Blockchain Basics// 8 min read

An Introduction to Cryptocurrency Mining

An Introduction to Cryptocurrency Mining

Without cryptocurrency mining, there’d be no Bitcoin.

But what is it?

Well, cryptocurrency mining is the process of offering your computing power to help solve complex calculations within the blockchain and process data within individual blocks. In exchange, you receive cryptocurrency and/or transaction fees.

Want that in English?

Read our introduction to cryptocurrency mining, where we break down the basics in simple terms you can understand and get you on the road to mining. But first, you need to know what a blockchain is…

What is a blockchain?

To truly understand cryptocurrency mining, you need to know what a blockchain is. A blockchain is essentially a public record of every transaction made using a cryptocurrency. So, Bitcoin’s blockchain records every time bitcoins have swapped hands.

A blockchain is made up of “blocks”, which are essentially folders full of transaction data. A record of every Bitcoin transaction ever made is stored publically within the blockchain (although personal data like the name of the person making the transaction is kept private).

Each transaction takes up storage space on a block, and in the case of Bitcoin, each block has a capacity of 1 megabyte. On average, there are around 2,000 unique transactions in each block, but this varies depending on the size of the transactions.

This is where mining comes in.

The resources needed to process and cryptographically sign these transactions comes from the combined hashing power of the computers linked up to the network.

So, mining is the process of solving the equations that enable blocks of data to be processed and secured cryptographically. This is known as “gaining consensus”, and without it there would be a backlog of transactions waiting to be processed and nothing actually going through.

A real example of a Bitcoin transaction

To help bring this concept to life, let’s take a look at a real example of how this all works. Let’s say I want to send my friend a bitcoin. To do this, I would create a new transaction within my Bitcoin wallet to send the bitcoin to my friend’s Bitcoin wallet. I’d do this using their public key, which is the equivalent of their bank account number. Once I make the transaction, the information is sent to the blockchain so it can be added to a block, verified, signed, and completed.

Once my transaction is sent to the Bitcoin blockchain, a miner will use their computer’s hashing power to process and order the transaction within a block. Once this is complete, the bitcoin I sent to my friend will appear in their Bitcoin wallet. It will also be visible in the Bitcoin public ledger (here’s a real example of a block of transactions on the Bitcoin blockchain).

Trying to process a transaction on the Bitcoin blockchain without any miners would be like trying to load a webpage onto the web without an internet connection.

Why would anyone be a cryptocurrency miner?

You’re probably starting to realize how integral miners are to the blockchain. You might also be wondering “why would anybody want to be a miner?” The main reason: miners are compensated in Bitcoin and transaction fees once a new block is completed.

Each cryptocurrency has a different way of compensating miners, but with Bitcoin it’s relatively straightforward. When a new block is completed (or “solved”), a fixed amount of bitcoins are released to the miner (or pool of miners) of that block. The fixed amount that is released is reduced by 50% after every 210,000 blocks, or roughly four years. In the beginning, the block reward for miners was 50 bitcoins. As of March 2018, the reward is 12.5 bitcoins.

This reward will continue to half in size until all 21,000,000 bitcoins are in circulation, which should be around May 7th of the year 2140. (We know this because there’s a fixed amount of blocks, and each block takes an average of ten minutes to solve).

Once the final bitcoin is “mined”, transaction fees will be the sole reward to miners. So when I send a bitcoin to my friend, I also have to pay a small transaction fee of around $4 (at the time of writing). This is given as a reward to miners along with the Bitcoin block reward.

How do I start mining cryptocurrency?

Anyone can begin mining cryptocurrency — all you need is a desktop or laptop, some mining software, and some form of wallet to store any crypto that you earn. It’s that simple… well, kind of.

While anyone can technically start mining cryptocurrency, not everyone can make a profit from it. This is because:

  1. The speed and volume at which you’re able to mine depend on the specification of your desktop or laptop (often referred to as your “rig”).
  2. Some cryptocurrencies are more difficult to mine than others, and this varies day by day.
  3. Your electricity costs will vary based on where you live and how much energy your rig consumes.
  4. Generally speaking, as time goes on, the cryptocurrency that you’re mining tends to become more and more difficult to mine (as more nodes are added to the network and more transactions are processed).

Nowadays, it’s almost always unprofitable to mine cryptocurrency using your personal laptop or low-end desktop computer.

Component manufacturers have been developing hardware specifically designed for mining cryptocurrency, and if you don’t invest in a rig that contains high-end components, you may just want to give up altogether.

Is cryptocurrency mining for me?

Before you jump in and start splashing the cash on a ton of mining GPUs, you’ll need to calculate whether you stand a chance of making a profit as a cryptocurrency miner. I say “stand a chance” because it’s important to realize that mining is partly a speculation built on events you have no control over. Here are the initial things you need to calculate:

  1. The cost per kWh of electricity in your area (this might be useful).
  2. The fixed cost of buying the components for your mining rig.
  3. The current price of the cryptocurrency you’ve chosen to mine.
  4. The price you expect the cryptocurrency to eventually reach (which is purely speculative).
  5. The reward on offer for mining the cryptocurrency you’ve chosen to mine.
  6. The current difficulty of mining the cryptocurrency you’ve chosen to mine.

This list may sound a little daunting at first, but let’s dig a little deeper into why you need this information.

