Cryptocurrency mining has become a very hot topic over the past year or so. No doubt you will have heard all sorts of reports in the news related to this recent phenomenon.
There are people and companies who are making millions of dollars through their Bitcoin operations, with entire warehouses being filled with mining machines which work around the clock. The electricity consumed by these machines across the world is greater than that used by entire countries such as Singapore.
It is clear that cryptocurrency mining is here to stay as it is an integral part of digital currencies since it allows transactions to be verified and processed. It is now a very competitive space as it usually requires significant investment in order to earn significant revenue from cryptocurrency mining.
This article will give you a background to cryptocurrencies, explain the role that miners have in the entire process and detail how you can get started mining if you wish to do so.
What Are Cryptocurrencies?
In very basic terms, cryptocurrencies are forms of digital money that have been created with the goal of being secure and largely anonymous. This is achieved through the process of cryptography whereby eligible information is converted into a code that is very near unbreakable.
This allows transactions to be highly secure rather than when using traditional fiat currency (paper currencies such as the US Dollar or the Euro etc.) as there is no significant paper trail that relates to a given person.
While transactions or cryptocurrencies can be tracked by looking at the wallet addresses used in these transactions, there is no proper way to link these random wallet addresses with a given person.
The Role of Cryptography in Cryptocurrencies
Cryptography utilizes a variety of different techniques from the fields of computer science and mathematics, having evolved over time to allow for the safe transfer of information and data. Even as far back as the Second World War cryptography was highly important as it helped the military and intelligence agencies send coded messages that were hard to crack.
Cryptography in modern times is used to ensure that communications, money and information are kept in a secure manner.
Therefore, cryptocurrencies give the user the ability to make secure payments without having to deal with a bank. These transactions are generally much faster, cheaper and more straightforward to execute compared with traditional banking.
For example, making a bank transfer to another bank account usually takes a certain number of working days. Cryptocurrencies usually allow you to send payments that are processed within half an hour and can be processed on any day of the week.
Some of the more popular cryptocurrencies on the market today include the likes of Bitcoin, Ethereum and Ripple.
Bitcoin is the most well-known cryptocurrency as it was the very first one to be developed back in 2009. These days there are over one thousand digital currencies, with more being added on a daily basis.
How Do Cryptocurrencies Work?
In order to operate, cryptocurrencies need a blockchain. This is a ledger that is shared across an entire network of computers.
It is effectively a document that is updated in real time and is completely public and transparent, meaning that all cryptocurrency holders can view it any time that they wish.
All transactions that are processed will be recorded on the blockchain, as well as all denominations of a cryptocurrency that is currently circulated will also be recorded. For the blockchain to run successfully, it requires the help of cryptocurrency miners who need to utilize powerful computers in order to allow these transactions to be verified and processed before the receiver gets their funds.
Every time a transaction is made, the function will be updated which allows the transaction information to be verified as being authentic. This process means that all transactions will be secure, and payments will be successfully completed in a safe manner.
Why Do People Mine?
As an incentive for the miners to constantly verify transactions, they are rewarded with newly minted cryptocurrencies as payment for each block of transactions that they have verified.
Of course, supply and demand affect the value of each cryptocurrency and there is never any interference from a centralized group or a fixed value implemented.
Just like with stocks in the traditional financial markets, the buyers and sellers on a given platform will agree upon a given price. Usually it will be guided by the prices of this cryptocurrency on the other exchanges.
There is no third-party intermediary involved in cryptocurrency transactions as it is a peer-to-peer payment, so there is no credit card fee.
As well as this, the identity of the two parties is kept secret. The transaction itself will be publicized for all of those on the blockchain network but, as mentioned, no names will be associated with these transactions.
The process of acquiring cryptocurrencies through an exchange involves depositing fiat currency and purchasing Bitcoin etc. with these funds.
What Does Cryptocurrency Mining Look Like?
There are two main factors that are associated with the mining of cryptocurrencies. These are the addition of new transactions onto the blockchain in order to secure and verify the transaction and having new currency released. All individual blocks that miners add need to have a proof-of-work (PoW).
To partake in the mining of cryptocurrencies, you will need a high-powered computer and a special software program. The hardware will allow miners to stay up to pace with their competitors in the market when it comes to finding solutions to the complicated math problems associated with mining cryptocurrencies.
