Mining is a complex process but it is the most critical component to a cryptocurrency’s success
The popularity of cryptocurrency has seen a resurgence in recent weeks, as bitcoin surged in price to cross over US$20,000 per bitcoin which was a 1700% increase year-to-date. This has fuelled interest not only in investors looking to ride the cryptocurrency wave, but also those who want to earn bitcoin simply by letting their computers run 24/7.
Cryptocoins may be the next big thing in finance, but it can be difficult for most people to understand how it works. There is a whole lot of maths and numbers involved, things which normally make a lot of people run in fear. Well, it’s one of the most complex parts of cryptocurrency, but it is also the most critical to its success.
So what is cryptocoin mining?
Bitcoin is a digital cryptocoin currency. Currencies need checks and balances, validation and verification. Normally central governments and banks are the ones who perform these tasks, making their currencies difficult to forge while also keeping track of them.
The big difference with Bitcoin is that it is decentralized. If there is no central government regulating it, then how do we know that the transactions are accurate?
The answer is mining.
Mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions. This ledger of past transactions is called the blockchain as it is a chain of blocks . The blockchain serves to confirm transactions to the rest of the network as having taken place and trying to solve a computationally difficult puzzle. Bitcoin nodes use the blockchain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere.
Anyone with access to the internet and suitable hardware can participate in mining.
Mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady. Individual blocks must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses the hashcash proof-of-work function.
The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a “subsidy” of newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.
But what exactly is this mathematical puzzle? And what does the Proof-of-Work method involve? To explain this, we need to show you which stages are involved in the mining process:
1. Verify if transactions are valid. Transactions contain the following information: source, amount, destination, and signature.
2. Bundle the valid transactions in a block.
3. Get the hash that was assigned to the previous block.
4. Solve the Proof-of-Work problem
Mining Actually Costs You Money
Mining programs tap into your computer’s hardware resources and put them to work mining any type of cryptocurrency.
Cryptocoin Mining requires specialized mining rigs with specialized hardware and cheap electricity. So, even if you put your computer to work mining Bitcoin – for your own profit, you’d actually lose money. You’d run up your power bill as your computer draws more power, and you’d make back less than it would cost you in power.
Is It Worth It to Mine Cryptocoins?
As a hobby venture, yes, cryptocoin mining can generate a small income of perhaps a dollar or two per day. Digital currencies are very accessible for regular people to mine, and a person can recoup $1000 in hardware costs in about 18-24 months.
As a second income, no, cryptocoin mining is not a reliable way to make substantial money for most people. The profit from mining cryptocoins only becomes significant when someone is willing to invest $3000-$5000 in up-front hardware costs, at which time you could potentially earn $50 per day or more.
How many cryptocurrencies are there?
According to coinmarket.com, currently there are 1385 cryptocurrencies with a market cap of $733,427,443,004. However, only a handful are relevant. Of those, even less have a market cap above $1 million. Therefore, which cryptocoin should be mined?
If you had started mining Bitcoins back in 2009, you could have earned thousands of dollars by now.
At the same time, there are plenty of ways you could have lost money, too. Bitcoins are not a good choice for beginning miners who work on a small scale. The current up-front investment and maintenance costs, not to mention the sheer mathematical difficulty of the process, just doesn’t make it profitable for consumer-level hardware. Now, Bitcoin mining is reserved for large-scale operations only.
As more people join the cryptocoin rush, your choice could get more difficult to mine because more expensive hardware will be required to to discover coins. You will be forced to either invest heavily if you want to stay mining that coin, or you will want to take your earnings and switch to an easier cryptocoin.
Is It Still Profitable?
The early days of Bitcoin mining are often described as a gold rush, but is it still the case in 2018?
Mining has grown from a handful of early enthusiasts into a into a specialized industrial-level venture. The easy money was scooped out a long time ago and what remains is buried under the cryptographic equivalent of tons of hard rock.
While mining is still technically possible for anyone, those with underpowered setups will find more money is spent on electricity than is generated through mining. In other words, mining won’t be profitable at a small scale unless you have access to free or really cheap electricity.
The good news is that mining is not limited to Bitcoin. New coins come up all the time with difficulties of mining that are vastly different from Bitcoin’s. Today, Ethereum is such a currency. When tomorrow Ethereum’s difficulty will make it less lucrative for mining, or when it’s moving to a different model altogether, other coins will be there that offer better returns.
If you want to go into mining yourself, the time you will spend educating yourself about the technology, the hardware, and the currencies, is significant. The setup costs for buying hardware are also considerable when you want to mine at scale.