Cryptocurrency mining: What you need to know

The new gold rush

With the price of each Bitcoin reaching almost $20K in late 2017, a lot of attention has been drawn to different ways you can make money from this exciting new niche of cryptocurrencies. One of the main focus points is obviously the prospect of mining Bitcoins, or cryptocurrency mining in general.

What is cryptocurrency mining?

Most cryptocurrencies are decentralized by nature. In other words, they are not controlled or issued by banks, which traditional currencies are.

Bitcoin was the first cryptocurrency, and when it was invented, one major question had to be solved: If the central bank was removed as the entity in charge of updating our balance sheet (or ledger), who would take care of this task? How could we give someone the role of our designated banker, but still keep the system decentralized?

In the end, the solution came in the form of a kind of digital lottery. Computers (aka miners) throughout the network compete for the right to become a designated banker. They accomplish this goal by trying to guess a random number that the Bitcoin network automatically generates.

With cryptocurrency mining, whenever miners manage to guess the number correctly, they win the right to become designated bankers — and update balance sheets of the system.

In practice, the miner takes a bunch of transactions that are awaiting confirmation, wraps them up inside a big box called a block, and then officially confirms them by inserting the block on top of the previously confirmed blocks.

Hence, we have the term blockchain, which is actually the ledger of all the transactions that have ever been made since the currency was created. And in cryptocurrency mining, miners are the ones with the right to update that ledger.

Once that process is completed, the lottery begins again. And this time, the odds are that a different miner will win it, since it’s partially based on chance. In the long run, no miner gets to have too much control, since the role of designated banker switches all the time.

Did you notice that I said that the lottery is partially based on chance? The reason is that cryptocurrency mining often involves investing in expensive equipment, which allows miners to guess more numbers per second. Therefore, they have a better chance at winning.

This equipment is called a cryptocurrency mining rig. It is very expensive, usually requires some form of cooling, and makes a lot of noise. So why would someone want to invest a lot of money and energy to participate in this lottery? Well, if you win the designated-banker contest, you get a reward, in the form of new coins that are minted in the network.

Cryptocurrency Mining Antminer
A Bitcoin mining machine (Antminer S9)
Photo: shop.bitmain.com

That’s why this whole process of updating the ledger is called cryptocurrency mining: the winning miner gets to mine new coins out of the system. In all likelihood, now that you know what mining is, your next question is …

Is cryptocurrency mining profitable?

If a cryptocurrency is truly decentralized, it means anyone can join its cryptocurrency mining efforts and become a miner. All you need is to buy the right mining hardware, install a certain mining software, and your mining rig will do the rest.

However, you need to keep in mind that if you’re competing against very big miners with deep pockets, you might not win the lottery as often as you’d like.

You might end up spending a ton of money on equipment and mainly on electricity (miners usually consume a lot of power) without reaping any rewards. So how can you know beforehand if there’s even a chance to make a profit with mining a specific cryptocurrency?

The answer relies on educated guesses. You’ll need to use a mining calculator in order to estimate how profitable you will be. The main factors a mining calculator takes into account are as follows:

  • Your mining rig’s hashrate (how many guesses can you hardware make per second).
  • The current exchange rate of the coin you’re mining.
  • The amount of coins you’re rewarded each time you guess the number correctly.
  • The electricity consumption of your mining rig.
  • The mining difficulty (how hard is it to guess the number?)

As more and more miners join the network, the difficulty of guessing the number increases. This is done in order to maintain a fixed amount of time between successful guesses. I won’t go into detail, but the larger the amount of time you need to wait on average between blocks (i.e., successful guesses), the more secure the network is.

Cryptocurrency Mining Calculator
An example of a simple Bitcoin mining calculator
Photo: 99bitcoins.com

After you put all of this information into the cryptocurrency mining calculator, you’ll usually get an estimate for how much money you’ll be able to make from mining a certain cryptocurrency. I say “estimate” because certain variables — such as the price and difficulty of the coin you’re mining — can’t be predicted with certainty. If a coin suddenly drops in price, you might find yourself suddenly mining at a loss.

How do you get started with cryptocurrency mining?

The first step is to decide which cryptocurrency you’d like to mine. Different coins require different cryptocurrency mining equipment — and have different levels of mining difficulty. For example, Ethereum mining can be done with a graphics card (aka GPU), but Bitcoin mining can only be done with specialized hardware known as ASIC (Application Specific Integrated Circuit).

Pro tip: WhatToMine gives a good overview of the different kinds of profitable coins you can mine, as well as the type of hardware you need.

Once you decide on a coin, the next step is getting the right hardware. Of course, that’s not an easy task. ASIC miners are pretty expensive machines, which require a lot of cooling. And remember: not long before this article was published, the price of GPUs went through the roof due to the popularity of cryptocurrency mining.

Cryptocurrency Mining GPU
A GPU rig mining Ethereum
Photo: 99 bitcoins.com

The last step is finding a cryptocurrency mining pool. Instead of mining alone, miners usually gather in pools, in order to increase their chances of guessing the right number. Once a mining pool wins the lottery, they split the profits among all of the pool’s participants, according to how much work each one has contributed.

Conclusion

So there you have it: cryptocurrency mining in a nutshell. Of course, there’s a lot more we could talk about, but I’ve covered the basics you’ll need to know about any coin you choose to mine.

Remember, cryptocurrency mining can be a very complicated, expensive business. If you want to pursue it, I’d suggest doing extensive research and gather the budget you need. Otherwise, your chances of getting a positive return on your investment will be very limited.

Ofir Beigel
Ofir Beigel is the owner of 99Bitcoins, a website dedicated to helping people get started with Bitcoin and cryptocurrencies. When he bought his first Bitcoin, it was worth $70, but that price is long gone. His main passion is taking complex subjects and breaking them down into everyday terms. He believes that Bitcoin is “the red pill of money,” which will change the world in a way we haven’t seen since the birth of the internet.