Factors Impacting Mining Profitability

FactorImpact
Electricity CostOngoing variable cost.
Hardware ComponentsFixed upfront cost.
Price of the CryptoVariable income.
Mining RewardOngoing fixed income.
Mining DifficultyOngoing variable that impacts reward.

Deciding which cryptocurrency to mine

Deciding which cryptocurrency to mine isn’t easy, although a great website called WhatToMine will really help you. WhatToMine calculates the difficulty of mining each cryptocurrency at any moment in time to help you understand which are the most profitable to mine.

This is a good starting point, but you need to factor a few more things in.

Let’s say you were mining Neo. When you began mining Neo it was worth $40, and you earned a total of $400 worth of Neo each month.

If in 6 months the price of Neo spiked to $80 per coin, your $400 per month would now be worth $800.

This is why you want to factor in future worth.

You may actually decide to mine a cryptocurrency at a tiny gain today because you believe that its value will shoot up in the future and make it well worth your while.

Just remember this when you’re thinking about which crypto to mine because it can work the other way round too.
The last thing you want is to spend a year mining a coin for it to lose 50% of its value.

While you can’t truly predict this, you’ll want to use the same logic you would when investing when you’re picking which cryptocurrency to mine.

How much should you spend on your rig?

This is arguably the toughest part of working out whether cryptocurrency mining is worth it for you.

If you spend lots upfront on premium hardware, you’ll be able to mine currency much faster. However, it will also take you longer to break even on your initial investment.

Let’s say you spend $2,400 on a mining rig. Based on its specifications, you project that it will generate $200 of profit per month. This means that it will take 12 months to break even (assuming everything stays the same — which it won’t).

On top of that, you have your ongoing electricity costs. Let’s say that your $2,400 rig consumes $50 of electricity per month which means that, in fact, it will take a total of 15 months to break even.

Alternatively, let’s say you spend $4,000 on a mining rig and based on its specification it can earn $500 of profit per month. Your fixed cost break-even point would be 8 months.

Factor in that this rig consumes $70 worth of electricity per month then your total break-even point would be 9 months. Surely it’s a no-brainer to go with the $4,000 rig?

That certainly makes sense if everything stayed exactly as it is right now, assuming you have the money to spend upfront. The problem is that something unexpected could happen.

On a catastrophic level, the currency you’re mining could completely crash in price and everything you’ve mined to date could be worth less than the cost of the electricity you used to mine it, not to mention the price of the hardware. On a smaller level, the difficulty of mining your chosen cryptocurrency could increase, which will increase the time it takes to turn a profit.

This is all about evaluating the risk vs reward.

Choosing the right equipment for your rig

One large criticism of Bitcoin is that the majority of all the hashing power (that’s the computational power used for mining) comes from a small handful of huge mining companies based in China, bringing into question how decentralized the network really is (but that’s a topic for another day!).

This means that you need to invest in higher specification hardware to stand a chance of turning a profit.

The problem here is that the more you spend on your rig, the harder it is to break even.

Most cryptos will have a community — usually a subreddit, Telegram, or Slack channel — dedicated to mining information and support. In a lot of these communities, miners will share the hashrate (computational speed) their hardware achieves.

Here’s an example of a hardware benchmark breakdown for Monero.

You’d be well advised to base your rig on the hardware recommendations you find in the community for the currency you want to mine. This is the best way to make sure you end up with a rig that can give you a good chance of making a profit as a crypto miner.

Solo mining vs mining pools

Once you’ve set up your rig there are two main ways you can go about mining: solo mining or pool mining.

Solo mining is the equivalent of buying a lottery ticket for yourself. The odds are stacked against you, but if you do win, you’ll take home 100% of the winnings.

Pool mining is like playing the lottery in a syndicate — a group of people who pool their money together to buy several lottery tickets and then share the money equally if one is a winner. You’ve got a better chance of winning as part of a pool, but you’ll have to split your profits with everyone else involved if you do.

Most cryptocurrencies have mining pools you can join.

As part of a mining pool, you’ll combine your resources with several other miners’ to solve blocks, and you’ll all share the profits.

This is almost always the best approach for home miners, as solving a block on your own could take years (like winning the lottery). Make sure you go through and look at the different mining pools available to join. As an example, here’s a list of mining pools for Vertcoin.

It’s important to know that you have to pay a fee to join some mining pools, so you might want to keep this in mind when you’re deciding which to join.

Mining software

The final piece of the mining puzzle is the software you use to mine. Every cryptocurrency has its own software you use for mining. This usually comes in the form of a desktop application that runs via the command line.

To get up and running, you just download and install the software, input a few basic configuration details(including your wallet address) and then let it do its thing. You don’t need to do anything specific, as the software will automatically run calculations for you. All you need to do is keep your rig running and it’ll keep mining.

In conclusion…

Cryptocurrency mining can seem very intimidating, but hopefully, this article has shown you that anyone can do it. In fact, once you get started and figure out the process for one currency, you’ll quickly be able to apply the process to the rest too.

Remember that this guide is simply an introduction to the basics of mining, and there are a lot of facets I haven’t covered here. Above all, do your research and speak to the mining community for the crypto you’re interested in before you invest any of your hard-earned cash into mining it.

Good luck and happy mining!

Written by:

Matt is the founder of The Coin Offering, co-host of the Decrypting Crypto podcast and a member of the team at The Litecoin Foundation.

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