Cryptocurrency Mining Explained
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With the advent of digital currency, there has been a hype and speculation that this currency is likely to replace traditional fiat currency. This, however, is yet to happen. But how do you acquire or get these digital coins?
You can acquire these coins by buying them from a crypto exchange or by mining. Mining involves solving complex cryptographic problems and then receiving a reward after your block is confirmed and added on the public ledger. Initially, people used simple personal computers using Central Processing Unit or Graphical Processing Unit, but now there are mining firms that have established complex mining hardware called ASIC miners. We’ll get to know more in this article.
What is cryptocurrency mining?
Most crypto coins are developed using various common programming languages. There are some like NEO that has their special language. The developers create a limited number of coins, then release them in specified ratios. These coins are acquired through mining.
Mining involves a process where miners solve complex cryptographic equations using miners or special computer equipment and hardware, then receive block rewards that are added and confirmed on to the blockchain. Miners can then sell their coins to the potential investors.
What is Hash Rate?
This is the algorithm that miners use to try and get a solution to the mathematical problems. It is the speed or power at which a given computational problem is solved. In other words, it is the number of attempts per second that a miner tries to vary a nod. The higher the hash rate, the better.
Crypto Mining Explained
In simple terms, crypto mining involves solving complex mathematical problems using special computer hardware and software. Once one solves a particular equation, it has to be first confirmed using the PoW scheme, before it gets added to the public ledger. Let’s simplify this process for you. There are three possible ways you can mine digital coins.
- Using a dedicated mining hardware.
- Cloud mining.
- Using your personal computer.
What is PoW? How is it connected to mining?
PoW stands for Proof of Work. This is a scheme or system in which peers in a network use to confirm successful transactions. It uses a hard to solve and easy to verify functions. Mining basically involves solving or cracking a proof-of-work scheme using special hardware to solve a complex equation. This scheme prevents miners from adding fake blocks or removing genuine ones giving value to the coins. PoW has some significant downsides though,
- Consumes a lot of electricity.
- Too slow considering the computational difficulty.
There are alternatives to the PoW scheme. Among these is Proof of Stake (PoS). PoS is a scheme or framework in which digital coin holders will be placing the coins as collateral to validate transactions on the network. Users within a plasma chain stake a number of tokens and get some interest from the staking. It is this interest that motivates token holders to buy some stake bonds.
Staking keeps the network alive. Users, in turn, pay ‘gas’ to run smart contracts on the network. It is this ‘gas’ that is used to pay stakeholders.
How to mine crypto?
- First and foremost, you need to be in a country where mining is legal and where electricity cost is not that high.
- Second, have the right equipment depending on the coins you want to mine (using a laptop is not recommended).
- Create a crypto wallet where you will store your coins.
- Get the required software and hardware like ASIC (Application Specific Integrated Circuit) processors like AMD Radeon.
- You can join a mining pool that gives you an opportunity to utilize computational power from other people’s computers making it easier to mine and then share the rewards.
- Open up an account at a reliable crypto exchange platform where you will convert your digital coins into conventional money.
- Have a reliable hardware set up location. It should be cool and air-conditioned. You can also install a house fan.
- Ensure you have a reliable internet connection. Preferably at least 2 MBS speed.
- Once you have these all set, your software will initiate the mining process.
Is Crypto Mining Still Profitable?
During the early years of cryptocurrency, mining was very profitable since it was relatively easy to mine even though the price of these coins was low. Mining only required you to download a software to your computer and run it. There was no need for specialized hardware or high-power consumption.
It has now become harder to mine cryptocurrencies especially the most popular ones like bitcoin. The initial investment is too high. Maintaining this equipment as well as paying for the electricity cost requires a lot of money. This is compounded by the difficulty in solving the computational problems. If you are planning to mine at the consumer level, it will not be profitable. You will need to do it on a large scale.
If you do not have a powerful hardware and, mining will not be that profitable for you. You can, however, hire someone else with a powerful machine to do it for you. This is where cloud mining applies. Here is how to gain from cloud mining, but you have to be careful since there are a lot of con artists in this business.
- Find a reliable third-party mining website like Hashflare.
- Sign up an account.
- Buy a contract based on what you want to earn. Contracts can run for a year or more depends on the site.
- Once you pay, they start mining for you as you wait for your earnings which they send to your cryptocurrency wallet.
In order to find out which method of mining is more profitable, you should take the following into account:
- Hash rate.
- Hardware maintenance price and energy consumption vs the cloud mining contract price.
