What is Mining and Why Should You Care?

By Gintautas Scerbavicius.

If you are interested in cryptocurrencies in general, you probably came across the term “mining”, and “mining pools” and you want to know how that works.

However, it’s not that simple. Mining as a concept is not as it used to be and you need to know a couple of things before you get into it.

To get a clearer picture of all of this, let’s take a few steps back and start over.

What is mining?

Mining is what makes most of the blockchains work. People or companies run single computers or large computing centers, that confirm transactions in the network. Each transaction needs to be confirmed by several nodes by doing computations. For doing that, miners get rewards in the form of the cryptocurrency they are mining. That can be Bitcoin, Ethereum, Zcash, Monero, or others.

How quickly people mine their currencies depends on how powerful their computers or computing hardware is. The more powerful the mining hardware, the more tokens can be mined as a reward.

How do mining pools work?

In general mining has an element of luck — you might be running your mining hardware for months without getting any reward. This is because due to the mining difficulty you might not uncover the blocs first. It might work vice-versa, you could mine few days and get a reward quickly. This makes mining more risky and unpredictable.

To solve this people and companies have started creating mining pools. A mining pool is when several miners join their computing power and start mining together. As a result they get the rewards more often and share rewards by themselves. In practice it means that the larger the pool, the more steady the result you get by mining. For example by mining in a pool for just a few hours you could already earn a few Satoshis (fractions of Bitcoin), which is comparatively better to most probably getting nothing while mining alone.

The largest pools

Even though the largest pools are concentrated in China and focused on Chinese websites, there are also European mining pools that work globally:

– BitFury: located in Georgia and mining around 15% of bitcoin.

– KnCMiner: located in Sweden and mining around 7.5% of bitcoin.

– 21 Inc: located in the US and mining around 3% of bitcoin.

(Source: Buy Bitcoin Worldwide, 2018)

An alternative: Cloud mining?

Another option similar to mining pools is cloud mining. With this concept, all of your mining efforts are managed by someone — all the mining hardware is placed in one or several locations. People who want to participate in this kind of mining don‘t have to worry about buying the equipment, electricity etc. All of this is provided by the cloud mining operator.

In order to participate, cloud mining participants need to rent or buy the equipment and pay for the electricity costs at the centralized location for the defined mining hardware or mining power. All the mining operations — paying for the electricity, joining the pool, even selling the mined currency is handled by the cloud mining centre. Which is a benefit as it takes less effort to start mining. However it has some drawbacks — you do not control what you are mining, selling, etc. You need to trust the cloud mining operator to work fairly.

The general opinion is that this option is still unsafe as there are a lot of frauds, less control, and inadequate control. However, some providers are recognized as reliable — such as Genesis Mining, Hashflare, Eobot, and Hashnest.

So is mining profitable?

This depends on several factors: electricity costs, cryptocurrency price, and hardware. New hardware, cheap electricity, and a growing cryptocurrency price might make mining super profitable. However through 2018 most cryptocurrencies lost more than 80% of their value, and many new mining machines joined mining, which made mining for many near the break even point, or even unprofitable. This is visible in the hash power charts for Bitcoin when in autumn 2018, hash power dropped — meaning that many miners were switching off their mining operations.

How can miners survive crypto winter?

Instead of selling crypto at an unfavourable rate today, you might want to hold it and wait for a time when it would be better to sell it. You can give your crypto as collateral to a lender like Hodl Finance and get a USD or EUR loan to your bank account. As soon as you return your loan, you get your crypto back. This is the way to finance your mining operations for crypto winter.

HODL Finance is the European digital lending company. HODL Finance issues loans backed by cryptocurrency and other digital assets. Founded by the shareholders of the peer-to-peer lending platform, Savy, HODL Finance now serves clients around the world.