Understanding Cryptocurrency Mining: A Comprehensive Guide

Many people are interested in cryptocurrencies, and a growing number are investing. But even among those who trade crypto regularly, few actually understand the underlying technology.

This stems from the fact that cryptocurrencies are currently largely used as a speculative instrument. Many people are chasing profits and care about nothing else. Minimal technical knowledge is required to buy crypto or engage in trading. But we believe it’s useful to know the basics. Knowledge can eliminate uncertainty and doubt, which still make up a large part of the broader public opinion about Bitcoin and other cryptocurrencies.

Mining is a typical example. Let’s take a closer look at this topic.

What Is Crypto Mining?

Mining is essentially a distributed consensus system. It’s a mechanism through which many people around the world participate 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 on proof-of-work blockchains like Bitcoin. Newer blockchains tend to use proof-of-stake and other consensus mechanisms. And they don’t require or allow mining.

In proof-of-work blockchains, mining determines the chronological order of transactions. This is essential to ensure that previous entries in the crypto “open ledger” cannot be altered. For a transaction to be successfully confirmed and included, it must be packaged in a block that must adhere to strict encryption rules. These are verified and validated by the miners in the network. And there is no involvement from government authorities. This protects the neutrality of the Bitcoin network.

We can make a quick comparison with the use of credit cards in the traditional e-money system. Every payment must be verified and recorded by the credit card company, such as MasterCard or Visa. One could say that the entire cash flow of today’s banking system is recorded in centralized systems, making them highly vulnerable to manipulation.

A crypto mining rig is a specialized computer system designed to validate transactions and secure blockchain networks (like Bitcoin or Ethereum) while earning cryptocurrency rewards.

Cryptocurrencies like Bitcoin don’t have centralized organizations that confirm transactions. With Bitcoin, this work is done by miners, who create new Bitcoins in the process.

The process is called mining because of its many parallels to gold mining. Both scenarios involve a large amount of labor and energy to produce a highly valuable commodity.

What is crypto mining? It’s a way to reward those who validate blocks of transactions so they can be added to the blockchain.

The Basics of Crypto Mining

How does crypto mining work? Let’s begin our explanation with an analogy.

You’re probably familiar with the basics of gold mining. We have to invest a certain amount of labor to recover the raw material that has value in the eyes of humans. Bitcoin is no different in this regard. Except that it’s a completely digital resource, with the mining process taking place in the virtual world.

Obtaining gold is easy, but the process can be volatile and unpredictable. Crypto mining is similar.

There is an economic incentive to mine gold when the costs associated with mining an ounce of gold (labor, paychecks, equipment) are less than the value of an ounce of gold.

Bitcoin is very similar, but there are some differences. Miners discover new Bitcoins with predetermined, increasing difficulty levels and increased energy consumption.

There is an economic incentive to mine Bitcoin when the costs associated with mining Bitcoin (electricity, computing power) are lower than the value of the mining rewards.

Mining Rewards

The most successful miners are rewarded with new Bitcoins when they successfully add a new block to the blockchain.

Today, the prize never goes to a single person because no one in the world has enough computing power to solve the complex mathematical operations required to successfully validate a block. Miners therefore join forces and form so-called “mining pools” to pool their resources. The reward is then distributed proportionally to the work of each pool member. Those with more computing power receive a higher prize.

The reward is halved every 210,000 blocks. At the time of this writing, the Bitcoin block height is 567,000. This means that the entire Bitcoin blockchain contains 567,000 blocks. Each block is linked to the previous one in the chain, all the way back to the original genesis block.

Miners were originally rewarded with 50 Bitcoins, and in 2012, the reward was halved to 25 Bitcoins. The halving occurs every four years. You can view the countdown here. Halving events coincide with the Summer Olympics.

Safety and Difficulty Level

The more miners there are, the more secure the network is. A large pool of miners means it’s virtually impossible to manipulate the network and its assets.

The downside is that increasing the number of miners also increases mining difficulty and decreases profitability. Roughly speaking, the difficulty is adjusted based on how much computing power is distributed across mining networks. This adjustment ensures that a block is always added to the blockchain approximately every 10 minutes, rather than earlier or later due to a varying number of miners.

