The Basics Of Crypto Mining

Sep 11, 2020 06:55 PM ET
The Basics Of Crypto Mining

Overview

Since the inception of bitcoin mining, many other cryptocurrencies have relied on mining since this is what drives their respective blockchains. With the increased popularity of crypto in recent years, creative methods of owning some have come to the forefront. Besides just buying crypto at a reputable exchange, one fascinating procedure of directly owning cryptocurrencies is mining.

cryptocurrencies

The term ‘mining’ in the crypto markets is quite analogous to gold mining or any other precious metal mining. Gold, for example, cannot be created out of thin air and has to be dug from underground. The work required to mine any precious metal makes it rare due to its limited supply. Cryptocurrencies are rare in economic terms as, unlike fiat currencies, they cannot be ‘printed’ at will without any value or proof of work attached to it.

Mining a cryptocurrency involves a cryptographic process where miners validate each record of the currency’s creation in the blockchain by solving extremely complex mathematical equations using advanced computers. As a reward for the effort, miners receive some portion of the currency they mined.

The technical factors of crypto mining

Speed is everything. The first deciding factor when thinking of mining’s technicalities is the hash rate, which we measure in kilo, mega, giga, and terra hashes per second. The hash rate is the speed that computer hardware performs hashing calculations. The hash is a computer function that converts different values. In the case of mining, it would be converting highly complex mathematical calculations. In a nutshell, the better the hash rate, the quicker you can solve the equation among thousands, if not millions, of other miners all with exceptionally impressive hashing power competing for the reward.

We currently class the hardware used to mine cryptocurrencies into three categories: 

GPU (graphical processing unit):

GPU (graphical processing unit)

A GPU is a good old-fashioned graphics card found on any computer. Of course, there are specific and expensive GPUs in the industry known for having the best hash rate to mine some cryptocurrencies. However, GPUs are still relatively cheaper compared to the other hardware.

FPGA (field-programmable gate arrays):

FPGA (field-programmable gate arrays)

We can consider FPGAs as high-end GPUs, known for their enhanced cost-effectiveness. They are integrated circuits with programmed blocks configured using HDL (hardware description language).

ASIC (application-specific integrated circuit):

ASIC (application-specific integrated circuit)

An ASIC is merely a microchip in a specially designed unit with at least 10,000 times faster hashing speed than standard GPUs.

The power consumption and costs for each respective class increase dramatically from one to the other, with ASICs being the most expensive and heat-consuming.

Barely any cryptocurrencies nowadays can be mined with a standard CPU due to its inferior hashing power. Miners do use GPUs to mine some cryptocurrencies if they have the necessary technical specifications. GPUs are not as expensive as FPGAs or ASICs, but they are limited to specific cryptocurrencies. FPGAs offer a bit more flexibility. ASICs are the most sought-after in the crypto world, and manufacturers specifically designed them to mine bitcoin. 

While bitcoin is the most in-demand crypto, it’s probably the hardest crypto to mine currently. In fact, in recent years, it’s been unprofitable for the average person to mine bitcoin individually due to the competitiveness, design of its blockchain, and hashing power required. Other recognized cryptocurrencies that garner interest from miners include Ethereum, Litecoin, Zcash, Dash, and Monero, to name a few.

Aside from the set-up costs of acquiring the hardware necessary, four primary considerations determine how profitable mining any other cryptocurrency is

  • Hash power/rate

  • Power consumption

  • Cost per KWh

  • Pool fee (if applicable)

While many investors have flocked to various other cryptocurrencies, the above considerations remain. Since mining is an intensive process, power consumption is arguably the number one ongoing cost. The advancement of hardware comes with more power consumption.

China is one of the leading cryptocurrency mining nations in the world due to its cheap electricity. They contribute roughly 65% of bitcoin’s total hashing power alone. Other countries that enjoy relatively inexpensive power include the likes of Argentina, China, India, and South Africa, to name a few.

The other consideration will be any applicable pool fees if the miner is not mining in their capacity. Miners may join a mining pool where the computational power is shared to compensate for either the lack of hashing power or expensive power cost. After that, when a block is solved, the rewards are split amongst the contributors, excluding the pool fees.

The last concern is the maintenance costs of the hardware. Most mining calculators online don’t paint the full picture of mining. All mining hardware heats up regularly, requiring constant cooling. Miners in countries with cooler climates benefit from its cooling properties. However, cooling is only one aspect of maintenance. Manufacturers also tend to offer limited warranties on the hardware. Therefore, there’s always a possibility of replacing the hardware at least once yearly.

Conclusion

The process of mining makes cryptocurrencies unique from fiat currencies in that miners create them through a valuable function by cryptography instead of central banks. While still a relatively new market, it is growing every day with the introduction of more coins, better equipment, and massive public interest. As with any venture, several considerations provide a higher barrier to entry than merely buying or trading crypto at a crypto broker or exchange. 


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