What is Cryptocurrency Mining and How To Do It Better

Collins Brown
MARKET Protocol
Published in
6 min readMay 7, 2018

Most people initially consider Bitcoin to be just “silly magic internet money,” but if you take a more in-depth look into its underlying technology, it’s much more.

Bitcoin is a protocol: a set of rules that replaces the rulers. It’s a network.

A network is a group or system of interconnected people or things, therefore the strength of a network depends on the relationship between its participants. In the case of mineable cryptocurrencies, the community consists of many participants such as miners, consumers using the currency for transactions, and investors.

Securing the blockchain

Cryptocurrency mining was introduced to solve a challenging problem: double spending. How can the recipient of digital funds ensure that the payer has not already spent the money and maliciously not told them?

To add a new block to the chain, a miner has to solve a cryptographic proof-of-work (POW) problem. This is impossible to solve without applying large amounts of computational power. Mining is essential for the immutability of the blockchain. The more power used for proof-of-work, the more secure the digital ledger will be.

If we consider things from that perspective, Bitcoin and Ethereum are becoming increasingly more secure. According to Blockchain.info, the amount of hash rate, or how much computational power the entire network is consuming to solve a block for these two networks, has grown tremendously over the past 12 months.

The estimated number of tera hashes per second (trillions of hashes per second) the Bitcoin network is performing. Source: blockchain.info
The estimated number of giga hashes per second (billions of hashes per second) the Ethereum network is performing. Source:etherscan.io

Since Bitcoin was created, many other mineable cryptocurrencies and different POW algorithmic functions have been introduced. However, the principle remains the same: create a Byzantine fault tolerant system and reward participants for making it stronger. By using their computational power and making the network more secure, miners earn newly created cryptocurrency as their reward.

Satoshi Nakamoto introduced the mining difficulty adjustment algorithm to maintain an equilibrium of incentives for miners, security of the blockchain, elements of competition, and decentralization. The goal is to ensure that the average time it takes to solve a block remains at approximately 10 minutes to prevent the system from forking. It is adjusted after every 2016 blocks based on the average execution time for the prior 2016 blocks, or roughly every two weeks.

The impact on mining profitability

The history of mining highlights that all features made in favor of higher network security, have pushed the equipment competitive feasibility beyond Moore’s law. In less than half a decade, the system went from solo mining in bitcoin using a common computer i7 CPU to specially designed ASIC chips and pool mining.

Recently, the biggest ASIC-based mining equipment producer, Bitman, launched an entirely new series of miners for different mining algorithms and currencies like Ethereum or Monero. For the individuals that mine for a living, the battle to remain profitable is never ending.

Mining profitability depends on many factors beyond the initial cost of equipment, including the above adjustment algorithm and the total network hash rate versus the hash rate of a single miner in a mining pool. However, the biggest influence on profitability is the price of the mined cryptocurrency.

Since this time last year, the price of Bitcoin has increased by tenfold but is also about 50% cheaper than it’s all-time high. Bitcoin daily volatility is still much greater than gold or other major currencies.

Since the price is still up compared to last year, the miners should be happy, right?

Wrong.

The difficulty of mining and the cost of hardware increased as well. In fact, mining difficulty has reached an all-time high, while profitability sits around one-fourth of what it was at the beginning of this year:

Bitcoin mining profitability — USD/day for 1TH/s. Source: https://bitinfocharts.com

This is primarily due to two key factors:

  1. The price has declined from about $17,000 to anywhere between $6300 and $7000.
  2. The estimated number of tera hashes per second (trillions of hashes per second) performed by the Bitcoin network has increased from approximately 13.75 million TH/s to 28.51 million TH/s within the same time frame. This caused the difficulty level to increase by 82% since the beginning of 2018. (source: https://blockchain.info).

As seen in the graph below, this has greatly affected the revenues of miners:

Total value of block rewards and transaction fees paid to miners. Source: blockchain.info

Consider the following:

  • the amount of hashing power and number of miners has increased;
  • the block reward amount has stayed the same since bitcoin halved in July 2016 and;
  • the total amount of transaction fees has reached its lowest point in the past 12 months

With this combination of factors, and lacking a price increase in the near future, Bitcoin miners will face several challenges in running a profitable mining operation. Without being sure of the next “bull run,” miners need a proper hedging mechanism against price declines more than ever before.

The current state of hedging mechanisms for miners

For making the network more secure, miners earn block rewards and fees from transactions associated with the block they solve. In many cases, mining operations are consolidated into large collections of hardware called mining farms. High electricity consumption and demands for specific storage conditions create relatively high operational costs. The amount of coins that miners will need to sell to cover their expenses is primarily dependent on the current market price.

In the midst of the latest market correction, combined with a lack of general public interest about purchasing cryptocurrency, the need for proper risk management tools are necessary.

Bitcoin futures were supposed to be a possible solution. However, they are limited to Bitcoin/US dollar and have a high barrier or restricted entry. For instance, in order to trade futures on CME, “you must open an account with a registered futures broker who will maintain your account and guarantee your trades. In the futures business, brokerage firms are known as either a futures commission merchant (FCM), or an introducing broker (IB)” according to their website FAQ.

Even if one has the opportunity to trade bitcoin futures, the initial margin is high. Retail brokers, like Interactive Brokers, have even higher barriers, with additional margin requirements for US residents.

BitMEX is an example of service available to only certain jurisdictions. If you are a resident of the United States of America, Cuba, Crimea and Sevastopol, Iran, Syria, North Korea or Sudan, you will be restricted from using their services.

Bitcoin is not the only mineable cryptocurrency where miners face these issues. What about the ones mining Ethereum, Zcash, Monero and other altcoins?

MARKET will enable miners to hedge their exposure by allowing them to initiate a short position in a derivative of that token. The protocol is open source and free to use. Since all contracts are fully collateralized before trading, it is trustless by design. Through the utilization of smart contracts, the protocol will allow miners to effectively secure their profit margin at a specific point in time, creating more secure revenue streams.

Flexible, trustless, liquid, secure, open source and more — visit http://marketprotocol.io for further information, follow us on Medium and Reddit for future announcements and join our Telegram chat to ask us anything!

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Collins Brown
MARKET Protocol

Co-Founder of MARKET Protocol | Powering decentralized derivative trading and exchanges | www.marketprotocol.io