Lucrative for those who understand it, cryptocurrency mining has hit peak popularity over the last year, causing a GPU shortage and a cryptocurrency boom. For those looking to get into cryptocurrency, it offers a potentially more affordable route.
This said, you need to understand the upfront costs, as well as the tasks involved, before plunging in. Our quick and easy guide has everything you know.
What is Cryptocurrency Mining?
In simple terms, cryptocurrency mining is the process by which new coins are made. As we all know, this doesn’t mean a physical coin. Instead, we mean a critical component of the blockchain ledger.
People don’t actually do the mining by themselves. Computers do. To mine cryptocurrency, you must solve extremely complicated maths problems that would take a human much longer.
People mine cryptocurrency because as a reward for putting in the computer power, resources, and time, they get a percentage of the coin they mined.
There are many different types of cryptocurrency. The mining process for each is fundamentally the same. However, the algorithms involved in mining each different cryptocurrency are different.
For simplicity, we’ll focus on the process behind Bitcoin mining for this article.
Where Does Maths Fit In?
From the above, the next logical question is, what does math have to do with it?
A lot. The maths behind cryptocurrency coins legitimizes the blockchain and verifies transactions.
This idea was created by Bitcoin’s founder, Satoshi Nakamoto. It keeps the currency from being manipulated or duplicated, also known as double-spending.
This is because as Bitcoin units don’t physically exist like other currencies, double spend is an issue. Once you give someone a dollar bill, that bill is gone, and you can’t use it again. With digital currency, this isn’t true; the trader could make a copy and send that to the other party and keep the original.
Using this analogy, the algorithms behind Bitcoins work similarly to serial numbers. In physical currency, we can look at the two bills and see which is fake from the duplicated serial number.
In cryptocurrency, miners do this process. They check the transactions to ensure the validity of the coin in question.
How to Earn Bitcoins Through Cryptocurrency Mining
The appeal of mining for most is monetary. However, even with all the right equipment (which we’ll cover below), you still won’t be earning straight away.
For Bitcoin, miners must verify one megabyte worth of Bitcoin transactions to be eligible for rewards. This limit was set by the creator of the currency.
This isn’t the only condition either, the second condition is much harder, and it’s why cryptocurrency mining is so competitive. To earn, you also need to be the first miner to solve the algorithm, also known as proof of work.
Due to the competitive nature of mining bitcoin, miners can join what’s known as mining pools. This is a community of miners who combine their computing power to increase their odds of meeting the second condition and the likelihood of them earning.
The Algorithm Behind Bitcoin
Though we said above that computers do the advanced maths involved in mining, it’s not quite the case. What the computer does is figure out the 64-digit hexadecimal number (or hash) that is less than or equal to the target hash.
So in this sense, the maths behind it is quite simple. However, for every single hash, there are trillions of possible guesses, making it a very tedious process for a human. Computers can run through these guesses at various speeds, depending on their processing power.
This processing power is what’s known as a “hash rate.” This is measured in terms of terahashes per second (TH/s), gigahashes per second (GH/s), and megahashes per second (MH/s).
How Much Can You Mine?
From the above, you could assume that with the most processing power, you could mine an unlimited amount of bitcoin. This isn’t the case.
Mining is the only way to bring new bitcoins into circulation. But the rate bitcoin is mined at has been reduced over time to prevent a huge amount of them being brought into circulation at once.
There are around 18.5 million bitcoins in circulation today, close to the total cap of 21 million. This is set by the Bitcoin Protocol and means there will never be any more than this.
As the mining rate continues to reduce overtime, the final bitcoin will not be mined until around 2140.
How Much Can You Earn Mining Bitcoin?
Much like the mining rate, the rewards for mining Bitcoin reduce over time. When the first bitcoin ever was mined in 2009, mining only a single block (1MB) earned you 50 BTC. This reward was halved in 2012, again in 2016, and again in 2020.
As of May 2020, the reward is around 6.25 BTC per block.
What Do I Need to Mine Cryptocurrency?
The difficulty of mining bitcoin has increased over the years. This is to ensure the smooth function of the blockchain.
With this, the computing power necessary has also increased. Where you could once have used a regular home computer, this is no longer the case.
To mine competitively, as a minimum, you’ll need:
- A desktop or custom-built computer designed for mining
- An ASTI graphics processing unit (between $100 to $3000)
- A cooling fan to manage the heat from your device
- A reliable, strong internet connection (min 2mb/s)
- A mining software package
- A private coin wallet database
These startup costs are real, especially for bitcoin. Your computing costs alone will set you back a good couple of thousand if you want any chance of being competitive. This is why many stick to the more traditional route of investing in bitcoin and bitcoin trading to earn money.
More Cryptocurrency Investing Advice
Cryptocurrency mining is lucrative with the right equipment, but the upfront costs are large. As the space is so competitive, those who want to earn mining will need to invest to ensure they have a good chance of doing so. This is why many people avoid mining and stick to the more traditional investment routes.
You can find lots more helpful advice on cryptocurrencies, including mining and investing, on our blog.