Beginning Cryptocurrency Mining: Everything You Need To Know
One of the most heated debates in the recent past is cryptocurrency mining. There has been hype about what it is, how it works, and whether it’s profitable. With the plethora of information out there, as a beginner, you can easily be confused. We’re here to make things easy for you. In this article, we will walk you through every detail you need to know if you're considering beginning cryptocurrency mining.
But, first things first!
What are Cryptocurrencies?
Cryptocurrencies are basically a form of digital money that you can use for online transactions. They are based on consensual computer networks that create a secure payment system and fully digital global currencies.
What’s more, cryptocurrencies use a special technique called cryptography to enable users to make safe and secure payments without intermediaries such as banks and governments.
Bitcoin was the first digital currency to be introduced in 2009. Since then, more than 900 other cryptocurrencies have come into existence. Some of the most popular cryptocurrencies in use today include; Bitcoin, Bitcoin Cash, Ethereum and Litecoin.
So, what is Cryptocurrency Mining?
Simply put, cryptocurrency mining is the process through which cryptocurrencies are generated. It’s referred to as “mining” since it’s more or less like “gold mining”. Just like gold exists underground, crypto coins exist in a blockchain protocol. Miners have to “extract” them by first creating blocks of transactions, then add them to a blockchain network, and then receive new cryptocurrency as a reward.
In other words, cryptocurrency mining is the process used to validate transactions executed over a blockchain network. Blockchain works to protect transactional data by encrypting it and storing it in servers and hard drives all over the world to prevent any single, centralized authority from gaining control of the network. This also ensures that the same crypto coin is not spent twice.
As such, mining comes in handy in ensuring that transactions involving cryptocurrency are true, accurate and that they cannot be altered in the future.
How Does Cryptocurrency Mining Work?
In cryptocurrency mining, there are two validation methods; proof of work (PoW) and proof of stake (PoS).
PoS is defined by the wealth/stake you have in a blockchain network. There’s no block reward. Instead, miners take the transaction fee. As a beginner with not many resources, PoW may be more useful for you.
In the proof of work model, individuals, groups, or businesses use high powered computers to compete against each other to solve complex mathematical equations that are in essence part of the encryption mechanism. These mathematical equations correspond to a group of transactions referred to as a “block”. When a mathematical equation is solved, a transaction is validated and the individual, business or group that solved the equation first is rewarded using the digital token for the currency that is being validated.
For example, the current reward block for Bitcoin is 12.5 tokens. As such, the first person to correctly solve an equation on the Bitcoin blockchain is rewarded 12.5 Bitcoin.
Types of Cryptocurrency Mining
If you're thinking about beginning cryptocurrency mining you need to know what options there are. Currently, there are two types of mining available: cloud mining and hardware mining.
a) Cloud Mining
In cloud mining, also known as cloud hashing, enterprises buy mining hardware and run a website that promises to give people returns for investment at their site.
Please note: BitPrime does not endorse any of these firms. They are purely listed as examples for you to consider when beginning cryptocurrency mining.
Before you invest in cloud mining, you need to be aware of the following disadvantages:
- The profits will be much lower when compared to having your own mining hardware.
- No one can guarantee you returns on cryptocurrencies or mining. Crypto is considered a high risk investment and subject to volatility.
- There is a big possibility of falling for a scam. Most of the cloud mining firms in the market are unverified.
- It is not possible for you to change the mining hardware since you do not possess it.
- Your service provider can terminate your contract or shut down shop due to low profits. In such a case, it is possible to never receive payment.
- Perform your own due diligence when considering any cloud mining firm.
b) Hardware Mining
In hardware mining, you have to invest in high powered computers and computer hardware that are connected to the blockchain. This is a genuine way of mining cryptocurrency.
Any computer can solve the block equation but the probability of a computer with low processing power solving a block is very low. The more powerful your computer is, the more likely it is to solve the next block problem.
How to Start Mining Cryptocurrency?
Before you start mining, you will have to purchase specialized hardware. There two types of mining hardware you can choose from; Graphics Processing Units (GPU) and Application Specific Integrated Circuits (ASIC).
