If you are interested in the growing world of cryptocurrencies, you may have wondered what cryptocurrency mining is, how cryptocurrencies are mined and even if cryptocurrencies can be mined from your own computer.
Although today there are various methods and cryptocurrencies to mine, and many opinions about the various risks and benefits of this activity, you must first understand how these digital assets operate, thanks to blockchain technology, the cornerstone of the entire crypto sector.
How do Cryptocurrencies Mining Work?
When carrying out a transaction in cryptocurrencies, it is stored in a computer file that will contain the following data:
• The addresses of the origin and destination of the operation,
• It allows digital information to be distributed, without being copied anywhere, in addition to maintaining a high level of security.
• The amount of cryptocurrencies to be exchanged,
• An identifier for the transaction
For the transaction to be carried out, it must be signed by the sender with his private key. In this process, cryptography comes into play to guarantee the security and privacy of the operation.
By encrypting the data, it is stored in a block that, when added to the chain, creates an indelible record of the transactions carried out, but not of those who carried it out.
As an example, if a person wants to transfer 20 cryptocurrencies to another, when it is registered in the blockchain, their transaction will be reflected in the registry for everyone to consult.
However, it will only show that user A transferred 20 cryptos to user B, allowing both parties to preserve their identity.
In a blockchain network, for a transaction to be validated, they must be registered in the block, so a complex mathematical problem must be solved to find the hash, a fixed-length hexadecimal value similar to this:
To achieve this, an important computational processing capacity must be provided and that is where the figure of the miner appears.
Since the chain will validate the hash provided if it is the same or similar to the encryption in the block, the miner will try to guess or mine the hash, providing as many answers as possible.
The computers that make up the nodes of the network will compete with each other to solve this problem with several of them giving the most approximate answer, which will confirm the transactions.
Miners are rewarded for their effort in two ways.
• A commission that will vary depending on the traffic or number of transactions compiled in the block
• The second and most appreciated, receiving a certain number of cryptocurrencies, which can already enter circulation.
But obtaining the hash is not enough to receive the benefits, you must also be the first of all the miners to find it, a system called Proof-of-Work or proof of work, which grants all the benefits to the first to get the hash. hash, while the others that get it will only act as confirmation of the record.
How to mine cryptocurrencies?
Regardless of which of the more than 8,400 cryptocurrencies (to date) is being transacted, obtaining the hash is the priority of every miner, so it seeks to obtain the highest possible processing speed, the hash rate, which is represented as hash / sec.
At first, it was possible to mine with the capacity of a conventional CPU, but as the difficulty of mining and participation of miners increased, in the various cryptocurrencies, graphics cards were chosen, which have a greater number of cores and thus further processing.
This was the standard for a time until the arrival of ASICs, the first mining equipment exclusively designed for this purpose, which made graphics cards practically obsolete, due to their superior hash rates of up to 97 Therahash / sec.
Obviously, maintaining speeds of these indoles implies higher energy costs, which can add up quickly if the price of the cryptocurrency is not high enough to justify the effort.
The paradox of valuable cryptocurrencies
As a cryptocurrency gains acceptance in the market and its value increases, it will become more attractive (see the Bitcoin price ), so we will see a greater number of miners competing in the processing or mining of its blocks.
To ensure that cryptocurrencies cannot be fully mined immediately, the cryptocurrency’s own algorithm regulates itself, increasing the complexity of mining as its use increases.
In the case of Bitcoin, the blockchain is designed so that the creation period of each block is approximately 10 minutes, so it readjusts the difficulty of mining every 2016 blocks, progressively increasing every 2 weeks or every 2016 blocks, depending on what whichever comes first.
Likewise, every 210,000 blocks or four years, a phenomenon called halving or division occurs, in which the miners’ reward is reduced by half.
Following the example of Bitcoin, when it barely emerged in 2009, the reward for the miner was 50 BTC per block.
After 12 years or 3 halvings, it is now estimated that they are in the order of 6.25 BTC, until the next halving in 2025.
Once the last of the 21 million bitcoins is released, the commissions will be the only reward for mining the blocks, although this would require a long wait as it is estimated to occur in 2140.
Mine solo vs pool
Although it is possible to mine on your own, the complexity of mining the blocks has made the success rates extremely low in the most traded cryptocurrencies, so it is required to have a good hash rate to tip the balance a little more to our favor.
Recommended : How to make passive income online
While any machine that accepts the mining software is capable of operating as a miner, on laptops and mobile phones, its processing power is very low compared to more dedicated ones.
