Cryptocurrency Mining Explained: A Comprehensive Overview
For many, the term “mining” awakened their interest some years back where they relate cryptocurrency mining to the process of digging for precious metals to get a value for their investment. Did the cryptocurrency mining then, pay-off? Certainly not!
While there are certain risks in the cryptocurrency mining, the opportunities may be irresistible for cryptocurrency enthusiasts. Cryptocurrency mining requires proper planning and execution so as to squeeze every bit of potential earnings in it to reach that Return-Of-Investment target.
So, what exactly is cryptocurrency mining?
Cryptocurrency mining is a computational process to solve complex math puzzles, validating transactions and get rewarded with the coin.
Cryptocurrency mining accomplishes two objectives- solving of complex math algorithm and validation of transactions resulting to creation of a new block to be added in the blockchain. When this is achieved, a reward is given.
Each set of processed transactions is called a block. Miners secure the block by verifying every transaction through the creation of hash (a 64-digit hexadecimal number) in the blockchain.
What is Proof of Work?
Decentralized information can be reproduced so easily, for cryptocurrency coin like Bitcoin, there is a risk that a user can make a copy of his/her Bitcoin and dispatch it to another party while still in possession of the original. Decentralized networks need a strategy (algorithm) for stopping double spends of digital coins like Bitcoins.
Miners use “Proof of Work” strategy to stop double transactions in digital transactions.
So, Proof of Work is a computational math that requires many attempts by the mining devices or computers in the network, competing to find a solution for a new block to be added in a blockchain.
Proof of Work (PoW) consensus rely on miners for transaction approval while Other consensus like Proof of Stake (PoS) require no miners, rather require stakers. As a result of their stake, the individual users carry out consensus to secure the blockchain.
The Details of Cryptocurrency Mining
The Details are going be broken down to a layman’s understanding, enjoy it!
Bitcoins are created by solving computational math problems and validating the transaction to create a new block. This is done by a mining device or computer in the network that is built to solve these computational hexadecimal problems. This whole exercise is called mining. Users who use these mining devices to mine cryptocurrencies are called miners. When a complex math problem is solved and the transactions processed, it becomes a block. Blocks are verified by other miners/users and once the verification is completed, they’re added to the block chain and the miner receives a block reward. It takes every 4 years to create 210,000 blocks in Bitcoin network which the reward to the miner is halved. The reward for such feat presently is 12.5 Bitcoins. By May 2020, it will be halved to 6.25 BTC as programmed.
This process of adding new blocks to the blockchain continues to grow since blocks are added approximately in every ten minutes. This chain, a master ledger continues to grow unending.
The Economics of Cryptocurrency Mining
Miners profit, if the price of “mined coin” exceeds the mining cost. With recent innovations in the technology and the creation of industrial mining rigs that have high computing power, cryptocurrency mining is becoming more profitable.
Many individuals are committing their skills, time and computational resources to be involved in cryptocurrency mining in order to receive block rewards.
People are beginning to see mining rewards as a drop of pennies from heaven which can be traded for other assets, stored in anticipation of adding value or exchanged with fiat currencies to make more profits.
Block rewards vary when trading different cryptocurrencies on the blockchain. For example, block rewards for Bitcoin are 12.5 BTC on the Bitcoin blockchain, 2 ETH for Ethereum on the Ethereum blockchain and so on.
Recall that block rewards for Bitcoin reduces to half every four years. The Bitcoin rewards are programmed to reduce by 50 percent every 210,000 blocks. From 50BTC in 2008,to 25 BTC in November 2012,down to 12.5 BTC in July 2016. Expect it to decrease to 6.25 BTC by May 2020.
Ask yourself, why this reduction? It’s for this purpose:
Simply by “Supply and Demand theory” it creates scarcity in the supply of the coin. This measure controls inflation and makes the value of the coin to appreciate.
Naturally, one expects this to discourage miners, but it’s never being the case.
Days have gone when miners mine for ideological reasons-aiding decentralization to stop third party interference and to secure the cryptocurrency network. Nowadays, cryptocurrency mining is for the money bags, trying hard to squeeze every bit of earnings from it.
Every beginner to this journey of cryptocurrency mining needs to plan and weigh the profitability of different mining coins. Cryptocurrency is not all about Bitcoin, other cryptocurrencies are beginning to add value.
Cryptocurrency Mining and Hash Rates
Hashrates is the measure of the processing power during a cryptocurrency mining operation in a blockchain network. In a simple term, Hashrate is used to measure how much power, the mining coin is consuming in a blockchain network in order to create a new block. For example, a mined Bitcoin, the block has to be “hashed” before adding it to the blockchain. The Hashrate will show the strength of the blockchain’ peer to peer network.
Using the Hashrate, one will be able to know the number of hashes per second.
To mine a block successfully, a user needs to “hash” the block’s header to be less than or equal to the target.
