Everything You Should Know About Cryptocurrency Mining
Over the past few months, crypto market capitalization has multiplied and the prices of many cryptocurrencies have reached new highs. As a result, more and more people started considering mining as an option to benefit from this rally.
But what is mining and what is needed for it? Only video cards or laptops? Let’s try to figure this out.
Simply put, mining is a process where a machine performs certain tasks to receive cryptocurrency as a reward for its work. This mining concept is also known as the Proof of Work algorithm.
But what are these tasks? Basically, it is solving mathematical equations and scenarios. The miner’s equipment is trying to solve a math problem and find an answer that must be in a certain range. If the miner finds the answer, then a new block will be created and added to the blockchain.
A block reward is sent to the first miner who found this block. This reward consists of a small amount of newly created coins and fees for transactions that the miner decided to add to their block. Then the process is repeated — miners start looking for a new block and add new transactions.
There is high competition between miners. The more computing power a miner has, the more chances that their hardware will be able to find the necessary solution and receive a reward. For the same purpose, a lot of miners are united in so-called pools. In mining pools, the reward is distributed among all participants, depending on their contribution to the process of solving the problem.
Not all coins are available for mining, as not all use the Proof of Work algorithm for consensus. Coins that support mining may have different hashing algorithms and mining difficulty. Therefore, it is necessary to select the appropriate equipment for the efficient mining of a certain coin.
What are the mining methods?
There are several main mining methods — CPU, GPU, ASIC, and cloud mining. Briefly about each of them. CPU mining involves using PC processors. In the early days of crypto, this was a fairly popular mining method, but now it has practically outlived itself due to its extremely low efficiency. The CPU method has been replaced by GPU mining.
Miners predominantly use GPU for mining because of its efficiency in the context of hash speed and rig price. Most often, GPU miners use several video cards for mining at once and create so-called mining farms.
But it is also possible to use an ordinary video card that is installed on the PC. There are no significant differences between mining on the home computer and the farm, the difference consists only in the number of GPU devices and the size of the profit that miners can get.
Most GPU miners try to use the latest generation of video cards for mining to stay efficient and predominantly switch to new devices when new versions become available.
ASIC is a piece of hardware that is specifically designed for crypto mining. ASICs are much more efficient than GPUs and CPUs, but they are also the most expensive.
There is some negative attitude towards ASIC miners in networks dominated by GPU miners because ASICs can introduce an imbalance in the network. That is why some coins cannot be mined with ASICs. At the same time, ASIC is the only effective option in networks where there are an extremely high mining difficulty and hash rate, for example, in the bitcoin network.
All the above-mentioned mining methods imply that miners will buy and deploy mining equipment on their own. But there is a way that allows miners to borrow computing power — cloud mining. With cloud mining, miners rent equipment for a certain period and pay another company for it. Generally, companies that offer cloud mining usually have huge mining facilities with multiple mining rigs at their
disposal, so it can be good for both miners with big ambitions and those who want to rent a rig for a test. All mining earnings (minus the electricity and maintenance costs) are credited to the miner’s wallet.
Cloud mining can be suitable for those who do not want to dive into the hardware-related part of mining and want to use ready-made equipment. However, it is important to double-check how reliable the cloud mining company is.
What do you need to start mining?
First of all, you need to decide what mining equipment to use. It must be prepared in advance by installing the necessary mining software for a specific coin. In addition, the software helps miners track important parameters such as hardware hashrate, temperature, fan speed, average hashrate in the particular cryptocurrency network, etc.
Also, miners have to select the cryptocurrency wallet for receiving mining rewards. If you need to exchange the mined coins for another cryptocurrency or fiat, for example, convert LTC to BTC, then you should also think about searching for a crypto exchange with multiple trading options.
If you are not going to mine crypto on a large production scale, then it is worth considering joining a pool where miners receive a reward depending on their contribution. Otherwise, you will compete with other miners and pools alone, which may be ineffective in some cryptocurrency networks.
Besides, miners should take care of the space for storing mining rigs. Mining farm consumes a lot of electricity and can make a lot of heat and noise. Therefore, in the case of large farms, miners might need fans and other cooling equipment as well.
And last but not least is knowledge. If you want to become a miner, you need to figure out how to set up the necessary equipment and calculate what coin to mine depending on the equipment and electricity costs. Also, to stay an effective miner, it is important to constantly monitor cryptocurrency prices and mining difficulty to find the most optimal way for earning crypto.
How to decide what to mine and whether it is profitable?
