To mine for cryptocurrency, a network of computers performs tasks that are essentially mathematical equations. The first computer in the network to solve the equation ‘wins’ a small fraction of the cryptocurrency they are mining. While the typical understanding of mining might involve pickaxes and coalfaces, there is no physical labor involved. All the work is performed by the computer, and the miner needs only basic technical knowledge to get started. However, there are several new words and phrases that you will need to know if you are interested in becoming a cryptocurrency miner, such as:
Cryptocurrency Blockchain Hashrate Proof of work
Cryptocurrency is a growing trend. It is partly due to this growth that more and more people are looking into the possibilities of gaining coins through mining rather than purchasing them. As mining is a legitimate way to earn cryptocurrencies, some miners have managed to replace their income with cryptocurrency, showing it can be a lucrative business that has almost become a profession. Even people who aren’t earning their fortune in altcoins (cryptocurrencies apart from Bitcoin) are involved in validating blockchain transactions – either because they like being involved in the technological innovation, or because they believe in the ideal of a decentralized currency and want to support it.
Understanding Cryptocurrency Mining
Cryptocurrency mining itself is mostly a hands-off process – set the hardware to do the work using the software and wait for the altcoins to come – but understanding how it works is somewhat more complicated. The first step is to recognize and understand some of the terminology:
What Are Cryptocurrencies?
A cryptocurrency is a digital, decentralized currency that does not require validation from a government or a country. It is valid across borders and is not based on the value of another commodity like gold. Although the most famous cryptocurrency is bitcoin, there are potentially thousands of altcoins available to buy, sell and trade. A growing legitimacy to the currency means people are increasingly able to spend their digital currency like traditional (fiat) cash. Cryptocurrency is protected from hackers and other digital attacks by cryptography, a secure encryption algorithm that is not only safe but also private and anonymous. Each cryptocurrency has a set amount of coin available – so at some point, there will be no cryptocurrency left to mine.
What Is Blockchain?
Blockchain is essentially a type of database in which records are kept in blocks that are chained together. It is a digital ledger of information that is impossible to alter and represents record-keeping technology stored on a network of computers known as nodes. Each block has a certain amount of storage space, and once it is full, it is chained to the existing blocks. The process for creating new blocks on the blockchain looks like this: Blockchain can be used for much more than the creation of cryptocurrency. It has been used to store all sorts of vital information for industries like financial institutions, property, supply chains and healthcare. It provides secure storage for property records, Smart contracts, decentralized apps, even voting information. As an example, IBM uses a Food Trust blockchain to monitor the journey of all their food products to their final destination.
What Is a Hashrate?
The technical work that goes into creating and generating cryptocurrency is measured by the hashrate. Sometimes known as hash power, the hashrate is shown in multiples of hashes per second (H/s) and represents the total processing power and the speed of the network. The hash power relies completely on the performance of the computer, and to get the maximum hashrate investment, powerful equipment like ASICs (application-specific integrated circuits) is needed.
What Is a Hash?
In blockchains, ‘hash’ describes all parts of the computation used to create new blocks. In a hash, you will find the following parts:
Block header – The 64-character hexadecimal string that is the unique identifier of the block Summary of the block – This includes the block version, the previous block hash, the Merkle root, the transactions on the block and the time when the miner tried to mine the block, as well as bits of the ‘target hash’ – part of the next block to be validated
What Is Target Hash?
This is the number that needs to be found, the answer to the mathematical equations that the cryptocurrency miners are working on. The target hash is the new block header, which must be less than or equal to the previous block header so that the new block can be created, and the miner rewarded. The field in the target hash that the miners focus on is known as the nonce. This is the arbitrary number that serves as an identifier in the string of digits that makes up the block hash. The block hash is hexadecimal and starts with a number of zeros. Once a hash is created, it is sent to the network to be verified by the nodes. Once verified, everyone includes it in the blockchain and the reward is generated for the miner.
What Is Proof of Work and Proof of Stake?
