What is Cryptocurrency Mining and How Cryptocurrency Mining Works?

Recently, due to the growing popularity and spread of various cryptocurrencies, primarily Bitcoin, an accompanying term called “mining” is increasingly being used. This word is translated from English as "mining". In relation to cryptocurrencies, the term refers to a process that involves the use of computer resources to process transactions of a payment system by creating new blocks, ensuring their security and creating new records in a common database.

What is mining?

To put it simply, but not quite correctly, mining is the extraction of cryptocurrency, most often Bitcoin, which is explained by their most serious demand and popularity on the market at the present time. In fact, the owner of the computer, using its resources for the operation of the virtual payment system, collects and processes information about ongoing transactions with cryptocurrency. This activity is necessary in order for transactions to be carried out, a high degree of their security to be ensured, and the uninterrupted functioning of the entire peer-to-peer decentralized system to be carried out. The greater the number of miners and, accordingly, the resources of computers involved in the process, the more reliable and stable the operation of the system.

Principle of operation

For processing information, the owner of a computer resource receives a reward in the form of a commission assigned by the owner of virtual money, or a reward in the form of a part of the cryptocurrency issued during the mining process. It is on this that one of the main principles of the operation of payment systems is based, involving the use of Bitcoin and some other virtual money. First of all, those transactions are processed and carried out, where the highest commission is set. Therefore, transactions with zero commission can be carried out for a very long time.

Why does Bitcoin need miners?

It is important to understand that the widespread belief that the need for mining and, as a result, miners will disappear after the release of the last Bitcoin, is extremely far from the truth. As already mentioned, no less important functions of mining are processing information, conducting transactions and ensuring the security of the functioning of the payment system. It is obvious that such work will always be required.

Bitcoin Mining

By far, the most popular cryptocurrency today is Bitcoin, created in 2008-2009 by Satoshi Nakamoto. That is why, most often, a decision is made to mine this particular type of virtual money. However, it is necessary to understand that the flip side of popularity is the huge amount of resources involved in processing information. Therefore, today, in order to really make money on Bitcoin mining, extremely large computing power is required.

Mining schemes

The simplest mining scheme involves installing special software on a computer, after which its resources are connected to the payment system.

State mining programs

Currently, interest in various cryptocurrencies has begun to appear in some countries at the state level. It should be noted that in most developed countries this sector of the economy is at the mercy of entrepreneurs. At the same time, in the DPRK, cryptocurrency mining is one of the important measures to support the national currency.

In recent months, there has been a serious interest in virtual money, primarily Bitcoin, and the process of their mining among the leaders of domestic government authorities. Some senior officials have repeatedly understood the issue of developing government mining programs. However, it is still somewhat premature to talk about the actual implementation of these plans.

Mining Pools

An important principle of operation of the most popular virtual payment system is the random distribution of issued Bitcoin. In order to make this process more predictable and uniform, special online services have been created, which are called mining pools. Individual users provide available computing power at their disposal. Ultimately, the Bitcoin received as issue considerations are distributed among the members of the pool, based on its rules. The features of the software allow users to work in the pool much more efficiently than on their own, which has led to the widespread use of this type of mining.

Cloud pools

Today, in order to effectively engage in mining, you need serious computing power. Obviously, the acquisition of such powerful computers requires considerable financial resources, the availability of which is unlikely for an individual. As a result, a new type of pool has appeared, called the cloud pool. It provides for the purchase or lease of computing power from specialized companies that have the appropriate equipment.

In this case, all operations are carried out via the Internet, and the interaction scheme is as follows. A specialized company receives in the form of profit the funds from the client that it needs for further development and the acquisition of new, more powerful computers, the result of mining on the most modern and progressive equipment remains at the user's disposal.

Hidden mining

Hidden mining refers to the use of other people's computing power to generate cryptocurrencies, primarily Bitcoin. This may be, for example, the launch by an employee of the relevant services on a work computer owned by the company, or the use of special programs that are introduced as viruses on third-party computers.

Recently, quite often there have been reports that some popular sites also found elements of programs that allow mining by using the resources of visitors' computers. It is obvious that such activity can hardly be called legal. However, given the complexity of the issue, dealing with such manifestations is far from easy.

What is a mining farm?

