer, and if you want to get into mining, investing in hardware that has been specifically designed for mining will definitely boost your chances of making a profit.
To mine, or not to mine?
Before you jump headfirst into the world of mining, we recommend doing a Cost-Benefit Analysis, so that you can determine if mining makes financial sense for you.
Your costs include:
- Electricity costs
- Costs of purchasing and setting up your mining rig
Your benefits include:
- The price of the cryptocurrency you want to mine (look at both its current price and the price that you expect it to reach)
- The reward for mining the cryptocurrency you’ve chosen
As mentioned earlier, the amount that you’ll earn from mining really boils down to the cryptocurrency you’ve chosen and the power of your rig. If you’re only able to invest, say, $1000 or so in your rig, you’ll be limited by the amount of computing power your rig generates, and you might only be able to make a dollar or two per day. This means that you’ll recoup the cost of your hardware in 18 months or so, but you’ve still got your electricity costs to consider.
If you can afford to splash out more on your rig, however, then you’ll be able to generate more income per day. This brings us to the question… how much should you spend on your rig?
How much should you spend on your rig?
Let’s assume you have two options when it comes to mining rigs:
Cost of mining rig = $2,500.
Potential profit = $250 profit generated per month, based on the rig’s specifications.
Electricity costs = $50 per month.
Break-even point = 2500 / (250-50) = 12.5 months.
Cost of mining rig = $5,000.
Potential profit = $600 profit generated per month, based on the rig’s specifications.
Electricity costs = $80 per month.
Break-even point = 5000 / (600-80) = 9.6 months.
From here, you might be tempted to conclude that it’s worth it to spend more upfront, and invest in the $5,000 rig. After all, this rig helps you mine more effectively, and it’ll result in your breaking even in just under 10 months (as opposed to 12.5 months).
Here’s the thing, though… you’re operating under the assumption that the price of the cryptocurrency stays the same, which is highly unlikely. The prices of cryptocurrencies tend to fluctuate heavily, and it’s possible that the currency you’re mining could crash in price, and whatever you’ve earned from mining will be worth pennies.
Even if that doesn’t happen, the difficulty of mining your cryptocurrency could increase (in fact, it’s likely to increase). Consider this: as time goes on, more nodes are added to the network; this makes the currency harder to mine. Bearing this in mind, you might find that you can easily generate $600 in profit in your first month, but that you’re struggling to generate even $500 the next. In other words: it’s all very much up in the air.
The bottom line? When it comes to your mining rig, yes, you’ve got to have a decent set up in order to be able to mine effectively, but don’t fall under the illusion that more is more. If you go all out and purchase an expensive, heavy-duty rig, only to realize that the value of the cryptocurrency you’re mining is dropping exponentially by the day, then your investment might just come to naught. So don’t take anything for granted, and think about how much losses you can potentially sustain before deciding on the budget for your rig.
Which cryptocurrency should you mine?
We’ve already answered the question “how do you mine Cryptocurrency?”; now, we’ll move on to addressing the second piece of the puzzle, which is… what cryptocurrency should you mine?
You’ve got plenty of options to choose from here, but one coin that you should definitely avoid is Bitcoin. Why is this the case? Here’s the thing: Bitcoin is built in a way that the difficulty of mining “self-adjusts” to the mining power that the entire network possesses. In other words: the more people mine Bitcoin (and the more computing power there is behind the mining), the harder the actual mining process becomes.
Because Bitcoin is the most well-known cryptocurrency out there, Bitcoin mining has grown to the point where only companies with specialized, high-powered machinery are able to compete and profitably mine Bitcoins. Yes, it was possible for people to successfully mine Bitcoins with their home set-ups a few years back, but today, Bitcoin mining is an industrial-level venture that is not suitable for individual miners.
Now that Bitcoin is out of the picture, what other coins should you consider mining? This really depends on which coins you personally think will take off, but for starters, you can look at Litecoins and Feathercoins, which are said to bring better cost to benefit ratios to miners. To learn more about mining cryptocurrencies, check out WhatToMine, which calculates the difficulty of mining the different cryptocurrencies out there.
BONUS: What cryptocurrency is the best for first-time miners?
We’ve already talked about how you need to invest in a proper rig in order to have a shot at making money with mining. That said, if you want to dip your toe into the world of mining for the first time before you decide if you want to do it seriously, there are several cryptocurrencies which can be mined on home PCs. These include Monero, Dogecoin and Vertcoin.
Cryptocurrency experts consider Monero the most advanced anonymous digital currency, and this currency experienced some pretty impressive growth in 2017. If you’d like to miner Monero with your PC, all you’ll need to do is download Monero mining software (popular ones include MultiMiner and GUIminer) and install it. If you want to mine more effectively, though, you can power up your computer using either an AMD or NVIDIA graphics card.
Dogecoin was created as a “joke cryptocurrency” back in 2013, but it’s come a long way since then. This cryptocurrency reached a market capitalization of $1 billion in January 2018, and seeing as 5.256 billion DOGE is added to the network each year, the currency is highly popular with miners hoping to make a good profit. For those who are keen to mine Dogecoin on their computers, your best bet is to use the multi-threaded CPU miner. Again, you’d want to purchase either an AMD or NVIDIA graphic card to boost your hash rate.
Vertcoin is a relatively new altcoin that was developed to promote decentralization of the mining process. While Vertcoin uses a proof-of-work algorithm to verify transactions (like Bitcoin does), Vertcoin is also designed to be ASIC-resistant. In layman terms, this means that it’s unlikely to be targeted by large cryptocurrency mining operations who develop specific hardware to use for mining purposes.
For those who are looking to mine Vertcoin, the team behind the coin recently released a one-click miner that consumers can use to miner Vertcoin on their home PCs. Simply download and install the miner, then join a mining pool and start mining.
What’s the difference between solo mining and mining pools?
There are two ways in which you can mine cryptocurrency: you can either engage in solo mining, or join a mining pool. If this is the first time you’ve heard of the latter, it’s pretty straightforward: a mining pool refers to a situation wherein various mining devices work together in a “pool” to generate a new block.
If you join a mining pool, your rig will receive a computational task that’s less difficult to solve (the same goes for every other miner within this pool). While each miner’s rig works on solving their task, the mining pool coordinates the efforts of all the miners, and checks to see if each obtained solution results in a complete solution of the puzzle. Once the puzzle has been solved, and a new block is unlocked, the block reward will be split among miners according to each miner’s contributed processing power.
If you’re having trouble picturing this, you can think of mining pools as similar to lottery pools. You could buy a lottery ticket and try and win individually, but the chances that you’ll strike lottery this way are close to zero. Instead, you team up with other lottery players, with everyone buying tickets and agreeing to split the winnings if anyone wins. While this makes your odd of winning higher, the catch is that you’ll take home a reduced amount in the event that you (or someone in your group) does win.
There are plenty of existing mining pools for the different cryptocurrencies out there; simply Google to find out more. Do note that some mining pools request miners to pay a fee to join.
A final word on cryptocurrency mining
Give yourself a pat on the back! You’ve made it all the way to the end of our guide to cryptocurrency mining, and you’re now an expert on all things mining-related.
There’s plenty to digest, so take some time, and think about whether investing in a rig and spending time on mining makes sense for you. While mainstream media might portray mining as an easy “get rich quick” scheme, this is really far from the truth, and you should understand that mining should not be looked at as a stable or viable source of income. Welcome to the world of mining!