Cryptocurrency Mining: What is Mining and How Does it Work
Mining is a way to obtain digital currencies, which can be used by members of the crypto community who operate computing equipment of sufficient power. They, like the physical technical devices they often use, are called miners.
Technically, mining (literally from the English “mining” - “mining”) is the processing and recording of new structures (blocks) in the blockchain database, in which transactions made by system participants are recorded. The blockchain architecture does not allow changes to existing records of completed transactions, only new blocks can be added to it.
This is the basis for the transparency of operations, which maintains full confidence in the reliability of the system. The most popular cryptocurrencies based on the blockchain system are bitcoin (BTC, Bitcoin) and ether (Ethereum, ETH).
How Mining Works
"Production" of virtual currency is decentralized. There is no single center responsible for issuing digital coins and controlling their movement. New "money" appears when performing mathematical calculations on computers.
Information about the results of these computational operations is also not contained in one place. No server or data center is needed to maintain the network. The data is distributed over the memory of multiple computers.
The virtual currency is stored in blockchains. Only the owner of a key that exists in a single copy can get access to its specific link with a fixed cost. This eliminates the duplication of bitcoin and other virtual currency that supports the blockchain system.
The unique key can be transferred to another person, who in this case becomes the new owner of the funds written to him. The procedure is accompanied by making changes to the database. The cryptographic algorithm protects the payment system from malicious interference.
How They Make a Profit :Functions of Miners
The first and rather obvious task of miners is the emission of cryptocurrency in decentralized systems, i.e. the issuance of new digital coins into circulation. Technically, it is the generation of a digital code when solving mathematical problems on powerful computing equipment (usually on mining farms). For each block created, miners receive a reward calculated in a fixed amount of currency.
Some currencies reach a level where the production of new coins becomes impractical. It may seem that miners are no longer needed at this level. However, it is not. Miners, as members of the crypto community, also:
They store copies of the blockchain . Thanks to the storage on thousands and hundreds of thousands of devices, information about transactions is insured against loss and falsification.
Confirm transactions and solve the "double spending" problem. The list of actions also includes checking operations that have received confirmation from other miners.
Without the participation of miners, it is simply impossible to maintain the network with digital currency. It can be summed up that they ensure the stability of the network and act as auditors, verifying transactions. For this, they get a “free” digital currency.
There are several legal ways to withdraw assets: through exchange services, through trading platforms, cryptomats. The last option is “ATMs” with a digital address, to which funds can be transferred and cashed out. The disadvantage of cryptomats is high commissions and low prevalence.
Factors Influencing the Profitability of Mining
Under the "profitability" they take the level of the reward, which is transferred to the user of the blockchain network for completing tasks to support the functioning of the system and emission. Roughly speaking, this is payment for the provision of computing capabilities.
Profit depends on two interrelated parameters:
The complexity of the process . The more investments it costs to solve problems, the smaller volumes are available for execution in terms of units. technical resource.
The cost of a unit of virtual currency . That is, how much the reward is valued when converted into fiat currencies.
The annual profit from mining during periods of segment growth is estimated at 120-200 percent. It is worth considering that the indicator is given without taking into account the necessary investments: renting rental visits, labor costs for management, paying bills for electricity consumption.
Online calculators help to estimate possible profit and expenses. For the calculation, you need to specify the available hashrate, the cost of electricity, the rent for the premises, etc.
Mining Softwares
To calculate mathematical problems and create network blocks, specialized software is required that is designed to work with the algorithms embedded in the currency. Mining is possible on the power of the central processor, ASIC, video card or even hard drive. For each device, you need to install separate software (there are universal programs for several devices).
Even on a non-industrial scale, miners prefer to use only video cards and ASICs. The choice of software is based on the capabilities of the mining equipment. The effectiveness of software is partly related to the configuration, the processing power of the machine.