A mining farm is a number of computers or servers combined into one system. At the same time, different equipment is used at different times and for different cryptocurrencies. In particular, for the “extraction” of Bitcoin a few years ago, mainly video cards were used, then they were replaced by specially designed processors (ASICs). At the same time, mining of some cryptocurrencies, for example, the second most popular Ethereum, is still most effective when using high-performance graphics cards.

Mining equipment

Simple mining schemes that were effective a few years ago included the following equipment: 2-3 video cards, a motherboard, a processor, RAM and permanent memory, and a power supply. Naturally, to connect to the system, it was necessary to install the appropriate software, which is freely available. An important resource that is consumed in the mining process in large quantities is electricity.

Mining software

Currently, many different programs have been developed that can be used to mine cryptocurrencies. The choice of a specific product is determined primarily by the capabilities of the user's computer. Obviously, for different configurations and computing power, the efficiency of different programs will be different.

The easiest mining option is to use a cloud pool. In this case, the capacities of a specialized company are rented or purchased along with the software installed on them. However, in most cases, the cost of renting or acquiring resources is quite high.

Mining other cryptocurrencies

The popularity of Bitcoin, which he received in recent years, does not mean at all that this cryptocurrency will retain its leading position forever. On the contrary, many experts predict the emergence of new virtual money or the allocation of any of the already existing cryptocurrencies. An additional argument in favor of this is the fact that any virtual payment system is based primarily on the trust of users. Obviously, this is an extremely subjective factor, which is currently in favor of Bitcoin, but may well turn against it.

Ethereum mining

In recent years, the rate of Ethereum (in Russia it is called ethereum or, even more simply, ether) has been growing at a fairly rapid pace, certainly yielding to bitcoin, but at the same time being the second most popular cryptocurrency. For mining ether, special programs are used. It is important to understand that this process today is much more efficient than the “mining” of bitcoins, since a noticeably smaller number of users participate in it. The most effective is the use of equipment in the form of productive video cards.

Mining Ripple

Ripple (XRP) is quite different from most cryptocurrencies, including Bitcoin. Currently, this virtual currency is popular, competing on equal terms with Ethereum. The main feature of Ripple is the impossibility of mining. This is due to the fact that the developers immediately issued 100 billion units of XRP, leaving about 2/3 for themselves, and distributing one third among users. As a result, additional emission of cryptocurrency is not provided, and mining is also not required for the system to function.

Litecoin

Cryptocurrency Litecoin (LTC) was created in 2011 and is a derivative (another name is fork) of Bitcoin. Currently, its development is carried out completely independently and has several fundamental differences from the most popular type of virtual money. These include:

1. Greater mining efficiency using powerful processors;
2. The need for a large amount of free memory;
3. Widespread use of pools, including cloud ones.

LTC is much less popular and in demand than Bitcoin. Therefore, the mining of this cryptocurrency is currently available and quite effective even for individual miners. However, it is much more profitable for the user to become a member of the pool, which significantly increases the profitability of mining.

NEM

Based on the NEM Blockchain technology, a cryptocurrency called XEM was created. It enjoys serious popularity in the Asian market, especially in Japan. Features of this type of virtual money was the release of the entire amount of cryptocurrency at once. However, XEM mining is quite possible. It is necessary to generate new blocks required for transactions, generate appropriate records in databases and ensure the security of ongoing operations. At the same time, XEM mining is considered one of the most democratic processes, since it does not require large computing power.

dash

The capitalization of the Dash cryptocurrency created in 2014 has now exceeded $2 billion. Of course, its popularity today cannot be compared with Bitcoin, however, the virtual currency is showing steady growth. Almost any computer equipment can be used for mining, however, the most effective is the use of ASIC technology and various cloud services.

Iota

The IOTA cryptocurrency, which appeared on the market at the end of 2015, quickly became widespread. This is due to the peculiarities of this payment system, the main of which are: the absence of commission when making transactions and the speed of their implementation. The principle of operation of IOTA does not provide for the possibility of special mining, since in fact the user of the system becomes a miner when making any transaction, because this requires confirmation of the two previous ones.

ZCASH

The developers of the ZCash cryptocurrency declare it as the first anonymous virtual currency. This payment system provides a standard mining option, which requires the availability of appropriate equipment, primarily a powerful video card, appropriate software and connection to the pool. It is in this case that mining will be most effective.