Essentially, to verify a transaction, a mathematical equation must be solved. This is why significant computer resources are needed. The process itself of solving a block involves utilizing cryptographic functions.
A hash value is a value that has a fixed length and is used to uniquely identify data. What miners do is they utilize their computer to drill down to the hash value that is lower than that of the target, with the first miner who cracks it becoming the one who will mine the block and subsequently be rewarded for this process.
Currently, when a block is mined, the reward is 12.5 bitcoins. In the initial stages of cryptocurrency mining it was only enthusiasts of cryptography who were processing and verifying these transactions.
Can it Be Profitable?
Some of the world’s leading institutions have gotten involved in this space which showcases what sort of opportunities are available to make significant revenues. The likes of the Bank of New York Mellon Group have been operating their own internal blockchain platform since the beginning of 2016 for the United States Treasury bond settlements.
As this platform has been kept extremely private, it has been shielded by regulatory oversight until the organization decides to potentially open this platform to their clients and use it in a commercial fashion.
If you want to get involved in mining cryptocurrencies, you will need to invest in a mining kit which could range drastically in price, even for an individual unit. Most of these kits include a fan, cabling, memory, a power supply, a processor and graphics cards.
Usually, these kits cost anywhere in the range of $2,400 and $3,800 and you can buy them on the likes of the Amazon Marketplace. The graphics cards used are often the same types that are using for PC gaming, which has led to drastic price increases in these cards as the demand for them have gone through the roof while the supply has been struggling to keep up with these levels of demand.
Currently, the most popular form of mining hardware is the AntMiner S9, AntMiner S7 and the Avalon6.
Normal GPUs do not have enough power on their own to operate mining software, which means that a lot of miners have been switching their preference to circuits that are application-specific, called ASICs.
In order to provide a solution for this issue, the likes of AMD and NVidia are believed to be developing their own GPUs that could be solely focused on providing enough power for miners.
When it comes to mining hardware for everyday consumers, the two most popular companies are Bitmain and Canaan. There are also others looking to enter the market, and there have been rumors for a while that electronics giant Samsung is getting ready to enter into the market.
Bitmain is located in Beijing, China and in addition to producing the mining hardware they also mine cryptocurrencies themselves in their facilities.
Most mining pools are found in China, with approximately 81% of the total network hash rate being found there. This is interesting as China has been strict on cryptocurrencies to date, having placed severe restrictions on the trading of digital currencies in their country as well as putting a ban in place for any company looking to fundraise using an initial coin offering (ICO).
An ICO is an event where a company will release their own digital token (cryptocurrency) that can be used on their platform, which is usually tradeable on the exchanges.
The goal of this is to circumvent the traditional venture capital route and raise funds by selling these tokens to investors. This has become a lucrative market over the past year or so and shows no sign of slowing down.
It is also interesting to see how significant China’s presence is in cryptocurrency mining, as the main aim of digital currencies is to be decentralized, whereas China has always been noted for being a centralized country.
Once cryptocurrencies started to take off in popularity and their values started to increase, it became somewhat of a lucrative business that attracted all sorts of people and companies to get involved in this space.
This has led to these parties having warehouses full of hardware that are working around the clock mining these transactions.
Once companies began to get involved with their vast resources, many individual miners were not able to stay competitive in the market. Therefore, they started to team up in open pools which allow them to combine their resources in order to compete on a more level playing field, though they have to share the profits with their fellow miners.
The Future of Cryptocurrency Mining Hardware
For firms like NVidia and AMD who are at the forefront of the gaming chip market, it may not be a wise decision to move completely away from what their core business is (gaming) and focus all of their efforts on cryptocurrency mining.
There will be extensive costs associated with the research and development, manufacturing etc. of releasing new types of GPUs which have been created solely for mining and to go after the market position of the ASIC chips.
The ASIC chips market is dominated by companies in China who are well known across many industries for operating in a very low-cost market environment, making them extremely hard to compete with, especially if the goods provided are on a similar level of quality.
This is why the figures may not add up enough for these companies when it comes to releasing their own specific product in the long run.
