Cryptocurrencies are steadily gaining popularity as more people are buying, selling, trading and talking about them in the recent years. As Bitcoin continues to make headlines in mainstream media, followed by Ethereum and Litecoin, more people have shown interest in the cryptocurrency market.
However, cryptocurrencies aren’t produced like physical cash or fiat. Since cryptocurrencies are decentralized, there’s no governing body that controls the issuance of new notes or coins. Instead, Bitcoin and altcoins are generated through a process called “mining” which is essentially a process of verifying transactions. This article will explain how this complicated process works.
How Does Cryptomining Work?
Miners are in charge of recording and verifying every transaction for the public. Part of this responsibility is ensuring that coins aren’t being used multiple times in different transactions–also known as double-spending.
When transactions are made using cryptocurrencies, they are assembled into “blocks”. Once all transactions within the “block” have been verified, and no double-spending has occurred, these blocks are broadcasted on the public ledger and are linked back to all previously verified blocks, creating a series called a “blockchain”. This public ledger contains all transactions that ever occurred using that specific cryptocurrency.
Miners need to find a hash that meets specific requirements for a block to be created. A hash is a cryptographic function that connects the new block to the previous block. To find those requirements, miners need to solve complex mathematical problems. Whoever solves the problem first and finds the hash, will be rewarded with a brand new cryptocurrency.
This is the only way in which new coins are created—i.e. no central authority can create coins without permission from the general public. Depending on the miner’s hardware, calculation speeds (or hash rates) will differ. The more expensive the hardware, the higher the hash rate, and the greater chance the miner has to find the next hash.
However, as more blocks are created, the mathematical problems required to verify the next transaction become increasingly difficult. This prevents miners from creating one block after another in rapid succession which in turn prevents the cryptocurrency from depreciating.
Integral Part of the Crypto System
As you can see, miners play a vital role in the cryptocurrency world today and will continue to play a role in the future. Anyone can become a miner as long as they’re willing to invest time and money on the required hardware. Cryptomining is an extensive task that requires extraordinary hardware and a huge amount of processing power.
That is why personal mining isn’t recommended and is very rare today. Today, Bitcoin is the most popular cryptocurrency in the world and is also the most expensive to mine. You would need a specialized equipment that has ASIC (application specific integrated circuit) chips designed for mining. These types of equipment require a lot of electricity and network connectivity even when not in use. If you want to try mining, make sure you consider all applicable costs and calculate if it is even worth it in the long-term.
Mining for Profit
Mining Bitcoin in the early days was feasible and profitable. But due to massive growth and popularity, the difficulty and cost of mining Bitcoin have increased. Mining is profitable because miners are awarded a fixed value of crypto for their hard work. But it’s also a speculative venture because you are depending on the value of the cryptocurrency to remain stable or increase. If prices fall, your purchased equipment may actually be more expensive than the realized profits. In order to calculate expected profits, you need to consider the initial investment cost as well as the difficulty level of successfully mining a coin.
The problem is, these factors change constantly and are all intercorrelated. That is, if the cryptocurrency price rises, more people will mine on the network which will increase the level of mining difficulty. As competition increases on the network, better and faster hardware is required. If miners want to be the first to solve the problem, they would need more processing power. This requires more and better GPUs (graphics processing unit) and ASICs which are expensive and would eat up a lot of electricity.
Overall, as the demand for cryptocurrencies continues to rise, more miners will get involved which will result in surging mining hardware prices. This will open up the market to new hardware innovation and encourage successful mining companies to upgrade their existing equipment. As capital is reinvested back into the mining industry, the overall cryptocurrency market will also grow as transaction speeds will undoubtedly increase leading to better user experience and higher market adoption.
For an overview on setting up your own cryptocurrency mining machine, you can read our article for beginners.