Since its inception, the crypto market has been fascinating to the masses. From its mechanisms to the amazing features it encapsulates, enthusiasts never seem to get enough of it. An even more fascinating concept of crypto is how it is created. Learn more about crypto mining and what it entails in this article.
What is crypto mining?
Crypto mining is the process of creating new cryptocurrencies through high-powered computers. Miners receive rewards from transaction fees charged to users. The mining process is often preceded by verifying transactions and adding new blocks to the blockchain. This method of generating new cryptocurrencies is employed by Bitcoin and other coins that use the Proof of Work (PoW) and Proof of Stake (PoW) consensus mechanisms.
How does crypto mining work?
The concept behind the process of crypto mining is quite an interesting one. Different miners with their nodes or computers compete to solve a computational puzzle. How does this even work? Well, there is a puzzle known as the hash puzzle. The hash puzzle is not an easy one that humans can particularly solve, especially with the time limit. Hence, high-powered computers are used to guess the solution to this puzzle.
For better understanding, we can liken crypto mining to conventional mining operations in the real world. When mining for precious minerals, the ground is dug through many obstacles in pursuit of minerals. Similarly, mining cryptocurrencies involves miners analyzing and going through numerous possible solutions before the correct one is found and new crypto is produced. The node to correctly guess the solution to this puzzle will be rewarded.
The rewards for crypto mining are essential to miners because they help to maintain the blockchain and keep it secure. Crypto mining is also important due to the decentralization of the blockchain. It serves as a means for different nodes on the network to oversee transactions, create new cryptocurrency, and keep the blockchain secure.
You might wonder how crypto mining keeps the blockchain secure. Let’s have a quick overview of the blockchain. The blockchain is made up of a long chain of blocks. Each block is filled with transactions. When all the transactions have been verified and filled in a block, that block is added to the blockchain, and a new one is created. Crypto miners access these unverified transactions and ensure that they are verified to avoid theft or attacks on the network. Following this, transactions are stored and recorded on the blockchain. To achieve this, miners use a consensus mechanism known as Proof of Work (PoW). PoW protocols select the miners that will be tasked with verifying transactions on the blockchain. It is mostly used by older cryptocurrencies like Bitcoin, Litecoin, and Dogecoin, among others. Ethereum also operates on a PoW network but will shift to a Proof of Stake (PoS) network soon.
Coins in the PoS consensus mechanism are mined differently. A method called staking is used in PoS to mine crypto and secure the blockchain. This method involves the locking of coins by validators. These validators are chosen randomly to validate the transactions leading to rewards. Crypto mining on PoS is relatively easier than mining on PoW. Crypto wallets and exchanges have made provisions for staking on their platforms. You could start staking with just a tap, and the platform will guide you through each step.
Types of crypto mining
Miners employ different methods to mine crypto. Here are the main types of crypto mining:
- ASIC mining: ASIC stands for Application-Specific Integrated Circuit. Bitcoin is a leading coin produced by ASIC mining. This method can be frowned upon due to its cost and high energy requirements. However, it is highly efficient and widely used.
- GPU mining: GPU is an acronym for Graphics Processing Units. It is more energy efficient than ASIC mining. Because it does not require as much energy as ASIC mining, it is not preferred to mine Bitcoin and other energy-intensive cryptocurrencies.
- Cloud mining: Cloud mining is a good option if you do not want to be concerned with the technicalities of setting up a mining device. It involves paying a company to rent a mining device and performing mining operations with it. Cloud mining decreases the cost of crypto mining. It is also less technical than its counterparts and can be used by the everyday Joe.
- CPU mining: CPU mining involves using the Central Processing unit of a computer to verify transactions, secure the blockchain, and generate new coins. You can execute CPU mining with a regular computer. However, it is not as profitable as its counterparts because the hash rate of Bitcoin, for instance, grew more than it could process.
How long does it take to mine 1 cryptocurrency?
Miners do not mine cryptocurrencies individually. Instead, they mine blocks individually. One block takes about 10 minutes to mine for Bitcoin. When that block is produced, the miner gets rewarded with 6.25 BTC. Mining Ethereum, on the other hand, takes about 13 to 15 seconds a day. The time taken and rewards to mine a block of cryptocurrency is not the same for all cryptocurrencies. These factors largely depend on the cryptocurrency in question.
Since Bitcoin and Ethereum use the same consensus mechanism, mining both cryptocurrencies are similar. This process involves the following:
- Setting up the required wallet
- Preparing your mining hardware
- Configuring your mining device
- Joining a mining pool if you choose to
- Earning your rewards
We have observed that crypto mining has been profitable across the markets. However, there are some things you need to watch out for before getting into it. Here are some risks you may consider:
- Cost: The cost of buying a mining device and setting it up is on the high side. The chances of making a big buck from crypto mining are also not guaranteed. With little profits gained from mining, it might take a long time for a miner to make up his initial cost. Other factors from the coin, like volatility, could also tamper with the profits of a coin. Hence, crypto mining can be risky in this scenario where the profits gained might not make up for the initial cost of acquiring and setting up a mining device.
- Energy intensive: It is no news that crypto mining is harmful to the environment. Because high-powered computers are used for the process, the result leads to gas emissions into the environment. This is a contributing factor to the already depleted ecosystem.
- Volatility: The volatility of cryptocurrency must be considered in all spheres, from trading and investing to crypto mining. When the market takes a bearish route and a crash is imminent, it could affect the general state of a coin, causing a ripple effect in crypto mining and its profitability.
Is crypto mining legal?
The issue of the legality of crypto mining depends largely on the country. In the United States, for instance, crypto mining is legal. However, it is not allowed in some states in the United States. Crypto mining and cryptocurrency as a whole are illegal in the following countries: China, Indonesia, Vietnam, Bangladesh, Iran, and so on. Many countries fear that cryptocurrency is a big threat to fiat currencies. Some have even gone ahead to attempt regulation of cryptocurrencies in their nations. However, countries like El Salvador are contributing to the adoption of Bitcoin as it made Bitcoin its legal tender in 2021. Other countries where crypto mining is legal include Canada, Australia, Spain, Mexico, France, and Japan, among others.
Is crypto mining worth it?
Over the years, crypto mining has gotten so saturated that people doubt if it is still profitable. Despite the decrease in profit it has taken over the years, mining can still be profitable in 2022. However, you need to consider some things before beginning. Factor in the costs will be incurred as well as the potential rewards you will make to give you an idea of the profit.
Assuming you are employing ASIC mining, a cost of $1500 or more will be needed for mining rigs. Then, you will need more money to set it up. Alternatively, you can join a mining pool to reduce costs. You also have to consider electricity bills. Keep in mind that mining is a rigorous process that requires high amounts of power. Another thing to consider is the current price of Bitcoin. Higher prices attract more profitable rewards. Hence, if the price of Bitcoin is higher now than it was before, then you will get higher rewards currently than you did before.
Now let’s have a look at how much you can make from crypto mining. In Bitcoin, miners get a reward of 6.25 BTC per block. The reward will decrease by half in 2024. This is because Bitcoin is set up to reduce mining rewards every four years.
Before getting into crypto mining, ensure to consider all possible cost and compare it to your rewards. Many miners make the mistake of overlooking this step, causing them a loss. Crypto mining is not a guaranteed profit-earning means. Hence, you need to take the right steps to approach it.
Diana is the CTO of Vestinda.
She’s an engineer with extensive experience in the payments space, passionate about mathematics and artificial intelligence.