There are also constant rumblings from governments and regulators about the regulation of this sector and any changes could have significant effects on mining. For example, China has enacted a crackdown on cryptocurrency trading and banned ICOs from their country, and other countries have similar stances.
Even those who have not brought in any negative rules and regulations regarding cryptocurrencies have issued warnings to people about the risks of investing in these currencies. Many well known figures such as Warren Buffet and Charlie Munger have also called Bitcoin a bubble.
There is also the issue of taxation in the world of cryptocurrencies, something that needs to be addressed soon by the authorities as it is believed that most crypto holders are not reporting their earnings to the tax authorities.
What Types of Coins Can Be Mined?
While back in 2009 you only had the ability to mine Bitcoin, there is now a multitude of different options for you to choose from. These days it is generally not advised that beginner miners get involved with Bitcoin mining, especially if operating on a small scale.
The maintenance costs and up-front investment do not make sense, especially given the huge amount of computer power needed to stay competitive in this process. For the most part, this industry will be tied up by the large-scale companies going forward.
Some useful options for beginner miners may be the likes of Litecoins and Dogecoins, which are scrypt-based and are perhaps the most cost-effective options for beginning miners. Mining Litecoins could results in daily profits of anywhere from $0.50 to $10 depending on the market value on the given day, presuming the utilization of standard consumer level mining equipment.
Other coins would generate somewhat smaller levels of profit, but on a daily basis more and more people are entering into the mining sector.
As the popularity of a given cryptocurrency rises, the harder it will be to stay competitive mining it, as more advanced technology will be needed to sustain the revenue levels you are earning.
This means that you will either have to upgrade to more expensive equipment when this happens, or you will have to turn your attention to another coin that fits within your parameters.
Note that in some nations cryptocurrency mining is actually illegal, so make sure that you are fully aware of all the rules and regulations related to mining in your country.
Is Mining Cryptocurrencies Worthwhile?
If you are looking at crypto mining more as a side hustle or hobby, it could definitely be worth getting involved.
It may allow you to generate a few extra dollars per day and most of the more mainstream cryptocurrencies are easily accessible when it comes to mining. Average hardware costs are around $1,000, which is usually recouped within the first two years of constant mining.
If you are looking at mining as a way to significantly bolster your current income level, then this is probably not the option for you unless you are able to invest in top-quality mining rigs.
Cryptocurrency mining is not a way to get rich quick, it is more of a way to make smaller, consistent profits. The main way to create decent revenue with mining is by being able to scale, with dozens of mining computers working around the clock.
A lot of beginner miners forget to take into account the electricity costs that are built up in order to run this equipment day and night.
The most effective miners will be looking to keep the costs of electricity below $0.11 per kilowatt hour. If they are using four GPU video cards, they will be able to mine about $8-10 worth of cryptocurrency daily, which would be between $250 and $300 per month.
As mentioned earlier, the main things to think about before starting mining are the upfront investment you need to make for the processors or graphics processing units as well as what the market value of the coins are at any given time.
While there may be the odd coin that sees significant growth like that of Bitcoin in 2017, this is not something you can bank on happening. While it is a bonus if it does happen, you shouldn’t be relying on this occurring.
Finally, it is extremely important that you have adequately conducted your research and you are dealing with the mining of legitimate coins and not ones that are scams.
How to Get Started with Cryptocurrency Mining
For most of the major altcoins, you will need just under a dozen items in order to get started.
You will need a coin wallet, which is effectively a free private database for your coins. This will be protected by a password and will allow you to store all your earnings, as well as providing a ledger of all of the transactions.
You can utilize free mining software such as the one provided by the team at AMD, which usually incorporates stratum and cgminer.
Mining Pool Membership
You should sign up for membership with a mining pool online, which is where individual miners band their computing power together in order to generate higher profit levels and ensure that income levels stay stable.
Cryptocurrency Exchange Membership
You should join a cryptocurrency exchange where you are able to sell your coins for fiat currencies or trade them for other cryptocurrencies. You need a very reliable internet connection that is available around the clock, ideally with a speed of at least 2 megabits per second.
You need to have a location to set up your hardware, ideally somewhere that is air-conditioned or adequately cool. You will need a desktop computer or one that is custom-built for mining.
