What is cryptocurrency mining? Cryptocurrency Mining Explained Simply

Cryptocurrency mining is key to introducing new crypto into “circulation.” This process also helps cryptocurrencies function as a decentralized network. 

What is Cryptocurrency Mining based on?

To give you a quick idea, in the world of cryptocurrencies money is not created, it is discovered. This process is known as mining. 

And as in every mining, there are some miners, who are the ones who obtain rewards (cryptocurrencies) from time to time.

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And now we will explain how cryptocurrency mining works in simple steps:

• Cryptocurrency users send virtual money all the time.

• The transactions made with cryptocurrencies are registered in a chain of blocks.

• Miners confirm and record those transactions. In return, they receive a small commission as a form of payment. 

You see, working in a virtual mine is very different!

This is the procedure that a miner follows in a cryptocurrency mine. And if you want to mine Ethereum, you need to build a powerful computer that is put at the service of a network. 

For this reason, components such as graphics cards are increasing in price dramatically.

What is the Block Reward?

cryptocurrency mining explanation

The block reward is, in a nutshell, money that a cryptocurrency network pays you for mining on it

Obviously, this payment is received in the native cryptocurrency of the network in which you mine, which can be: Bitcoin, Ethereum, Zcash, Dash, etc.

In mining cryptocurrencies such as Bitcoin, the reward is made up of two amounts: one corresponds to the sum of the mining commissions

These are commissions that users pay to have their transactions verified by a miner and included in a block. 

The other amount consists of the newly issued cryptocurrencies.

What is Crypto Mining for dummies?

Mining for cryptocurrencies like Bitcoin gets this name because, in essence, it is similar to mining any mineral such as gold or coal. 

Only, instead of taking a pickaxe and a wheelbarrow to extract value from the land, you use software and computer hardware to extract value from the network.

When you mine cryptocurrencies, you put the processing power of your hardware at the service of a network, call it Bitcoin , Ethereum , Litecoin , Monero , etc. 

These cryptocurrency networks need the power of your teams to confirm that their users’ transactions are valid. All valid transactions are grouped into a block that you then add to the blockchain.

Adding new blocks to the chain makes you worthy of a reward that consists of two parts: the commissions paid by the users who made the transactions included in the block plus the new coins generated. 

Yes, with each new block, new cryptocurrencies are issued and you, who mined it, receive them. 

It is as if the central bank of your country sent you newly printed bills for loaning your computer; Except when we talk about Bitcoin, we are talking about truly organic money.

In short, the mining of Bitcoin and other cryptocurrencies could be defined as a process in which the transactions of a network are validated and grouped, and then added to its blockchain . 

This process provides security to the network while allowing the generation of new currencies.

On the question of what is cryptocurrency mining explanation, It is important to mention that there are networks that validate your transactions with methods that do not require the use of processing power. 

But those details are part of another much deeper topic that we will discuss later.

Cryptocurrency Mining Explanation

How cryptocurrency mining works / cryptocurrency mining farm

To clarify the question of what is cryptocurrency mining… Cryptocurrency mining is about empowering computers to earn real money. Why with computers? 

Because in this case, money is not created, but is discovered. 

To “mine,” miners solve mathematical problems using computer equipment that performs random calculations. 

Its job is to record and verify new transactions on the blockchain, using hardware that provides its power to validate these transactions, which are grouped into blocks

The blocks are added to the chain of blocks, or blockchain. In the case of Bitcoins, about every 10 minutes a new problem is created to solve.

 The reward is left to the miner who finds the solution faster, which must be confirmed by the rest of the miners. 

Once this occurs, a Bitcoin is discovered. Subsequently, a new problem is posed and, 10 minutes later, one more unit is discovered. 

As with the mining of precious metals, such as gold, cryptocurrency mining will become increasingly difficult. 

This is because, normally, cryptocurrencies (for example, Bitcoin) are limited in existence. 

What Does a Miner Need?