Mining with a personal computer
You can opt to use your personal computer to do the mining, but it has to be compatible with the mining software. This method isn’t profitable nowadays at all. Here is how you should do it:
- Download a mining app from the internet (Bitcoin Miner).
- Install the app.
- Enter your bitcoin wallet’s address.
- Press the prominent start button and wait for your earnings.
Mining with graphics cards (NVidia, AMD)
- Mining with AMD Cards
AMD cards are considered to be the big giants in the world of crypto mining. With technology improving at an exponential rate, higher-end AMD cards such as the AMD Radeon RX Vega 64 Liquid Cooled Edition are capable of providing a Hashrate of 30 MH/s.
Similarly, the RX 480 8GB gives a Hashrate of 32 MH/s for mining crypto coins including Ethereum and Zcash in specific. The net profit that this card would bring is approximated at $2 after cutting off the electricity costs and bills.
However, higher end graphic cards like these will drill a big hole in your pockets as they are quite expensive. Nevertheless, since graphics cards are more like a one-time investment, a higher-end AMD card will last for years to come.
As compared to NVidia cards, AMD cards are quite cheaper for the same or very close specifications. Hence, they are usually preferred by buyers even though their market is not as vast as that of NVidia.
- Mining with NVidia Cards
In comparison to AMD graphic cards, NVidia Cards tend to be more popular among the crypto mining community, especially when it comes to altcoins. While there are plenty of NVidia graphics cards that you can use for mining cryptocurrencies, not all of them bring an equal level of profit. This is because of a notable difference in their specifications.
In terms of profitability, only those graphics cards that are suitable offer a low electricity consumption along with a high hashrate for mining whatever coin/altcoin you want to.
A good example of a profitable NVidia setup would be a combination of two NVidia Rx 1050ti 4 GB cards. It is highly likely that in the very near future, mining Ethereum would be near to impossible via a 4 GB graphics card. However, altcoins such as Zcash will remain mineable for quite a while. In fact, NVidia cards are generally considered to be much more profitable for mining altcoins as compared to AMD cards.
Another example of a profitable NVidia card would be the GTX 1070 8 GB. It offers a hashrate of 32 MH/s for Ethereum. However, it has a higher power consumption.
In general, NVidia graphics cards tend to be more expensive as compared to AMD cards. This makes AMD cards more suitable for mining Ethereum, while NVidia cards are much more profitable for altcoins such as Zcash.
What does crypto mining profitability depend on?
Mining cryptocurrency involves various parameters. These parameters will determine whether it will be profitable or not. If you are getting into it as a part-time business, then it will not be worth the effort, but if you want to do it on a large-scale basis, then you’ll need to invest substantially and be patient enough to recoup your investment. Otherwise, you’d be better buying the coins from an exchange and wait for them to rise in value. Here are some factors you should keep in mind.
As explained earlier, this is the computational strength and speed at which a miner can solve the mathematical equation to get a reward. These equations are usually very difficult to solve to prevent unwarranted additions and deletions of transactions on the blockchain.
Cryptocurrency miners, thus, compete with each other to determine who will solve the problem first. Whoever manages to do so receives a reward. A higher hash rate can give you a better chance of winning in this competition. It is this incentive that pushes miners to seek for more computational power or hash rate to stay ahead of the game. Consolidating this power can be very expensive reducing miners’ earnings considerably.
Once a miner wins in solving the equation, they broadcast the solution on to the network so that the other miners or peers can verify whether it is correct. Once verified, the network adds the mined block on to the public ledger.
Mining hardware or mining rig consume an excessively high amount of power. For instance, the cost of electricity utilized mining bitcoin as of February 2018, could power 4,594,251 households in the United States. The annual global mining costs currently stand at $2,480,895,304 according to the Bitcoin Energy Consumption Index. In countries like Germany, where the cost of electricity is high, cryptocurrency mining may be not as profitable.
The mining rigs consume a lot of energy since they must run continuously during the mining process. The whole process is like trial and error in which miners consistently attempt to find the correct value for a block component then hope it will adhere to the requirements. This block component is called a nonce. The mining hardware, therefore, has to run continuously and with a strong computational ability to stand a chance consuming a lot of energy as a result.
Before you delve into crypto mining, you should consider the efficiency of your equipment and the income you intend to earn. If you want to try and mine using your own computer at home, it will not be profitable since your computer won’t have enough hash rate to compete in the network. You can join a mining pool to bring together several computers hence having more computational power. Otherwise, you can simply buy and speculate from the exchanges.