A higher difficulty theoretically means lower profits for miners. This is because the reward is distributed among a larger number of miners, so each receives a smaller share. This isn’t a big problem when the Bitcoin price is high or when miners have access to cheap or free electricity.

Sometimes the mining reward doesn’t cover the mining costs. In this case, many people continue mining anyway, believing that Bitcoin will be worth more in the future.

How to Mine Cryptocurrencies

Now you know what cryptocurrency mining is. By now, you might be itching to try mining yourself. Let’s take a look at the hardware and procedures required to set up a home mining operation.

Hardware

The first step to starting Bitcoin mining is to invest in suitable computer hardware. A faster, more powerful computer increases your chances of success.

In principle, anyone can mine cryptocurrencies. You just need to run mining software on your computer. But without some research, you’re unlikely to make any worthwhile profits.

In the early years of Bitcoin’s existence, it was sufficient to use ordinary home computers and consumer graphics processing cards. But in recent years, this has become largely ineffective. A major factor has been the rise of application-specific integrated circuits designed for mining. ASICs perform only the specific types of computational operations required for crypto mining. These are noisy and hot devices that are not suitable for home environments.

Is crypto mining profitable? It can be profitable. But if you want to make your fortune from Bitcoin mining, you should be prepared to spend a lot of money on custom hardware.

Ethereum gained popularity in 2016 and 2017, partly because it brought huge profits to users with home computers. In addition, there was a growing market that also led to huge profits.

Mining Pools

Miners quickly realized they could increase their profits by combining multiple GPU units. As a result, entire mining farms were built in regions with affordable access to electricity and computing equipment. These farms made many miners millionaires. Some mining companies even outsourced their computing power by renting it out to consumers.

Given the increasing popularity of Bitcoin mining, some people started to join together to form so-called mining pools, which increase the chances of receiving the reward.

How to Get Started

Crypto mining requires equipment that consumes as little power as possible. We’re always looking for the best combination of price and performance.

If you decide to start mining cryptocurrencies, you’ll likely have a difficult time due to the cost of electricity. We call this solo mining. However, it’s recommended that you join a mining pool or community that uses their combined computing power to mine cryptocurrencies.

Where does the term “pool” come from? Let me explain with an example. Imagine computing power as water and the entire Bitcoin network as a large ocean. People with the largest amount of water have the greatest chance of receiving the reward. Most people only have a small bucket of water. As a result, they group together and pour their water into a pool. When their pool receives a prize, it is distributed proportionally according to the amount of water poured by each individual.

Beginners are therefore advised to join a mining pool. But be careful and choose only well-known mining pools.

You need specialized software, without which it won’t work. Even if you have the best hardware for cryptocurrency mining, setting up the software requires a lot of technical know-how. Therefore, this process is intended for those with a bit more experience.

How to Get Rewards

After setting up your mining hardware and software, you can start mining right away! But you may be wondering where your potential earnings will come from.

Payouts are usually made with Bitcoin, as it is by far the most popular cryptocurrency in the mining community.

You probably already know that Bitcoin can’t be stored in your bank account. Therefore, you need a crypto wallet. Your Kriptomat wallet is an excellent choice.

The mining software transfers all the rewards you earn to the crypto wallet address you specify.

Energy Consumption

Crypto mining comes at a price. In this case, it’s electricity consumption. Mining equipment constantly operates at maximum load, and huge amounts of energy are wasted in the form of extra heat. As a result, many large mining companies are located in northern countries, where it’s easier to reduce the electricity costs associated with cooling.

It’s difficult to accurately assess the environmental impact of Bitcoin mining. But it’s clear that crypto mining, and Bitcoin mining in particular, has contributed more to global warming than many countries. Depending on how the electricity is generated, mining also contributes to greenhouse gases.

Conclusion

We live in interesting times. People invest a lot of time, effort, and energy into mining virtual assets, recorded with digital ones and zeros. It seems strange, but it’s just a natural social and technological evolution. What was strange yesterday will be normal tomorrow.

Our civilization is based on the exchange of goods for currency. Who says this system doesn’t have room for fully digital currency? As things stand, the entire financial system is migrating to a digital domain anyway.

The world is becoming increasingly digital, and crypto is playing a very interesting role. Miners are a critical part of the system.