• A specialized hardware.  This can be an ASIC mining machine (a computer dedicated to mining a specific coin), a computer with a GPU (high-performance graphics card for mining any cryptocurrency), or a CPU

Typically, specific hardware is used for each type of currency required.

• A software – specific troubleshooting. (The faster the software solves the math problem, the more likely it is to verify transactions and receive your reward.)  

• A wealth of computing power to meet your mining demands.  

Stable electrical power.  (This is more decisive than speed.) And this is where the high cost of mining is taken into account. 

High quality graphics or video cards. They are cards similar to those used by gamers, which do not have a CPU but a GPU, which makes them faster. 

They are from brands such as NVidia or AMD or Asus.

Due to this, their price has been increasing significantly.

What Types of Mining are there?

Proof of work (pow) and proof of stake(pos)  what is crypto mining?

Two specific modalities are known, as well as a different alternative. 
• PoW (Proof of Work): In Spanish it is called proof of work and requires high power machines. It is the modality that is most used for currencies such as Bitcoin, Ethereum, Litecoin and Monero. 
PoS (Proof of Stake): Proof of Stake implies that the more coins the miner has, the more they can mine. 

This modality arose to compensate for the problems caused by the PoW, which discouraged some miners.  
Cloud Mining: It serves so that those who do not have specialized hardware can mine through remote and shared data processing centers, such as a browser, as is the case with  Bitrad.io This happens in the cloud. 

It is a cheaper and more accessible way to mine.  

Cryptocurrency Mining Farm / Coin Mining Farm

It sounds like places where there are crops, however, what is grown in them are cryptocurrencies. 

It consists of buildings or hangars where there are hundreds or thousands of computers connected to solve the algorithms for cryptocurrency mining.  

Many farms are in places that, for security reasons, are not identified as such. However, it is known that there are buildings like this in the United States, China or Russia where companies are engaged in the mining process. 

In Latin America, Paraguay is known to be an attractive destination for coin mining farms, due to the low cost of electricity. ( Here’s a map of the geographic distribution of Bitcoin mining around the world.) 

However, this does not mean that this work is done only on cryptocurrency mining farms, as there are also people who, independently, are dedicated to this. 

Is Crypto Mining Profitable?

Yes and no. The reason for such an ambiguous answer is that there are several factors that influence the profitability of mining Bitcoin or other cryptocurrencies

So in some cases mining may be a good idea and in others it may not.

To know if mining a particular cryptocurrency is profitable for you, you must evaluate at least four essential variables:

• The price of the crypto asset in the market (and its ups and downs throughout history),

• The difficulty of mining,

• The price of hardware to mine and

• The cost of services such as Internet and electricity in your locality.

If you are not satisfied with a couple of video cards mining or a small ASIC, but you want to have your own mining farm, then you should consider other additional variables related to the costs of adapting the space where your farm will operate. 

This implies evaluating the investment in the installation of transformers, electrical panels, extractors, air conditioners or other cooling systems for the equipment, in addition to the maintenance of such equipment.

How to Start Cryptocurrency Mining

The price of the cryptocurrency

The price of the cryptocurrency you want to mine allows you to calculate your potential earnings and the time to recover your investment. 

However, remember that this is a VERY VOLATILE market! , so your profit could take a long time to come if there is a drop in price. 

For this reason, it is recommended that you always be attentive to market movements .

Historical Bitcoin price chart between April 2013 and July 2020. Source: CoinMarketCap

The difficulty of mining

The difficulty of mining affects the productivity of the work your mining equipment does. It varies constantly, in order to keep the network running in a stable manner. 

Its variations depend on the hashrate of the network, that is, the joint mining power exercised by the miners of that cryptocurrency worldwide.

Each miner is free to mine or stop mining at the time he decides. The addition or subtraction of miners causes oscillations in the hashrate which, in turn, result in a proportional increase or decrease in the difficulty of mining .