Which Cryptocurrency to Choose for Earning on Mining
There are no universal answers to this question. The first cryptocurrency appeared only 12 years ago, and over the past period the market has not had time to form. It remains quite unstable. In addition to changes in the existing field, this volatility is fueled by the emergence of new cryptocurrencies. Because of this, it is very difficult to predict the development of the situation in the cryptocurrency market at an acceptable level even in the short and medium term.
However, there is one trend at the time of the last months of 2021 that is useful for novice miners to know: with a single “extraction” of popular types of virtual money (bitcoin, ether), it gradually becomes more and more difficult to earn a profit. Therefore, a more promising approach when connecting to mining is to start with new or lesser-known types of cryptocurrency. Short-term market fluctuations are more significant for those who are going to invest in virtual money.
1. Home Mining Costs
The rise in prices for computer components, largely provoked by the boom in the mining business, complicates the entry of private newcomers into this area. If we bring the situation at the beginning of 2021, then the purchased hardware, which includes 4-5 video cards with technical indicators comparable to the GeForce RTX 3060 T, should pay off within 10-12 months. An additional item of expenditure is the payment of electricity bills. It simplifies the situation a bit by the fact that the software for "mining" installations is distributed free of charge.
2. Mining Farm
A "farm" is an assembly of multiple computers or servers. It is a kind of data center, specially created in order to mine digital currency. It is faced with the task of maximizing performance and, consequently, the hashrate (Hash Rate is an indicator whose value affects the chances of finding the desired block and taking the reward for it).
Bitcoin Industrial Mining at The End of 2021
On a modern scale, the BTC market has become so big that industrial mining operator BitCluster recommends entering this territory with at least 500 modern miners. With such resources, you can confidently survive the losses due to breakdowns and get a satisfactory profit.
Large entrepreneurs and organizations, as well as private traders, are experiencing problems with the purchase and updating of equipment. A number of assemblies are reserved for pre-orders for several months in advance.
There is a massive outflow of miners from China to other countries, associated with the tightening of regulation of the cryptocurrency market in the country. Now Chinese companies are busy looking for sites for placement outside the PRC. Over the next 2-3 years, the largest data centers will be built, which are necessary to transport production and employees to new places of work (mainly in Northern Europe).
Cryptocurrencies to Watch Out For
Bitcoin is the most popular cryptocurrency format, however, this does not guarantee stable growth. It is characterized by high volatility. For example, in 2021 there was already a sharp drop after a record increase: on October 21, the cost per day decreased by 5%.
Therefore, many miners are looking for markets with a stable growing position. One of them is ether (ethereum), the second largest virtual currency. Due to the smaller number of participants in this community, the “mining” process is significantly more efficient than in the oversaturated environment of bitcoin miners.
You can go even further by trying to predict the circle of fast-growing "newcomers". Experts believe it is:
Litecoin (LTC) . Litecoin is based on the code base (fork) of bitcoin, but is in the status of a separate cryptocurrency. Relatively low demand allows you to mine individually, but you need a large amount of free memory.
XEM . Miners are used to support the functioning of the system (generating blocks for transactions, fixing transactions in the database and protecting security). Significant computing power is not needed. XEM is predominantly distributed in Asian regions.
Dash . An option with good stable growth, capitalization since the advent of d 2014 has reached two billion dollars. The preferred equipment is based on ASIC technologies.
IOTA . The fast execution of transactions and the rejection of commissions helped the formation of Iota. It is noteworthy that it works on the principle of "blockless blockchain".
An alternative for buying but not for mining is Ripple (XRP). Additional emission is not provided, the developers have created 100 units. XRP, about a third of which were divided between users.
Are there ways to make money on mining without initial investment?
Until 2013, users could mine popular digital currencies using a regular home PC. However, with the growth of competition among miners, the situation has changed dramatically. A few years ago, it was still possible to earn income from an assembly consisting of;
- A pair of video cards
- A motherboard
- A processor
- RAM
- Hard memory.
Now the competition to find the right hash has grown so much that mining on an individual basis has lost its practical meaning. Calculating the right combinations on a personal computer pays off poorly because of the cost of electricity and equipment wear and tear.