If you are using a computer for mining, it cannot be used for anything else at the same time. This is why the optimal approach is to have a sole computer for mining that you do not need for anything else. The likes of handheld devices, gaming consoles and laptops are not powerful enough to create any income.
You will need an ATI graphics processing unit (GPU) or a device specialized for processing called an ASIC chip. Generally, these prices vary largely and can be gotten second-hand for about $90 and can cost as much as $3,000. These chips are the workhorse of the entire system.
You will need some sort of fan to keep the computer cool. As it will be working intensively for a long time it will heat up significantly, so having a proper cooling strategy in place is vital.
Finally, you need to constantly stay up to date with all the developments in the mining space to ensure that you are optimally maximizing your profits.
This includes keeping an eye on the latest changes in technology and techniques to optimize the amount of coins you are able to mine. By dedicating a few hours every week to studying, you can reap decent rewards in the long run.
Risks Involved in Cryptocurrency Mining
Of course, just like any venture, there are going to be risks involved in the process of cryptocurrency mining.
This risk can even be significant despite the potential rewards that are available. Due to the lack of regulations in the sector, it is hard to predict where a given cryptocurrency will be in a few days, let alone in a few months or years.
There is also the chance that your national regulator will bring in rules that prevent you from mining or there will be some strict regulations put in place when it comes to dealing with digital assets inside of your jurisdiction.
It is important that you are fully aware of the risks of cryptocurrency mining before you begin.
Keep Yourself Well Protected
One of the most fundamental risks is not keeping your mined coins well protected. There are a variety of ways you can have issues accessing your coins.
You may have locked yourself out of your wallet due to you forgetting your password, physically losing a hardware wallet, having your hard drive broken or the online wallet provider you are using going out of business or getting hacked.
If you are thinking about getting involved with a mining pool, it is important that you complete your due diligence and ensure that they are reputable and operated by honest people. The last thing you want to happen is to have your earnings skimmed from you, or have all of your funds stolen.
You don’t want to forget about the electricity costs your mining will generate, as this is very often the reason why miners are unprofitable.
In general, $0.14 per kilowatt hour is the maximum rate you should be looking at paying when you are mining cryptocurrency. Mining most digital currencies will not be profitable at any rate higher than this.
There is a risk that some platform you are part of, whether it is an online wallet, mining pool or exchange, gets hacked and all the users’ wallets on these platforms are emptied, leaving you with nothing to show for your efforts. This is why you should regularly withdraw your coins from your mining pool account and exchange-based wallet.
Finally, as the cryptocurrency markets are so volatile, you can never be sure of the direction of the price of a given digital asset. Your coin value could drop significantly, making your venture go from being profitable to making a loss in the blink of an eye.
How Can You Minimize Cryptocurrency Mining Risks?
While naturally, there are no ways in which you can make your cryptocurrency mining completely risk free, there are certain steps that you can take to help minimize the risks as much as possible.
Some of the best ways to protect yourself from potential hacks is to implement proper habits and make sure you have the right hardware. You want to utilize a hardware wallet such as a USB stick or detachable hard drive that is not connected to the internet, so it cannot be hacked.
It should always be kept away from your network and computer when it is not in use and should be stored in a safe location. You should not keep too many funds in storage online at any given time before withdrawing them onto your hardware wallet in case there is a breach in security on the given platform.
You should get into the habit of having your wallet backed on a regular basis. While it is not advised that you write down your password in case it falls into the wrong hands, sometimes this will have to be done due to the complexity of it.
If you are using say a desktop wallet, make sure that it is kept on your personal computer and not on the device you are using to mine, as this helps to reduce some of the risks.
If you are looking to join in a mining pool, you should ensure that you are dealing with people who are reputable. The pool should have plenty of active members and should be formed of people who will keep you on your toes and will constantly ensure that the operations of the pool are maximized in the best way possible.
Finally, there are certain energy providers who will allow you to lock in a specific per kilowatt hour fee for an extended period of time, say a year or two. If this option is open to you at a price of $0.14 per kilowatt per hour or lower, this could be an ideal plan.
This will allow you to have your electricity costs fixed so you won’t have to worry about changing electricity prices which could affect the profitability of your mining operation. It also takes one volatile variable out of the equation when it comes to planning and forecasting your revenues as a business.