September 7, 2020

How does crypto mining work?

Cryptocurrency is a very popular category of financial instruments thanks to the news where people who managed to become millionaires after the growth of this asset. These news are less popular, but there are a lot of people who can really become very rich thanks to cryptocurrency.

Is mining so beneficial now? How popular is it? Can an average person mine on his own? You will know the answers to these questions very soon.

What is mining?

Mining is a process of cryptocurrency creation. A lot of people compare it to the money emission, but there are significant differences between them because cryptocurrency is based on a decentralization principle. It means that all transactions in the network are not processed by a certain single government agency such as an FRS or other Central Bank. Every person can create coins on their own. All you need is a personal computer and motivation.

To motivate users to create Bitcoin, Ethereum or another cryptocurrency, the system gives them a reward, which is some amount of a token they mine.

However, this is not as easy as it sounds. Many cryptocurrencies are based on blockchain technology. Due to this, every transaction consists of information about all previous transactions. That’s why the difficulty of mining grows regularly. Also, only one miner can pretend to the reward. Mining isn’t a game. This is a serious work that requires certain qualifications and an investment method that can bring both profit and losses.

Can an average person earn money on cryptocurrency?

When in 2009 Satoshi Nakamoto created Bitcoin, only one computer with an average power processor was enough. However, just in 2 years, the difficulty was increased because of a growing popularity and number of these operations. That’s why, in 2011, you needed a video card. One year later, one computer wasn’t enough to mine Bitcoin. At that time, you needed to create a mining farm.

What is the mining farm? This is a lot of computing power that aims to create a cryptocurrency. However, a few years later, the process required ASIC-pools, which consist of very complicated equipment that aims to mine certain cryptocurrency based on a special algorithm.

Today, the cost of mining equipment grows and you need tens of thousand dollars. Also, this technology consumes a lot of electricity for the work and cooling of this system. On the other hand, a lot of cryptocurrencies are very expensive and volatile.

In the first years, you could cover your investment costs in several weeks, but now you need several years. Today, mining is a serious investment and pool owners need to analyze a lot of indicators to make it more profitable: prospects of cryptocurrency growth, mining difficulty, cost of equipment and their characteristics, electricity tariffs.

Due to the high volatility of cryptocurrency, you need to be very attentive. You can mine it but after some time, you won’t be able to exchange this coin as much as you could. For this reason, you can earn less than you paid. This uncertainty can make you worried.

How does mining work?

Mining is a consensus system that is used for accepting the transactions. This is a process of a search for a hash that meets certain requirements. Every day, the number of possible hashes decreases. For this reason, the miner needs to test more hashes. Therefore, you need greater computing power to decrease the time which you need to do this.

Mining is a significantly more complicated process. When you try some number of hashes, you get a reward in the form of Bitcoin, Ethereum, Litecoin or other cryptocurrencies.

There are many kinds of mining. Each one has its specific features. Let’s describe them in more detail.

CPU mining

This is a very old kind of mining that was sufficient 10 years ago. However, now, there is not enough processor power to process data. Now, it is used only for young cryptocurrencies that don’t have a huge history of operations. Therefore, you can process transactions faster.

Some cryptocurrencies, such as Monero, Dash, Litecoin and others, are based on a technology that allows to mine on the processor faster. However, even with this method, you won’t be able to earn more than 50 dollars a month. The fact is that the processor’s core can process only four or eight 32-bit operations per the tact depending on the CPU frequency. Turns out that GPU mining is a hundred times more effective than CPU mining.

GPU mining

This type is the most popular and relevant due to high transaction speed because the graphic cards were developed for processing a lot of video data. It is a quite similar mining method. You should understand that you need a full graphic card, not integrated into the laptop. The first one is more effective. That’s why you’re not supposed to mine on Macbooks because they weren’t created for such difficult tasks.

ASIC mining

Mining has become such a popular business that the need for special equipment has appeared. It is an Application Specific Integrated Circuit. This equipment was created for a certain mining algorithm specific for certain cryptocurrency. For example, modern cryptocurrencies are based on these algorithms: SHA-256 (Bitcoin, Bitcoin Cash, Namecoin), Ethash (Ethereum, Ethereum Classic), Scrypt (Litecoin, B3Coin), etc.

When ASIC was created, graphic cards were small and connected to the main computer.

This is a serious investment, so you need to consider many factors. One of the most important is hashrate. This is a processing speed.

Cloud mining

A considerably recent method that appeared when the price of ASIC became too high to be profitable for a private miner. On the other hand, mining is a business with a high level of uncertainty because a quickly falling price of the cryptocurrency can stop all your plans. This problem created a new sphere of mining which has been called «Cloud mining».

It means that major miners rent online a part of their business to small miners using special programs.