Monero

Mining a relatively new cryptocurrency called Monero can currently turn out to be a very lucrative activity even for single users. The fact is that the payment system service does not allow the use of specialized ASIC processors. As a result, even with a regular, but at the same time sufficiently productive computer, you can mine Monero.

Stratis

The Stratis cryptocurrency (abbreviated as STRAT) appeared in 2016 and is one of the latest such developments that has already managed to make itself quite loudly in the financial market. The creators took into account the experience of using previously issued virtual money, which allowed the newcomer to become one of the ten largest cryptocurrencies by capitalization almost immediately after the appearance. However, the hype soon subsided and today Stratis is ranked 16th in this indicator, which is an undoubted success, given the short time on the market.

Cryptocurrency mining is carried out in traditional ways. For the process to be effective, either the purchase of high-performance computer equipment or participation in cloud pools is required. Given the opinion of experts, investments in Stratis can be very profitable even in the short term.

Which cryptocurrency to choose for mining?

Finding an answer to the question of which e-currency is the most profitable to mine is quite difficult. The fact is that the cryptocurrency market was formed only in recent years. It is constantly changing, in addition, new types of virtual money appear regularly. All this makes more or less accurate forecasting of the further development of the situation on the market extremely unlikely.

However, every year it becomes more and more difficult for single miners to make a profit by “mining” the most promoted cryptocurrencies, such as bitcoin or ether. Therefore, it makes some sense to pay attention to no less popular types of virtual currency.

Mining prospects

It is important to understand that with the growing popularity of virtual money, it becomes more problematic to make a profit from mining. This is explained not only by the increase in the number of participants, but also by the arrival of significant financial resources in this segment of the market. As a result, mining individually becomes simply unprofitable and unprofitable.

Another potential danger is the fact that some cryptocurrencies that have recently appeared do not provide for the possibility of mining. Such virtual money includes, for example, Ripple or IOTA, which have shown stable growth in recent years.

How much can you earn?

It is almost impossible to give an unambiguous answer to the question about the potential earnings from mining. This is due to the fact that it is determined taking into account many factors that are difficult to predict, including the current exchange rate of a particular cryptocurrency and the dynamics of its change, the amount of investment in mining, the number of participants in the “mining” process, etc.

At the same time, it is necessary to understand the following: the growth of the total capitalization of the virtual money market leads to the fact that the average payback period of investments is constantly increasing. For example, until recently, investments in Bitcoin mining returned within 2-3 months, bringing further profit, and the entry threshold was quite low. Today, in order to start effectively mining the most popular cryptocurrency, a serious amount of funds is required, amounting to at least several thousand dollars. At the same time, the payback period is 9-12 months, and in some cases even more.

Is mining possible without investments?

At present, it is quite difficult to talk about serious mining without investments. At the same time, many companies providing cloud mining services are trying to increase the number of customers through a variety of advertising campaigns. In some cases, users are offered the opportunity to "mine" cryptocurrency for free for a certain period.

There are also so-called cryptocurrency faucets on the network, which are advertising sites that offer satoshi, that is, a small part of bitcoin, as a reward for visiting. This way to earn cryptocurrency is hardly a full-fledged mining, however, the number of such resources is increasing every year, which shows their demand on the market.

Investment risks

The cryptocurrency market is one of the most volatile. Even Bitcoin, whose value has risen very strongly, has repeatedly fallen in price. There is no guarantee that the growth of the rate will resume after the next collapse, which can occur at any time.

Possible problems and "pitfalls"

The main potential problems of any cryptocurrency are two factors. First, the unclear legal status, which also varies from country to country. In today's global financial market, this is a serious obstacle to further growth.

Secondly, the main condition for the popularity of cryptocurrency is trust in it. This criterion can hardly be called stable and objective. Therefore, any problems that arise can easily bring down even the most promoted cryptocurrency.

Energy inefficiency

The arrival of large players with serious financial resources to the cryptocurrency mining market has drastically reduced the efficiency of “mining” most types of virtual money. Naturally, often the profit received in the process does not pay off the invested funds, including the cost of electricity, which make up the bulk of the costs, in addition to the purchase of equipment.

Inequality between early and late miners

Every year the reward for mining is reduced. This is explained by a very rapid increase in the total computing power of the process participants, as a result of which the amount of resources spent on “extraction” is growing noticeably, which is to a torn extent related to the consumed electricity and hardware capacities. It is quite logical that early mining was much more efficient and profitable than later, and this trend continues to this day.