What is Cryptocurrency Mining?
The popularity of cryptocurrencies is increasing by the day. Those who delve deeper into how cryptocurrencies work need to learn the fundamentals and be able to answer the basic questions such as, “what is mining for cryptocurrency?” or “how does mining work?”. This post discusses crypto mining and how cryptocurrencies are generated.
Cryptocurrency has become a global topic of discussion today as it is increasingly being considered a new form of currency and an investment instrument worldwide. Concepts like decentralization and blockchain networks have gained prominence because of cryptocurrencies. Today, various businesses accept cryptocurrencies just like they accept fiat currencies. To understand their underlying function, one needs to be familiar with the concept of ‘crypto mining’. The following discussion explores how cryptocurrency mining works.
So, What is Cryptocurrency Mining?
Although thousands of cryptocurrencies exist today, we can understand the concept through Bitcoin, as it is the most common cryptocurrency. Fundamentally, it can be said that cryptocurrency mining is the creation of new cryptocurrency coins. The generated coins then enter circulation. Bitcoin mining is crucial to the blockchain ledger’s maintenance and development because it is the process that confirms the transactions of the decentralized network.
Just as mining gold and minerals require sophisticated machines, cryptocurrency mining involves using advanced and sophisticated hardware to solve complex computational math problems. Hence, the name “mining.” Cryptocurrency mining is a complex, costly and painstaking process. Still, it has a magnetic appeal for investors despite these negative aspects because of the hope to earn cryptocurrency for their work with crypto tokens. In addition, miners are rewarded with tokens for validating and monitoring crypto transactions. This reward motivates people to become a miner.
How Cryptocurrency Mining Works
So, how do you mine for cryptocurrency? If cryptocurrency mining were easy, everyone would have become a miner. However, Bitcoin mining involves miners solving complex math puzzles, also referred to as Proof-of-Work (PoW), the consensus mechanism behind the process. The below information provides a brief idea of how to start mining cryptocurrency.
Bitcoin miners try to guess a 64-digit hexadecimal number (comprising the numerals 0 to 9 and the alphabetic letters A to F) less than or equal to a target hash in the Bitcoin’s PoW algorithm (SHA256). The mining systems use brute force comprising multiple CPUs stacked together to guess hashes at variable rates (mega-hashes/sec, giga-hashes/sec, tera-hashes/sec, etc.). The guessing involves all the possible 64-digit combinations until they arrive at a specific solution. The system that comes the closest to guessing the target and is equal to or less than it gets rewarded with Bitcoin (6.25 at the prevailing rate).
Here is an example to explain the crypto mining meaning in simple terms. Suppose the target is 27. Ask your friends to guess any number between 0 and 100. The person who thinks 27, or the number closest to and less than 27, gets the reward. If it ends in a tie, the prize is shared. The difference with bitcoin mining is that the target is not a simple 2-digit number, as in this example. It is a 64-digit hexadecimal number. It makes the situation complex. However, the above example is sufficient for anyone to understand how cryptocurrency mining works clearly. The below section looks a bit deeper into the difficulty of bitcoin mining.
Mining Difficulty Explained
Mining difficulty directly influences the bitcoin generation rate because it refers to the problem of solving the math puzzle and generating cryptocurrency. It also changes with the miners’ efficiency in the preceding cycle. Therefore, the mining difficulty increases because miners keep improving the sophistication of the machines used for mining cryptocurrencies. An increase in the number of miners will also make the puzzle harder.
The mining difficulty level as of March 2022 is 27.45 trillion. Therefore, the odds of a computer guessing the correct hash is 1 in 27.45 trillion. The present rate of difficulty makes it 91,655 times more challenging than winning the Powerball Jackpot with a single lottery ticket.
Economics of Mining Cryptos
As stated above, crypto mining is expensive. Here are the direct costs involved in Bitcoin mining.
- Power (Electricity): Crypto mining requires massive computer systems to run 24x7x365. Hence, it can consume an astronomical amount of energy that could be greater than some nations consume.
- Sophisticated mining systems: Initially, people used home PCs for cryptocurrency mining. However, they proved insufficient with time because of heat, bandwidth issues and increased mining difficulty. Hence, mining required investment in sophisticated mining systems such as ASIC (Application-specific integrated chip) systems. These machines are expensive and cost between $4,000 to $12,000.
- High-quality network infrastructure: While a high-speed network is desirable, the network speed does not make much difference. However, the internet connection should be continuously available without interruption. The latency from other mining pools located in the vicinity is also a problem. Dedicated computer networks can reduce external dependency and, thereby, the latency.
For mining to be productive, the output should exceed the input costs. However, mining crypto is not always an attractive proposition today, with cryptocurrencies displaying price volatility. It is an expensive venture with a high chance of failure. Besides, the amount of Bitcoins awarded to miners has reduced from 50 in 2009 to 6.25 today. Hence, it is an unappealing activity for individual miners. It explains why large mining establishments such as Antpool dominate the market. For retail investors, an ideal way to make profits off of Bitcoin would be to simply hodl (hold on for dear life), and use Pokket to help you earn a passive income by providing you regular interest on your crypto assets.
If Mining is so Complex And Unproductive, How Do You Obtain Bitcoin?
As is apparent now, crypto mining is not an attractive proposition for individuals interested in investing in and trading bitcoins and other cryptocurrencies. It is easier for them to purchase Bitcoins from those who already have them than to obtain them directly through bitcoin mining. If you wish to buy or trade cryptocurrency, you need a crypto wallet and a trading account. Platforms like Pokket offer facilities to maintain savings accounts in cryptocurrencies and earn interest.
Final Words
Thus, cryptocurrency mining requires high-powered computers with massive processing capabilities to solve cryptographic math equations. Besides, mining also constitutes validating data blocks and adding records to the blockchain. It is a tedious process that consumes massive amounts of energy and resources. Therefore, an individual who understands what is crypto mining will find the method unfeasible. Individual investors are better off earning cryptocurrency through alternative methods like trading, investing, and staking with the help of crypto exchanges and crypto saving products.
References
Hong, E. (2022, March 14). How does bitcoin mining work? Investopedia. https://www.investopedia.com/tech/how-does-bitcoin-mining-work/
Frankenfield, J. (2022, March 14). Bitcoin Mining. Investopedia. https://www.investopedia.com/terms/b/bitcoin-mining.asp
Baker, B. (2022, January 7). What is Bitcoin mining, and how does it work? Bankrate. Retrieved March 22, 2022, from https://www.bankrate.com/investing/what-is-bitcoin-mining/
Freeman Law. What is Crypto Mining? https://freemanlaw.com/mining-explained-a-detailed-guide-on-how-cryptocurrency-mining-works/
Crane, C. (2020, October 16). What is crypto mining? How cryptocurrency mining works. InfoSec Insights. https://sectigostore.com/blog/what-is-crypto-mining-how-cryptocurrency-mining-works/
