Cryptocurrency Mining: What It Is & How It Works

Cryptocurrency mining is a required action for the Proof-of-Work (PoW) consensus mechanism that creates new coins on a blockchain network, validates transactions that take place, and ensures the security of the network. Since mining is a process that offers block rewards to the miner who solves complex mathematical problems in the fastest way through their powerful computers, it requires intense energy usage.

The time required for miners to create blocks on a network determines how long standard users on that network have to wait to perform a transaction. Transfers between wallets wait on the transaction pool, also known as mempool, before being executed on the blockchain network. These transactions are then used to combine to form a block. These blocks are embedded into the blockchain once they are verified and approved by the devices connected to the network. Transaction data that is completed and processed into a block are loads that are almost impossible to change and manipulate thanks to the network’s strong chain structure.

Although anyone with a computer and internet can mine, the overall mining process is quite complex and require advanced information about the topic, as well as powerful software & hardware.

KEY TAKEAWAYS:

•  Cryptocurrency mining is the process of miners adding a new block to the blockchain / validating transactions by solving complex mathematical problems with powerful hardware in a competitive process.
• Mining is a form of income generation as it allows miners to receive crypto rewards for each validation.
• Proof-of-work is the underlying consensus mechanism for validating transactions and ensuring network security in a network by mining.
•  Cryptocurrency mining requires a good internet connection and powerful hardware to solve equations. Meaning, the process requires a high amount of energy and is not very ecological in that respect.
• There are four different basic coin mining methods; these are: ‌ASIC mining, GPU mining, CPU mining, cloud mining

Requirements For Coin Mining

For coin mining, you primarily need an internet connection and suitable hardware that is powerful enough to solve cryptographic equations and record the acquired data to a blockchain. Mining is based on the principle of generating and confirming encrypted versions of the blocks. These blocks contain the buying/selling transactions performed within the blockchain system.

Things to Know Before Starting Cryptocurrency Mining

In the earlier years, it was easier to compete for coin rewards that individuals could receive from block computations with a normal home computer. However, things have changed a bit as the difficulty of coin mining has increased over time since everyone has become involved in it.

As we said above, coin mining offers block rewards acquired by verifying transactions’ for the smooth functioning of the blockchain. Depending on the difficulty ratio of the hash values of the blocks in a network, the block creation times may vary. For Bitcoin, this time is 10 minutes. This means that a new block is added to the network every ten minutes. In Ethereum, this time is only 14 seconds.

Compared to old times, the most difficult cryptographic equations started to be solved much faster, as thousands of people are now doing the computations that a few people used to do. Therefore, for example, adjustments are made in Bitcoin to evaluate the difficulty of mining by every 2,016 blocks, which approximately takes two weeks. 

So, what should you infer about what we just explained above? What we mean is that as the collective computing power increases to mine coins, mining gets more difficult so that block production can maintain at a constant rate. That’s true, as the computing power decreases, the difficulty level to mine coins decreases. Because the competition for block creation in the network will decrease. Considering all of these, coin mining by using a casual home computer will almost mean zero profit in today’s coin mining circumstances. 

4 Popular Crypto Mining Methods of 2022

Due to its increasing popularity and difficulty, there are different types of coin mining nowadays. However, each method has its own advantages and disadvantages in terms of profitability, cost, and difficulty.

So what are these methods? Today, there are four main methods used for coin mining:

• ‌ASIC Mining
• GPU Mining
• CPU Mining
• Cloud Mining

‌ASIC Mining

The software and high-tech hardware involved within ASICs (Application Specific Integrated Circuits) allow performing cryptocurrency mining. ASIC devices function with many processors and have high energy requirements due to high computational capacity. Therefore, to make mining based on ASIC devices sustainable, miners are willing to pay high energy bills and choose their location accordingly.

Bitcoin and Litecoin are cryptocurrency examples that can be obtained with ASIC mining devices since both coins require high computational capacity. Most miners work with Antminer, Dragonmint, and Avalon brands to obtain Bitcoin.

