What is it, how to do it and is it worth it?
If you know the basics of how cryptocurrencies work then you will be familiar with the role mining plays in the blockchain technology that supports them. You may also have heard the buzz about how mining cryptocurrencies can be profitable and be interested in trying to mine cryptocurrencies yourself, but should you? That’s a question only you can answer for yourself. Here we’ll try to offer some additional clarity on exactly what cryptocurrency mining is, how it’s done, how you could become a miner, and what the pros and cons of mining might be.
What Is Cryptocurrency Mining?
One of the main ideological arguments for cryptocurrencies is that there is no central control by banks or other authorities that manage and control traditional fiat currencies. That means there is no danger of vested interests leading to manipulations of the currency that may benefit some parties to the disadvantage of others. For example, reducing the value of existing units of the currency by printing more and increasing the supply.
Blockchain technology achieves that by multiple copies of the record of all transactions (the ledger) involving a particular cryptocurrency existing. That record is still required to verify cryptocurrency ownership and transfer it following a transaction. Every time a transaction is made the blockchain record must be updated across all of its copies to ensure no cryptocurrency unit is ever ‘spent’ twice. Verifying and updating these transactions securely and reliably involves cryptography and the process, which uses powerful computer processors to solve cryptographic problems, is ‘mining’.
The term ‘mining’ comes from the fact that the individuals dedicating computer processing power to keeping cryptocurrency blockchains operating are economically incentivised to do so. They are rewarded through a combination of the small transaction fees paid by those exchanging a cryptocurrency and newly issued cryptocurrency units. The latter are considered ‘mined’.
So, cryptocurrency mining is basically contributing the computational resource that the validation models allow cryptocurrencies to function require. There are two validation models and almost all cryptocurrencies use one of the two. They are referred to as
- 1) ‘proof-of-work’, and
- 2) ‘proof-of-stake’.
Proof-of-Work (PoW) validation is the mining model used by Bitcoin, Ethereum, and many other smaller cryptocurrencies. In PoW mining, miners, who might be individuals, pools or even companies, compete to be the first to solve cryptographic equations that validate a group of transactions, locking them into the blockchain. The first miner to solve these cryptographic problems, validating the block of transactions, receives the ‘block award’ paid out in the cryptocurrency.
For example, the block award for mining a Bitcoin block is 12.5 Bitcoin. With bitcoin currently valued at around $4000, that would mean a reward of approximately $50,000 for the successful miner of a block.
How difficult the cryptography the computational power of miners has to solve varies. Which means the level of equipment and chips needed to mine cryptocurrencies varies as does the overhead of the electricity consumed. Bitcoin is particularly difficult to mine so costs miners a lot in electricity as well as necessitating investment in a sophisticated and specialised kind of chip called ASICs. For less demanding cryptos, powerful GPU chips such as those manufactured by NVIDIA will do the job.
Proof-of-Stake validation works differently and doesn’t incentivise ‘professional’ mining in the same way. Owners of cryptocurrency units are randomly invited to validate a block of transactions. If they do so the miner receives the fees paid for all of the transactions in a block. The more units of the cryptocurrency held, the higher the chance of being randomly selected to mine a new block. But the unpredictability of the system means holders can’t really consciously set out to try and make money from mining.
How To Mine Cryptocurrencies
There are two main options for anyone who wants to start mining cryptocurrencies. One is to invest in the hardware yourself. You can then either join a mining pool or go it alone. Mining pools combine the resources of many miners, splitting profits between them. If you want to go it alone, unless you choose to mine smaller, less competitive cryptocurrencies, you’ll probably have to make a big investment in hardware and electricity. With no guarantee of success this is certainly a risky investment.
The second option is to join a ‘Cloud mining’ company. Here, you basically ‘rent’ Cloud-based computing power and someone else does the mining for you. You are really just providing part of the upfront capital to finance a big combined mining resource along with other investors. Most mining companies offer different packages at a range of prices. The bigger the package the more hashing, or computational, power you are renting from the Cloud provider. You will again join a global mining pool, contributing your rented Cloud-power to the combined effort.
Is Mining Cryptocurrencies Worth It?
Unfortunately, there is no black and white answer to the question of whether mining cryptocurrencies is profitable. That’s because the market is constantly changing. The difficulty level of validating blocks changes as does the amount of mining competition. Electricity and hardware prices also vary.
If you do decide to give mining cryptocurrencies a go you should research carefully. There are mining calculators available online that you can use to monitor current difficulty levels and your expected overheads from electricity and hardware. These can give you a good idea if conditions are currently in place that means mining a particular cryptocurrency could be profitable at that moment in time.
You should also carefully research hardware options before buying as well as mining companies and pools you may be considering joining. Mining cryptocurrencies is risky and involves quite some effort to set up, at least initially, but there are certainly many individuals and groups who have and do make money mining cryptocurrencies.