Proof of Work (PoW) is cryptographic proof of the effort your computational power has made. In cryptocurrency mining, the more mining work you do, the more chance you have of success. There is another way to earn crypto through releasing coin from the blockchain that doesn’t involve huge amounts of computational power, and it is slowly becoming more common in different cryptocurrencies like Ethereum. This is a consensus system known as Proof of Stake, and it means that the creator of a new block is chosen through a varying combination of luck and the number of tokens, coins or blocks that the miner holds.
Advantages and Disadvantages of Mining Cryptocurrencies
No Fees
If you buy cryptocurrencies through an online broker like Coinbase or Kraken, you have to pay a fee. This might be charged in altcoin or fiat. When you mine cryptocurrencies, you receive rewards without any fees (except the ongoing electricity bills). Digital currency mining is a fee-free way to get hold of your preferred cryptocurrency.
Untapped Potential
As the alternative currency market grows, there is still potential to earn a lot of cryptocurrency through mining – being an early adopter can pay dividends in the future if the price of your chosen coin rises. As an example, in the early days of bitcoin mining, the creation of a new block was less computationally difficult, yet the rewards were much higher. The first miners were rewarded with 25 bitcoin per block – a value of more than $100,000 now. As with many financial projects, being an early adopter gives you early access to that untapped potential.
Replacement Income
Some miners, especially those who can invest in the right mining hardware systems, can make a serious amount of cryptocurrency. Depending on the market price of their preferred coin, they could replace a 9–5 income, or at least make some decent side hustle cash – without much in the way of ongoing effort.
Support Decentralization
For some miners, the end goal isn’t necessarily to make millions but to support the idea of a decentralized currency. The thought of a world without borders, supported by a currency that does not rely on the value of gold or the say-so of a government might sound like some dystopian future, but the power of blockchain means that this could well be the future. With the Ethereum network focused on creating decentralized apps (dapps) to replace our everyday online needs, and cryptocurrency becoming more mainstream, it could be more than just a pipe dream.
Disadvantages of Mining Cryptocurrency
Upfront Costs
Although in the early days of cryptocurrency mining, it was possible to gain reliable and regular rewards through just the power of your CPU, today a successful miner needs to be prepared to make an investment. The amount needed varies depending on what you are planning to mine. An extremely basic GPU might only cost a couple of hundred dollars, while a cheap but effective mining rig might be around the $3,000 mark. Of course, for the serious miner who wants to build a mining farm capable of competing on a blockchain like bitcoin, you might be looking at an investment of more than $100K.
Running Costs
Even the less power-hungry ASIC setups are likely to skyrocket your electricity bills, and the problems of high energy consumption are an ongoing cost that needs to be factored into any profitability calculations that you are making when deciding how best to operate your cryptocurrency mining operation. According to Digiconomist, the energy consumption used to mine bitcoin is more than is used in the country of Belgium in a year. The energy consumed for a single bitcoin transaction is the equivalent of almost 665,000 VISA transactions.
Noise and Heat
When you have powerful machines running constantly, there is going to be both noise and heat. In an attempt to keep themselves cool, the computers will be running their exhausts high, and you will have to install some form of cooling system – even if it is just a series of fans. This might be enough to turn you off the idea of installing a full rig system.
Risk
Cryptocurrency value is volatile. Look at any cryptocurrency chart – even bitcoin – and you will see that the price moves constantly, and not always upwards. The cryptocurrency you are mining is as likely to take a drastic dive in price as it is likely to grow, so in essence, you are taking a risk of investing money in a mining system that could be rewarded with cryptocurrency of no value. Each miner will have a different value of profit that they need or want, but if you are looking to see a return on your investment, you need to make the calculations work for you.
What Cryptocurrencies Can Be Mined?
Bitcoin (BTC)
Bitcoin is the most well-known cryptocurrency, and it might seem the obvious choice for those who are looking to mine. It is the most valuable on the market – by quite a margin. BTC also has the greatest market capitalization. However, there is huge mining competition from massive operations known as mining farms – think of vast warehouses holding ASICs and GPUs (graphics processing units) that are monopolizing the chances to earn any BTC. It isn’t worth trying to mine BTC as a beginner – even as part of a mining pool.
