Everything You Need To Know About Cryptocurrency Mining
Cryptocurrency mining seems like a complicated process, and it might seem like something that is not essential to know; however, in order to fully understand how cryptocurrencies work, it helps to understand that there is a mining process, as well as what it does.
What is a Cryptocurrency?
To understand the mining process completely, it is vital that you have a clear idea of what cryptocurrency. Simply put, a cryptocurrency is a digital asset that has been designed to work as a medium of exchange. It uses a process call cryptography which secures all of the transactions and controls the creation of additional units of the currency. These digital currencies are also classified as alternative currencies and virtual currencies.
Although Bitcoin became the first decentralised cryptocurrency back in 2009 and arguably the most famous, it has been thought that the concept was developed long before this. Since Bitcoin came onto the market though, there have been many different cryptocurrencies that have been created.
All cryptocurrencies will run on a blockchain, which is important to understand, to really get not just cryptocurrencies, but also the mining process. The definition of blockchain technology can be left to Don and Alex Tapscott, the authors of Blockchain Revolution, who say; “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
It really is a great invention originated from Satoshi Nakamoto. This is because it allows digital information to be distributed, but not copied anywhere, keeping security levels high. Any information that is held on a blockchain exists on a shared database. Because the blockchain database is not stored in any single location, it means that all of the records are easily identifiable. It is accessible to anyone on the internet, due to the fact that it is hosted by millions of computers simultaneously.
What is cryptocurrency mining, and how does it work?
Like we have said previously, although it is not always essential to understand the mining process yourself, unless of course you want to become a miner, but instead, to understand that there is one, and that it is needed in order to create the virtual currency. Cryptocurrencies are produced using a mining system, which involves miners using a sophisticated algorithm, which then releases blocks of coins, which are then free to go into circulation.
Each different cryptocurrency uses a different algorithm; but, the more coins that have been mined from a single cryptocurrency, the more difficult it will be to release new blocks, and therefore get new coins. This is intentional, and the algorithms have been designed in this way, to ensure that not all of the coins would be mined immediately.
There is only a limited amount of crypto coins that can be mined, and once these have all been mined, there will simply be no more. So, for example, there are 21 million Bitcoins in total, and once these have all been mined, they will be the only coins in circulation – no further Bitcoins will be added to the system. This is not just apparent to Bitcoins though, and refers to all other Cryptocurrencies.
Can anyone do it?
Although the process of mining cryptocurrencies is actually pretty simple, it is difficult to mine the coins for a profit. This is because you will require specialist equipment as it is not advisable to use your own computer, as many are not compatible and capable of mining crypto coins. Not only that, but you will added electricity costs on top of it, which is why many people turn exchange sites, which allow you to buy cryptocurrencies easily, saving you time.
But…that said, if you are looking to mine as a hobby, and have the initial startup costs that will buy you all of the equipment that you require, it can be really great, and overtime, you can make a couple of dollars a day doing so. Certain coins, such as Litecoins, Dogecoins and Feathercoins are easier and more accessible to mine, and people can expect to make up a lot of their hardware costs in one and a half to two years. If you are looking to earn a second income though; like we previously said, you will be far better off purchasing cryptocoins with cash, instead of mining them.
If you do choose to mine cryptocurrency, you will essentially do so to accomplish three main things. The first is to essentially provide a bookkeeping service to the coin network. You are basically providing a computer accounting service 24/7; you will get a paid a very small reward for these services, and this will be paid to you by you receiving a fraction of coins every couple of days; you should also place focus on keeping your personal costs down, which should include electricity and hardware. If you follow these three simple tips, you have the opportunity to mine crypto coins effectively.
According to the experts, you need just a few things to start mining coins. This is more focused at the easier currencies to access, like we mentioned before, which are, for example, Litecoins, Dogecoins and Feathercoins. These are:
- A crypto wallet. Like a physical wallet, this does exactly what you would imagine it does and stores all of your earnings in a password protected container. It will also keep a ledger of transactions.
- A mining software package, so that you can actually begin to carry out the mining process. It pays to look around for these, and keep an eye out for any free ones.
- An online cryptocurrency exchange membership – this will allow you to exchange your virtual currency for a conventional one, and the other way around.
- A good, fast and reliable internet connection. You will struggle to do any sort of crypto mining if you are using a poor connection, and you will simply waste your time.
- A cool area in which you can place your hardware setup to prevent it from overheating at any time. Like we said before, mining is a 24/7 process, so it is important that you are using a good and reliable system. It is also worth directing a house fan, which can then blow cool air across the computer, as the mining process will generate more substantial heat. It is absolutely imperative to keep your system cool.
- A custom built computer that has been specifically designed for mining. Do you remember when we mentioned initial start up costs, and not being able to use your own computer for mining? This is because you will not be able to use your computer whilst you are mining, making it much more ideal to have a separate one completely. Laptops and handheld devices are not advisable to use, as they simple do not have enough power to generate any sort of income.
- An ATI graphics processing unit, or a ASIC chip. These are not cheap to purchase, but will be essential for providing the accounting services.
The above list shows that, fundamentally, yes, anyone can mine cryptocurrencies; however, you must have a keen interest in mining, as well as an appetite to constantly learn and keep up to date on any technology changes. You also have to have the initial budget to be able to set up everything that is required.
So, although, technically anyone can mine, realistically, it is not suited to everyone.
Pros and Cons of mining Cryptocurrency:
There are very few advantages and disadvantages of mining cryptocurrencies that we have not already covered, so to finish, it is appropriate to highlight the above points:
- It is a fun hobby
- If you are looking for a fun hobby, and not to make a huge profit, crypto mining is a really great thing to do.
- They are becoming more popular
- Cryptocurrencies themselves are quickly becoming much more popular than they once were. More currencies are constantly being improved and developed, which not only makes the competition better, but will help those in the mining industry.
- Anyone can mine
- Anyone can mine cryptocurrencies. As long as you have the means needed to successfully get all of the equipment to start mining, there are no restrictions.
- It is a simple process
- The actual process of mining is a relatively simple process. Once you have got the software needed, it can run by itself.
- There is not a lot of profit
- If you are thinking of mining to earn a second income, it will not work. This is due to the initial start-up costs. Once you have started you can look to earn a few dollars each day.
- Like we previously stated, if you are looking to make a lot of money, it is more beneficial to you to buy and sell cryptocurrency instead of mine it.
- High start-up cost
- This has been stressed heavily throughout the article. Mining can be a lot of fun, but it does come with a cost, and you have to be dedicated to the hobby to purchase everything that is required to mine successfully.
- There is not a lot of profit
- It is a fun hobby
References and Further Reading:
- PCGamer; What you need to know about cryptocurrency mining
- Lifewire; How to mine Litecoins and Dogecoins
- TNW; Learn about cryptocurrency mining with this interactive blockchain demo
- TheStreet; How cryptocurrency mining works explains why AMD and Nvidia’s sales to miners might soon fall
- Bitcoinmining; How Bitcoin mining works
- Digital Trends; How to mine Bitcoin: A crash course on cryptocurrency mining
- PC World; Beginner’s guide to mining Litecoin, Dogecoin, and other Bitcoin variants
- Coindesk; How Bitcoin mining works
- iGaming; How mining works
- Blockgeeks; What is Blockchain Technology? A Step-by-Step Guide For Beginners
- Coindesk; What is Blockchain Technology
- Quora; What are the advantages of mining bitcoin over buying them?
- The Cointelegraph; Pros and cons of starting Bitcoin mining farm, no more child’s play
- Coin Report; What are the advantages and disadvantages of Bitcoin?
Coin Report; What is Bitcoin Mining?