The target means, for the SHA-256 hash of a block’s header, it must be a 256-bit alpha-numeric string, starting with 18 zeros. The target is subject to changes as the computational complexity changes every 2016 blocks.
The miner arrives at this hash/target by comparing small portion of the block’s headers known as a “nonce.” A nonce starts with “0” and increases as it obtains the required hash/target.
When varying the nonce, the miner is simply doing, hit and miss.
The probability of getting the hash, which starts with zero, is slim .It requires that, many attempts have to be made by varying the nonce.
This number of attempts per second is called “hash rate” or also known as hash power. The process of making these guessing attempts to mine the coin/block by the miner is called cryptocurrency mining.
The hash rate metric is important for two reasons:
- It has a direct link with the price of the coin;
- The hash rate is a measure of the privacy of a Proof of Work consensus.
Hash Rates and Market Prices
A crazy high hash rate will definitely create a “price floor” to sustain the price level of that coin. This is because; no miner will like to sell mined coin below the mining cost. Considering the mining expenses, there should a break-even cost.
A high hash-rate is a reflection of a high mining cost and it implies that, the miner will not like to trade the coin below the mining cost.
The volatility of the market can cause a crypto price fall which will automatically render the mining rigs unprofitable. This can lead to shutting down of the mining rig or switching to a different cryptocurrency until, the prices recover.
A low hash-rate will intensify competition, putting the smaller miners at a disadvantage.
Furthermore, if the price of a coin continuously appreciates while the hash rate is at a stable state, it will serve as an incentive for miners to join the network. The influx of miners will definitely increase the difficulty to create a block and will have effect in the cost of that particular coin until equilibrium is reached.
Hash Rates and Blockchain Security
A high hash rate is an indication that, the blockchain network is secure and robust. The lower a blockchain’ hash power, the more, prone to attack, it becomes.
Many miners compete to get the correct nonce to earn reward; it means that, a singer miner cannot hold majority of network Hashrate. In a situation where a singer miner holds the majority of network Hashrate, there will be serious exploitation of the “Longest Chain” rule.
In this scenario, malicious miners might turn the table against other miners by preventing transactions to be verified.
The Production Costs of Cryptocurrency Mining
As earlier stated, the production mining costs determines the willingness to trade a mined coin by the miner. It’s a determinant to a coin break-even price.
Electricity and hardware are two key factors that determine the production mining costs.
Mining equipment such as ASIC consumes a lot of energy. This is why PoW consensus mechanism has not been a better option for most miners.
According to Digiconomists, the annual figure of electricity consumption of these mining devices is in the staggering figure of 73.12 TWh. This is why many miners tend to set up their mining rigs to areas where electricity tariff is very low.
In 2018, to mine 1BTC of Bitcoin cost $4,758 in the United States. For anyone who intends to mine should assess his/her domiciled electricity cost to determine the mining cost.
Hardware cost should be factored when determining mining viability. Initial capital expenses should be part of the profit calculation in the mining calculator.
How to Begin Cryptocurrency Mining
Nowadays, to be profitable in crypto mining, one needs to invest in capital like equipment, electricity, cooling and storage. It’s no longer fashionable mining with a GPU or computer at home.
Here’s what you need to get started:
- Calculate mining profitability
- Get a cryptocurrency miner.
- Get a Bitcoin wallet.
- Find a good mining pool
- Get mining software.
- Start mining
Note that, mining devices vary including the cost implications.
Application-Specific Integrated Circuit (ASIC) Mining Rigs
In the world of hardware mining, we have two dominant mining devices- Application-Specific Integrated Circuits (ASIC) and GPU miners.
Application-Specific Integrated Circuits (ASIC) has some striking similarity to random access memory (RAM) chips in a computer. Application-Specific Integrated Circuits (ASIC) performed better with PoW algorithms utilizing high hashpower. ASIC performs optimally with cryptocurrencies such as Bitcoin Cash, Bitcoin and Litecoin.
Graphics Processing Unit (GPU) Mining Rigs
Graphics Processing Unit (GPU) rigs is graphics cards oriented, to mine different crypto coins. Higher robust GPUs are best suited to mine cryptocurrencies such as Ethereum (ETH), Monero (XMR) and Ethereum Classic (ETC).
The Future of Cryptocurrency Mining
Cryptocurrency mining started 11 years ago, with the traditional cryptocurrency mining remarked to have had a devastating effect on the environment based on its high energy demand. This mining method is no longer profitable to behold the future.
The Future of Cryptocurrency Mining belongs to large-scale mining companies that site their mining rigs to regions where electricity consumption is cheap. Also, some decentralized options have demonstrated resilience in providing the average miner ways to make mining more cheaply, accessible, less risky, easier, and more profitable.
Crypto miners are relying on Altcoin mining, for example, Monero and ZenCash do not need expensive mining hardware. Monero can be mined with a simple browser extension.
Finally, the mining future is for miners who integrate capital expenses such as local energy rates, mining hardware and other factors such as Hash rates, market volatility etc. into their cryptocurrency mining plan.