Ethereum (ETH)
Ethereum has a proprietary altcoin called ‘ether’ and is another extremely popular cryptocurrency. It has excellent market capitalization and has held high value in the crypto market for some time. Ether mining is much simpler than BTC because it uses a different hashing function from bitcoin. BTC is hashed using SHA 256, where Ethereum is created using Ethash. Ethereum is one of many cryptocurrencies that are ASIC-resistant, so miners can compete with a GPU or maybe a CPU setup. This is still tough to mine as an individual and is much more suited to a pool-mining operation. ETH has a block time of just 15 seconds, unlike BTC which is 10 minutes, and the rewards are 2 ETH per block completed.
Ethereum Classic (ETC)
Ethereum and Ethereum Classic shared the same blockchain but separated through a hard fork in 2016. The fork created two similar but different ether currencies. ETH is an updated version while ETC is the original, unmodified blockchain. Mining ETC has the same basic principles as ETH, from block time to hashing function, but the payout is slightly more at 3.2 ETC per block.
ZCash (ZEC)
Established in 2016, ZEC was created to be ASIC-resistant, so it is more accessible to miners who are using CPU and GPU setups. ZCash is known for being heavily into the privacy aspect of decentralization. Despite being ASIC-resistant, ZEC is not easy to mine. The value is therefore less fragile in terms of the market. ZEC uses another hashing function called Equihash. Miners have a 1.25-minute block time and completed blocks will earn miners 2.52 ZEC per block.
Monero (XMR)
Monero has seen some powerful market performance since its creation in 2014 and is one of the more popular choices for mining without too much competition. It can be mined effectively using just a GPU (or even a CPU) and uses the hashing function CryptoNightR. The block time is two minutes, and miners can earn 2.15 XMR per completed block.
How to Mine Cryptocurrency
Mining with CPU
The starting point for many miners, and the simplest way to get going on your mining operation, used to be harnessing the power of your computer. The CPU (central processing unit) of your home PC can be used to power a mining operation with just a software download. In modern mining terms, however, CPU mining is excruciatingly slow – just 0.7 MH/s (milli-hashes per second) – and the machine will need a lot of electricity and cooling. This method is considered obsolete and unprofitable.
Mining with GPU
The next level of mining complexity comes from using a GPU – or more than one. GPUs are usually used for high-quality gaming, but with the right setup you could get a maximum hash rate of 43.3 MH/s. Several GPUs together with a motherboard and processor offers flexible, efficient and relatively cheap mining options, making GPU-mining the most popular option. The average cost of this sort of rig is $3,000. GPU mining, especially with a rig of 2–8 graphics cards, does have power consumption problems and generates a lot of heat.
Mining with ASIC
ASICs are designed to complete the specific task of mining a cryptocurrency. Using an ASIC, miners can achieve up to 14 TH/s (tera-hashes per second) with relatively low power consumption, so they can allow the mathematical equations to be found very quickly. ASICs can only be used for specific hashing functions (usually SHA 256, although ASICs are available for other algorithms too). Some people think that ASICs are too powerful. If everyone used ASICs to mine, the total cryptocurrency capacity would be reached quickly – there is a limited amount available. Each ASIC is only capable of mining one specific cryptocurrency.
Cloud, Pool and Solo Mining
Cloud Mining
Cloud mining does not involve investing in any hardware or other equipment. Those who use cloud mining rent a mining rig from an entity (usually a large corporation). All earnings created by the rented rig are sent directly to your cryptocurrency wallet. This is usually a contract-based exchange, with cloud miners paying for the mining facilities for an agreed-upon period that could be a year, or even for life. The downside to cloud mining is that the entities are not usually very transparent about their processes, and should the cryptocurrency price crash, you are tied into the contract.
Pool Mining
Pool mining combines the computational power of several miners to make it more likely that they will solve a hash and get rewards. There might be a joining fee, and there is likely to be a charge taken out of any rewards earned. When your mining pool earns a reward, it is shared between the miners, often proportional to the amount of power that each miner puts in. While the rewards might not be as high as those gained from solo mining or cloud mining, they are likely to happen more regularly.
Solo Mining
Solo mining means that every part of the process is down to you. You use your own computational power (and luck) to earn rewards, and you don’t have to share them. The downside to solo mining is that in almost every case you will be in direct competition with mining pools and huge mining farms. The chance of solving the hash and getting the rewards is much smaller.