Historical graph of Bitcoin mining difficulty adjustments between April 2016 and July 2020. Source: statoshi.info

The price of the hardware

There are price ranges that can be adapted to any pocket in the world of mining hardware. It all depends on what cryptocurrency you want to mine and how much mining power you want to have. 

ASIC equipment is usually the most expensive; So if you want to experiment with mining cryptocurrencies like Bitcoin, Litecoin or Dash, better prepare your pockets.

Graphics card rig for cryptocurrency mining. Source: stockcentral / Envato Elements.

The graphics cards can undermine networks profitably as ethereum, ethereum Classic and Monero. Also, they are more versatile and less expensive than ASICs, on average. 

However, the final decision is yours. Just try to keep a couple of facts about mining hardware in mind: more expensive doesn’t mean better and more powerful doesn’t mean more profit .

There are mining hardware that, despite being very powerful, consumes a lot of energy; so you can end up spending everything you earn on your electricity bill. 

There are also very good quality and powerful equipment, but they are so expensive that it can take years to recover the investment you made.

Try to find equipment that offers a good return for your particular case. Mining hardware that effectively mines the cryptocurrency of your choice, that has a good balance between power and electricity consumption, that you can pay for it and recover your investment in a reasonable time and that it is available.

It has happened to many that they buy a mining device in pre-sale and when it finally reaches their hands, the profitability of mining with it has radically diminished due to changes in the difficulty of mining or the price of the cryptocurrency in the market.

Mining operational costs and quality of essential services

The cost of electricity and the Internet, as well as the quality of such services, is crucial in evaluating the profitability of mining cryptocurrencies such as Bitcoin. The more mining power you want to have, the higher the electricity consumption.  

On the other hand, if you live in a place where the electrical service tends to fail and fluctuate, this will undoubtedly affect the performance of your equipment and, in the worst case, you run the risk of irreparable damage to it. 

As for the internet, it may not need to be too fast, but it does need to be constant.

If you are one of those who want to mine on a small scale, be it with a couple of ASIC miners that you bought, with that GPU that you also use to play in your free time or with your computer’s CPU, the adaptation and cooling costs may not be very tall.

If you live in a cold place, it may be enough to set your computer’s heat extractor to a good speed. 

Whereas, those who live in warmer places or with the four seasons, it would be enough to place your rig (your mining equipment) in a room with air conditioning or a powerful fan (if the temperatures do not exceed 30 ° C in the hottest season. ). 

In both cases, don’t forget to buy a good surge protector. Better safe than sorry.

Other things to invest in for large-scale mining

Those who want to pursue cryptocurrency mining and own their own mining farm will need to consider further investment

In this case, they should also think about the adequacy and cooling of the space where the farm will operate, as well as the maintenance of everything.

Liquid cooling system used in cryptocurrency mining rigs. Source: vait_mcright / pixabay

As we mentioned before, surely you need to improve your electrical installations with new wiring, board and even a new transformer, if the energy demand requires it. 

In addition, the issue of cooling your equipment is vital for its long-term performance, so you should think about what is most convenient for you, be it heat extractors, air conditioners or even liquid cooling systems.

Electricity and refrigeration are not everything, you may also need to invest in furniture where you can locate your equipment in an accessible way for maintenance and that does not involve overheating risks. 

After having bought everything installed and started it, from time to time you will have to evaluate its performance and carry out the corresponding maintenance. 

This to avoid that everything stops working correctly and you have to run with more urgent and significant expenses later.

To evaluate all the variables that we have just mentioned, we have tools that can make this work a little easier. Websites like WhatToMine and CryptoCompare offer their users the ability to calculate the profitability of mining different cryptocurrencies .

For this, such sites take into account the mining power of the hardware you have, electricity costs, current market prices, etc.

Summary of Cryptocurrency Mining Explanation

The profitability of cryptocurrency mining fluctuates and is relative depending on where, when and how it is executed.

Now that you are up to date on this topic of cryptocurrency mining explanation perhaps at some point you feel like investing in digital currency or becoming one of these miners. 

Whatever happens, remember that it can be the currency of the future!

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