Another important factor to consider is electricity. Mining rigs consume a lot of electricity eating into miners’ profits. If you want a sustainable business, then you need to find equipment that does not consume a lot of electricity.
Some of the best cryptocurrency mining hardware like the ASICs work at very high speeds, consume less power but are very expensive. If you are going to establish a mining business as a full-time job, then you’d better consider these machines. Faster and more efficient hardware is being developed as crypto mining becomes more difficult.
Currently, among the top bitcoin miners are
- AntMiner S7
- AntMiner S9
What is Halving?
Most cryptocurrencies are limited to a certain amount. Bitcoin, for instance, has a limitation of 21 million. The developers wrote a code which halves the mining rewards after every 210,000 blocks. This is approximately after four years. Currently, only 12.5 bitcoins can be earned after every 10 minutes, while in 2009 when the coin was developed, it was 50 bitcoins. The current reward will again be halved after 210,000 blocks are mined and so forth until the year 2140 when all coins will have been mined.
Halving reduces profitability as the miners continue incurring the same expenses to mine a block while receiving fewer rewards. This is why crypto mining profitability might not be plausible in the coming years. This problem can be solved by the price of cryptos going up, but this is dependent on the market forces and the value the crypto community assign to these coins. It could either go up or even collapse completely.
Let’s look at some of the top coins and see how much you can earn from mining them at the moment.
Mining bitcoin becomes difficult depending on the previous block. The system is set that only one block can be mined every 10 minutes. At the moment, the miner who wins gets rewarded with 12.5 coins. This means that only 75 bitcoins can be mined per hour and 1800 coins per day. Considering the level of difficulty required and the number of peers competing in this network, it is extremely difficult to get some BTC.
You cannot conclusively determine how much you are going to earn since there several variables that determine your profitability. These are:
- Difficulty factor.
- Hash rate.
- BTC/Dollar exchange rate.
- Hardware costs.
- Power costs.
- Pool fees.
- The number of miners in the network.
If we were to take an example of BTC mining calculator and include
- 2% mining pool fee
- 14 TH/s hash rate
- 1375 power consumption
- 5 BTC per reward
- Exchange rate 8,500
These variables would earn you about $2,160 in one year which does not make sense from a business perspective.
Ethereum is different from bitcoin. It is not just a digital currency, it is an open software platform on which developers can build and implement decentralized applications. It is also based on the blockchain technology.
The total supply of ether is not yet decided. It was 60 million at the presale, of which 12 million were assigned to the developers and the Ethereum Foundation. About 5 ethers are created per block after every 15 seconds. This reward dropped to 3 ethers due to the Byzantine fork.
Ether also requires PoW scheme but is set to change to PoS which is more efficient and fast. With this scheme of work, miners will be able to use a personal computer to mine ether. Just as bitcoin, the level of difficulty in mining ether makes it unprofitable on a small scale. Even though the Byzantine fork made mining a little bit easier, the block reward was also reduced cutting down the possible gains.
Electrical cost also affects ether, considering that miners have to use special hardware to solve the PoW mathematical problems. Changing from PoW to PoS framework where transactions will be validated by having holders place them as collateral will make miners useless and significantly reduce the cost of energy consumed.
With a hashing power of 20 MH/s and a power consumption of 140W and at a cost of $0.15 kWh and a pool fee of 0.8%, you’ll earn about $28.10 per month, mining ether.
Litecoin is digital currency individuals use to transfer payments directly without the need of an intermediary like a bank. Litecoin transactions are super-fast, it generates blocks four times faster than bitcoin. Litecoin has a limit of 84 million coins.
Whenever a transaction is made in this network, it is grouped with previous blocks. You can use ordinary computers that use Central Processing Unit and/or Graphic Processing Unit to mine litecoins, but you have to join a mining pool or have the right mining rig. Unlike bitcoin that uses Secure Hash Algorithm (SHA-256) that is more complex, litecoin uses scrypt, a memory-intensive algorithm.
Even if litecoin uses a different algorithm, it still requires more gigabytes to mine as compared to bitcoin. You will still need some expensive computer to solve the mathematical problems. This will consume a lot of energy as well.
Considering a hashing power of 20, a power consumption of 130w, cost per kWh is $0.15 and a pool fee of 1%, you will lose $0.07 per day.
Small-scale mining is not a good way of earning from cryptocurrency. However, if you were to buy the ASICs anyway for another purpose, you can give it a try to get some side income, though not that significant. There are coins that are relatively cheaper to mine, like peer coins, but still not good enough as a business.
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