Choosing a GPU
Mining a crypto coin requires you to use an algorithm that corresponds to that of the coins you want to mine. The efficiency of a GPU in mining a certain algorithm largely depends on the GPU’s specs. You should, therefore, choose your GPU depending on the algorithm you’re looking to mine. Afterwards, you can choose hardware based on its price, power consumption, and brand reliability.
For example, if you will be mining heavy algorithms such as Loki and Monero, you would be better off going for AMDs. NVIDIAs, on the other hand, are great when mining Ethash and Equithash; algorithms used for Ethereum, Zencash, and Zcash.
Choosing an ASIC
An ASIC is a machine that is created to mine a specific type of cryptocurrency and algorithm. There are quite a number of ASICs available in the market. Options available largely depend on the demand for a certain coin.
Before you settle for an ASIC, you need to define your objective. Do you want to mine a specific coin or are you looking to opportunistically buy machines to capitalize on disproportionately high profits?
If you have a specific coin in mind, you need to find out the algorithm used to mine the coin. If the algorithm is not supported by any of the ASICs available, you may need to consider a GPU.
After you have outlined the ASICs available for the coin you want to mine, compare them using the following metrics:
- Revenue potential / Hash rate
- Electricity usage
- Initial mining hardware cost
- Date by which you would be able to receive the ASIC
Generally, the most profitable machines are new releases. They can easily out hash incumbent GPUs making it easier to break even within a short time.
There are some sticking points to be wary of when purchasing an ASIC. The first one is the projected breakeven period based on hashrate relative to electricity cost. The other is the probability of another manufacturer releasing an ASIC to mine the same type of coin in the near future as it will drastically reduce your ASICs profitability due to increased network difficulty.
Is Cryptocurrency Mining Profitable?
As earlier discussed, most coins are mined through the proof of work consensus. This is an extremely power-intensive practice. The equipment needed for mining is usually very expensive, and some are not profitable at all.
That being said, you can opt to join a mining pool to make it easier for you to make a profit from mining crypto coins. A mining pool is where different miners pool their resources together to increase their chances of solving blocks faster. Each of the miners is awarded a share of the profits according to the amount of computational power they provide to the pool.
So, How Do You Choose a Mining Pool?
Here is what to look for:
Payout structure and preference
A pool can pay out rewards to its members through a Pay-Per-share or Pay-Per-Last-N-Share basis. Each of these methods has its costs and benefits.
Team trustworthiness and pool reliability
Lack of governance and infancy of the cryptocurrency industry give room for unethical practices by service providers it is therefore important to go for service providers that have trustworthy teams.
Quality pools usually offer enhanced UX and UI design, providing users with functionality that allows them to monitor their performance.
Fees generally range from one to three per cent. They are used to pay for the pools operating expenses and the interface functionality provided to users.
Mining cryptocurrencies will give you two main benefits. First, you will obtain crypto coins as a reward for solving mathematical problems and validating transactions. Secondly, mining plays a vital role in eradicating middlemen and maintaining the decentralized nature of the blockchain.
As a new miner, it might not be a good idea to go for Bitcoin as it is highly unlikely that you will make any profits. Many experienced miners have joined the Bitcoin network over time, raising the difficulty bar thus significantly reducing its profitability.
Mining less competitive currencies such as Litecoin, feathercoin, and Dogecoin is likely to yield better returns. With Litecoin for example, you can earn anything from fifty cents to ten dollars in a day using consumer-level hardware that costs about a thousand dollars.
What are your thoughts on beginning cryptocurrency mining? Do you have any handy tips to share? Let us know in the comments section below.
About the author:
Jay Jackson is a blockchain enthusiast and a freelance writer at topcryptowriter.com. He works closely with brands (people, businesses and startups) in the crypto sphere. He currently writes: Blog posts, Guides, Press releases, ICO reviews, eBooks & Whitepapers. You can find him on LinkedIn.
Disclaimer: The above references an opinion and is for informational purposes only. Do not take this as personalised financial or investment advice. The opinions expressed by the author do not represent the opinion of BitPrime.
Images courtesy of Shutterstock and Pixabay unless stated otherwise.
Last updated: 10/07/2019