Antminer series, Dragonmint, and Avalon brands are coin miners starting from 500 to 1000 dollars. However, since the demand for many mining devices is very high, prices can rise regularly and fall according to the situation of Bitcoin.

Note that you cannot directly use the purchased device. First, you need to install it and connect it to the network or mining pool. You should also calculate the electricity requirement and bills caused by the device. Due to these devices, which work very loudly and consume a lot of electricity and emit heat, you can experience both the temperature you do not want to deal with and the electricity bill may cost you at unexpected levels.

GPU Mining

The processors of the computers’ graphics cards are called the Graphics Processing Unit (GPU). GPU mining, which is cheaper to set up the system than ASIC devices, is a method used by those who aim for small-scale coin mining and miners who combine multiple graphics cards to create Rig systems.

However, what is a “Rig” though?

Rig systems are customized computers designed to increase the efficiency of mining processes. A rig system involves all the common components like CPU, RAM, storage, etc. However, in terms of GPU, what makes a different Rig system from a normal PC system is that Rigs have to include a lot more powerful GPU’s, and the count should be more than one. The higher the number of GPUs and the more power they have, the more coin you can mine.

GPU mining depends on where transactions are verified through the graphics card processors’ calculations. Since GPU is more computationally-oriented than computer processors and more functional in this manner,  GPU-based mining focuses on verifying transactions in mining-based cryptocurrencies such as Ethereum, Zcash.

CPU Mining

It is possible to mine with a CPU. In fact, CPU mining can be done even with an ordinary processor that everyone uses at home (although your annual earnings will be around 10-20 dollars on average).

While lucrative at first, CPU-based mining is now almost entirely replaced by GPU-based mining, as the number of people contributing to solving cryptographic equations increases and the number of rewards decreases per individual. In particular, obtaining very popular cryptocurrencies such as BTC and ETH with CPU mining is as difficult as mining activities on a planet outside our galaxy system.

However, CPU mining has not come to the end of its road. Computer processors are used by many people today in Proof of Stake (POS) mining. Without the need for high energy consumption, as long as the mining software is functional with an adequate amount of cryptocurrency in the wallet, CPU-mining for POS can generate profit. 

Cloud Mining

Cloud mining is an alternative method for coin mining investors who do not have sufficient hardware, time, knowledge, or capital. By renting processor power from cloud mining services, individuals can mine cryptocurrencies in the mining pool they want. 

Companies that rent processors with cloud mining, considering different cost aspects such as hardware, software, and maintenance, offer users a package for a fee on a periodic basis.

Here is how cloud mining works: When you choose cloud mining, you actually buy hash power from the mining farm. While making the purchase, you specifically determine the power you need. For example, when you want to buy 25 TH/s bitcoin mining power, the hardware that can offer this power is rented to you for a certain fee. If you make a one-year lease for this hardware, you earn a profit by subtracting the rental fee and the consumption/maintenance costs of the hardware from the mining income for one year.
It’s that simple.

Learn more about cloud mining and the best 10 cloud mining platforms.

Coin Mining: What Should I Know Before Investing?

Crypto mining is a type of investment that requires a certain amount of time to reap the benefits after the initial investment is made. This timeframe will vary depending on the type of mining, the type of cryptocurrency, and prices. In addition, since the price required for devices, components, and electricity bills is not the same in every country, it is necessary to consider this before investing. However, if we give a general number, profitability in terms of electricity expense can range from $0.03 – $0.08 per kWh. 

To have a satisfying amount of profit from crypto mining, miners should have the technical knowledge to operate the devices before investing. Besides that, they should have sufficient hardware and well-planned infrastructures, such as a suitable room where they can place the devices that can be overheated and appropriate refrigerating devices to cool them down.

On the other hand, the coins you will get with processor power are directly proportional for many scenarios. However, it will not be true under all circumstances to say the same for the profit you will get. Remember that increased processing power means higher electricity consumption and more energy demand, heat, and cooling devices. In addition, in this sector, where computer malfunction and burning of the part are quite possible, there is always a possibility of replacing components again and again until the system gets stable. 

In short, as the number of coin systems/devices increases, so does time spent operating, controlling, and maintaining the devices increase as well.