Rigid fluctuations in the cryptocurrency market sometimes make it worthwhile to return to personal mining farms with the cost of components for assembly in the range of 350-400 thousand rubles. This approach has its advantages:
Purchased equipment can be resold and recaptured. After the end of the period of profitable mining, often the warranty period does not even have time to expire.
Independence from intermediaries . You can choose which cryptocurrency to generate.
There is no risk of being deceived by speculation . You have knowledge about the power of equipment and understand how much income it should give.
An additional advantage is the ability to create a fully automatic home station for earning digital coins.
However, more and more often people, in order to make money on mining operations, pool financial resources to gain access to more powerful computing equipment.
3. Cloud Mining
The "cloud mining" is meant the extraction of cryptocurrency without buying your own computing equipment. Instead, a remote connection is made to the leased equipment, which can be located thousands of kilometers from the representatives of the pool of tenants.
As a rule, companies providing such services are located in countries with low electricity prices.
There are 2 scenarios for the interaction of cloud mining services with its users;
In the first, the service provider, after sending the payment, opens access to the remote mining of digital currency.
The second cooperation scenario is more complicated. Customers pay fees, and the company uses them to cover costs, to upgrade and maintain equipment, and to grow the business. Under the terms of the concluded agreement, the organization pays the investors who invested in it a share of the profits.
4. Web Mining (Hidden Mining)
This name was given to the secret use of other people's computing power in order to mine digital coins. A special case is the use of work computers by employees of large IT companies.
However, to a greater extent, unauthorized exploitation is carried out by infecting third-party equipment with software that launches mining services without the knowledge of the owner.
Cases are often uncovered when elements of virus programs are found on network resources with good traffic. Of course, such activities are illegal, but it is not easy to catch the hand and punish mercenary hunters for profit.
5. Indirect Investments
Direct investment of money capital in mining is fraught with risks. At the global international level, the status of virtual coins is still in the initial stages of legal status. Therefore, many investors are afraid to contact cryptocurrency exchanges , not wanting to become a victim of changes in legislation.
They see the prospects of the market, but do not want to take responsibility for the content of the “crypto” on “cold” wallets. Instead, they are looking at opportunities to invest in tools that are integrated into the processes of interaction with the ether, bitcoin.
The list of investment instruments associated with virtual currency includes 5-6 directions. Among them:
Crypto stocks
Shares of specialized investment funds
Futures on the Chicago Exchange for BTC and ETH, which are not calculated for physical deliveries of ethereum or bitcoins.
If direct investment in mining in recent years has brought an average profit of about 70% per annum, then indirect investments give less income, but greatly reduce some risks.
Criticism of Cryptocurrency Market
The importance of digital money as an innovation is often disputed. In particular, mining is charged with energy inefficiency. The artificial complication of the process of mining blocks leads to a huge waste of electricity. And this indicator is constantly growing due to the decreasing reward for mining.
A study from the University of Cambridge shows that Bitcoin, the most popular cryptocurrency, “eats” more electricity in a calendar year than Argentina consumes.
Another side effect of mining is large amounts of thermal radiation, which negatively affect the ecological situation. Technologies to mitigate this problem are being actively developed. Among the proposed solutions is the introduction of alternative sources of energy resources into mining (hydropower, solar panels).
Nobel Prize winner in economics Robert Shiller expresses the point of view in his statements that cryptocurrencies have become “another failed attempt to change money.” The academic economist sees in it signs of an economic bubble and notes the lack of real value, which has been replaced by an "aura of exclusivity."
My Opinion About Mining (K.A)
The cryptocurrency market, like the mining associated with it, remains difficult to predict due to its volatility. But it can be argued that the moment to enter the realm of bitcoin mining has not yet passed. However, success will require significant investments in the purchase of equipment. An alternative would be to secure a place in the pool for cloud mining, indirect investment, mining cryptocurrencies that are not from the “big two BTC and ETH”.