Hardware price is not the only factor that a miner should take into account when calculating mining profitability. Mining equipment operates 24/7, and this carries a significant amount of electrical power. In this case, not only the electricity costs are important, but also electricity consumption per mining rig.
One of the determining factors in the cost of electricity is the country where the miner is located. For example, the largest Bitcoin miners are located in China close to hydroelectric power plants in order to have access to cheap electricity and optimize their costs. To calculate the mining profitability, special calculators are mainly used that take into account a lot of parameters. Some of these metrics are:
● Mining equipment specifics (mining type, hashing power, power usage)
● Electricity costs (depend on country and place for mining)
● Cryptocurrency network features (hashing algorithm, mining difficulty, block reward, block time, etc)
● Cryptocurrency price and its volatility
Such calculations may seem complicated at first glance, but it is still worth diving into this for efficient mining. Thanks to these calculations one can understand how profitable the existing equipment is and in which cryptocurrency networks it can show its best.
There is no such thing as right or wrong cryptocurrency to mine. Everything rests on the efficiency and miner’s desire. For example, if you like Litecoin, want to support the network and it’s profitable for you, then you can just start mining and not delve into the specifics of other cryptocurrencies.
However, if you want to get the most out of your hardware, then it’s worth keeping a close eye on the cryptocurrency market. The price of cryptocurrencies is constantly changing, and if something is profitable now, it does not mean that it will be profitable in the future.
How to choose a mining pool?
While solo mining gives you the opportunity to claim the entire block reward, this is not always profitable. Mostly in cryptocurrency networks, it is the mining pools that are dominated since there are more chances to get a reward if you are a part of the pool.
Mining pools consist of thousands of miners who are trying to get block rewards together, while solo miners are ones against all. Pools are especially popular with small and medium-sized miners as they allow for more steady and consistent mining rewards.
Here are some things to look out for when choosing a pool:
● Reputation — before joining the pool, you should find out what current members think of it
● Pool hashrate — compare the total cryptocurrency network hashrate and the pool’s hashrate in a given network to understand how often a pool can find a block and receive a reward
● Pool’s fees — when a block is discovered, many pools charge a commission, but some do not.
● Uptime efficiency — check that the pool’s uptime is 99.5% or higher and that it has backup servers in the case of an outage
● Pool’s threshold — using low effective equipment may not be feasible in some mining pools
● Payout method — familiarize yourself with the main payment methods and what the pool itself uses
● Location — make sure that pool’s servers are near you to quickly get information about the situation in cryptocurrency networks and the pool
Finding a pool that will be perfect in all respects is almost impossible, so it is always a compromise. Many large mining pools even have their own support in case of technical issues, so if you have any questions, you can address them directly to the pool representatives.
What are the advantages and disadvantages of mining?
One of the main advantages of mining is that the cryptocurrency market is still in its early stages of development. And the earlier miners join the network, the more benefits they get from it. Therefore, many miners join the network not only due to current profitability but also because they are confident that the cryptocurrency will be more valuable in the future.
Let’s take a look at bitcoin as an example. Due to halvings, the amount of new coins in the block is decreasing and that increases the scarcity of the asset. Those who mined bitcoin in 2010 on a laptop and received 50 BTC for it benefited significantly from the current price of the main cryptocurrency. Now miners are launching huge mining farms to receive a reward of 6.25 BTC. The next 10 years will show whether it is justified.
One of the main disadvantages follows from this. Given that mining certain cryptocurrencies is becoming more and more difficult and costly, this creates a higher entry threshold for miners every year. Therefore, if the miner does not constantly adapt to changes in the industry, they will become less and less efficient.
But if the miner can remain in positive territory, then one becomes their own boss. Miners are left to themselves and only they decide in which direction to move. Therefore, if you are looking for financial independence, then mining can be a great way to achieve this goal.
As one of the disadvantages, the current attitude of society towards mining can be recalled. According to some experts, cryptocurrency mining requires too much energy and this affects the climate. However, the eco-friendly issue of mining is rather related to the energy sources that people mainly use, not to mining itself. With the gradual transition to renewable energy sources such as solar, wind, and hydropower, such an issue will be sidelined.
Mining is a very flexible process where everyone can find a suitable path. The answer to the question of what to mine depends only on the miner’s ambitions and
capabilities. The cryptocurrency market is diverse enough for efficient mining both for small miners with a few video cards and large players with industrial capacities. The main thing is to study the issue in advance and assess your capabilities