What Do You Need to Start Mining Cryptocurrencies?
Hardware
The hardware options are wide-ranging, so the first thing to consider is what type of mining you are going for. If you type ‘mining hardware’ into Google, you’ll get recommendations of ASICs mostly, but there are many options for GPUs. The main hardware options are:
CPU – A normal computer is fine for this, but don’t use a laptop as it will overheat and be destroyed. GPU – A decent, simple-to-use and powerful GPU rig should include a motherboard, a processor, cooling equipment, a rig frame and 2–8 GPUs. Well-known brands include Nvidia and AMD. ASICs – This is specialized hardware and the most expensive option. There are many brands available, some of the most popular include Antminer and AvalonMiner. Cooling – Unless you are opting for the ASIC, you need to look for effective, efficient cooling options for your rig. This might include electric fans, air fans and extra exhaust fans. Power source – As mining is such an intensive process that uses lots of energy, it is important to make sure that your plug sockets are capable of safely providing enough power.
Software
When you have decided on the altcoin that you will be mining, it is simple to find the right software to mine with. All you need to do is make sure that the download is from a recognized and reputable source. Legitimacy is important to ensure there is as little risk as possible to your profits. If you are joining a mining pool, you might need to install specific software for that too.
Wallet
Your cryptocurrency wallet is a really important part of your mining setup, as it is where any rewards you earn will be sent. Although they are developed to be safe and secure, you need to understand how they work to make sure you choose the right type of wallet for you. Cryptocurrency wallets have a public address that can be used to receive altcoins, and a private key for you to withdraw or transfer crypto coin to other wallets:
Hardware wallet – This is the most secure, long-term option for altcoin storage, and is also the most expensive. Desktop wallet – This wallet is simple to use and download but is only accessible through your computer. Online wallet – This is a wallet that is usually held by a cryptocurrency exchange in the cloud. Mobile wallet – As the name suggests, this is a wallet held in your mobile phone and is really user-friendly. Paper wallet – This is a printable QR code, although you do need a software wallet to transfer funds.
When you are looking into cryptocurrency wallets, you should consider the following:
Cost Security Mobility Ease of use Convenience Flexibility
Is Mining Cryptocurrencies Still Profitable?
To work out the profitability of cryptocurrency mining, you need to calculate the expense of buying the hardware and the ongoing running costs against the rewards you are likely to receive. There are several calculators available online to help you with this. Although they may not be completely accurate, they can at least give you an idea of the figures involved. When it comes to the more well-known cryptocurrencies, like Ethereum, you will find it difficult to make any profit as a solo miner due to the monopoly held by the mining pools. For bitcoin, mining is mostly inaccessible even with a mining pool. However, with lesser-known altcoins, like Monero, there is less competition from other miners so you have more chance of having enough hash power and luck to earn the rewards. With more and more consideration of using Proof of Stake to release cryptocurrencies, however, some people think Proof of Work mining will become completely obsolete – which will happen at some point anyway when all the digital currency has been released and the currency has hit the market cap. If you are prepared to make the investment needed for either an ASIC or a GPU rig, you might not break even for months or years – but if you find the right cryptocurrency to mine, there is still profit to be found.
Final Thoughts
Harnessing the power of your computer to release new cryptocurrency and be rewarded with a small portion of that coin is something that anyone can do. It does not require great technical knowledge or programming know-how. For those looking to make a profit in mining, you will need initial investment into appropriate hardware and payment of ongoing running costs, such as higher energy consumption and mining-pool fees. Getting involved in the world of blockchain and cryptocurrency means being a part of a decentralized currency and is one of the biggest reasons that miners exist – it is fun to be involved in the innovation. Aside from the potential profits and rewards, those who are future-minded passionately believe that cryptocurrency is the way forward and helping make it a reality is important to them. There are several methods to mine cryptocurrency, and several ways to apply your hash power to the network. Choosing the one that is best for you is a personal decision but if you get involved in mining one of the lesser-known altcoins and become an early adopter, your chances of success (and profit) are much higher. WikiJob does not provide tax, investment or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