Likewise, its use is practically restricted for other activities so as not to waste resources and having to be connected to a continuous source of energy, is harmful to its batteries, so its use is discouraged.
A mid-range gaming computer could do the mining work, however, combining both functions at the same time is not recommended. This leaves us with ASIC equipment, much more powerful, but with a higher investment.
Those who can acquire the most sophisticated equipment and scale in volume, have created mining “farms”, intensive hardware facilities that are dedicated exclusively to mining cryptocurrencies, being those who dominate in the sector.
In case you want to try mining without making a large investment, it is always possible to buy “mining power” in the cloud.
To do this, one contracts with a provider company (usually a farm) hash rate speed packages for a certain time in which we will periodically receive our cryptocurrencies.
While we don’t have to worry about equipment maintenance, we will continue to come at the expense of market prices and the difficulty of mining. Likewise, you have to be quite careful not to fall for false promises.
Due to the high difficulty, the lower rewards, and the presence of farms dominating the cryptocurrency mining market, mining is taking place in so-called “mining pools”.
These “pools” function as groups of several miners that unite the capabilities of their teams to create a network with the most powerful hash rate, making them as competitive or more effective than a farm, distributing the benefit to each participant according to their contribution.
It is necessary to take into account that these “pools” charge a commission for participating in them so it must be added to our costs.
What is the cost of mining cryptocurrencies?
The cost of mining will depend a lot on the type of cryptocurrency to be mined and the cost of living in each country, especially its electricity.
The price per kWh in countries such as Germany (€ 0.3), Belgium (€ 0.26) and Spain (€ 0.23) is considerably high, which makes mining in them unattractive.
We must bear in mind that a miner will be working 24/7, also requiring cooling due to the heat generated, triggering our electricity bill.
This has meant that a large part of the mining farms are in countries with lower electricity costs, locating them even in remote locations where low temperatures can lower costs.
The type of cryptocurrency to be mined will indicate the type of equipment to choose, as we will not find the same level of difficulty in a recent entry to the market or small capitalization cryptocurrency such as RavenCoin, Kalata, or Binstarter, to other more consolidated such as Bitcoin, Ethereum and Monero.
In any case, the progressive difficulty of mining in them will sooner or later force us to scale our investment, involving higher disbursements, joining a pool paying commissions or even hiring hash rates from the cloud in order to stay competitive.
Due to the large number of teams working in parallel as the first to mine the block, the level of energy resources consumed has also increased.
This encouraged the creation of the Proof-of-Stake or proof of participation, in which everyone involved in the mining process will be rewarded based on the effort contributed.
At the moment, this system requires that the miner have a certain number of cryptocurrencies in order to validate their participation, however, it has allowed to reduce electricity consumption, making mining more environmentally friendly, reason enough for Ethereum to do the same transition from Proof-of-Work to Proof-of-Stake in December 2020.
1. Before deciding to mine cryptocurrencies, a study must be carried out to verify if this activity is indeed convenient for us as a profitable business.
In this study, in addition to the cost of hardware (graphics cards, ASIC miners), energy regulators, ventilation systems, etc., the cost of electricity that will be necessary to keep the equipment running 24 hours a day must be accounted for. and 7 days a week.
2. Consider the risk / reward ratio. Mining on your own can give us the greatest benefits, but it carries greater risks of loss, even with the right resources.
Likewise, mining in “pools” minimizes the profits by distributing them among the participants, but it also dilutes its risks.
3. To mine any type of cryptocurrency, we must have a good, fast and secure internet connection. If a poor connection is used, we will simply waste our time and financial resources.
4. We must be attentive to the evolution of the cryptocurrency market. If the market is bearish it may not compensate for the mining activity.
Instead, if cryptocurrency prices remain high and trending upward, mining bitcoins or any other cryptocurrency can be a profitable business.
If you decide on cryptocurrency mining, it is advisable to see this activity as another instrument or financial asset within your investment portfolio, and not to allocate all the capital to this activity.
Although a promising future for cryptocurrencies is perceived, you should never bet all the economic resources on a single business.
Considering the above, in theory, anyone with adequate capital availability could mine cryptocurrencies.
Read also : Best alternatives to payoneer in 2021
However, money alone is not enough, and you must have a great interest in constantly learning and staying up-to-date on any technological change.
You must also have knowledge to analyze financial markets to be able to foresee changes in the trend of prices that may alter the profitability of mining.