Skip to content
Unlock the Secrets of Making Money with Bitcoin in 2024!
Subscribe And Get A Free Bitcoin Trading E-Book
Carla Moretti
With almost two decades of experience in the fast-paced financial industry, Carla has established herself as a powerhouse and an innovative leader.
Table of Contents
Add a header to begin generating the table of contents
What is Cryptocurrency Mining and How does it Work?
Carla Moretti
With almost two decades of experience in the fast-paced financial industry, Carla has established herself as a powerhouse and an innovative leader.
What is Cryptocurrency Mining?
Cryptocurrency mining refers to the act of minting new coins. If you’re mining BTC, for example, you will use the resources of your computer to validate transactions on the blockchain. Your computer will also solve complex puzzles to ‘mine’ blocks of cryptocurrency. As payment for both of these services, you will get rewarded with new coins.
The successful miners add information to the blockchain and update the ledger. Cryptocurrency mining requires a large amount of electricity and processing power. There are costs associated with such a massive initiative, but the rewards can be worth it.
With the advent of cryptocurrency, there seems to be a significant and radical shift towards digital currencies. Private investors, institutions, and in some cases, governments, are jumping aboard the blockchain bandwagon, as no one wants to be left behind.
These major changes in the financial structure of the world really puts into perspective the reality of money. What really is money? How is it created and issued? And most importantly, how does it grant financial freedom to the common man? Will crypto mining be viable in the future?
Read on as we try to make sense of the essence of money and its significance in the financial world.
The Origins of Money
The first known traces of money appeared as early as 5,000 years, in the form of the Mesopotamian Shekel. The rich people of Lydia and Ionia stamped coins made of silver, gold, and bronze to pay their armies. Coins were developed throughout the world soon after. Their weights and buying powers were standardized.
Precious metals were used as tokens of exchange because of their inherent value. Their scarcity meant that their supply could be limited and regulated. Although you could still store your buying power in other valuables like fruits, animals, and land, it made much more sense to use precious metals because of their portability and longevity.
Money evolved throughout the ages and became more and more standardized as different parts of the world connected with each other to engage in trade. With the industrial revolution and the ability to print bank notes, the money went through another important transformation. It was much safer for banks and states to store the reserves of precious metals and instead ask people to use a paper currency that could at any time be redeemed for gold or silver. Is that still possible?
What is Fiat Money?
If you were planning to exchange your dollars for some shiny gold from the government, you’re going to be disappointed. What we use as money today is termed “fiat money” in the financial world.
Fiat money is the bank notes that we use today – currency that is not backed by a commodity but is still considered legal tender in the country that issues it. This allows the central banks to have much greater control over the supply of money since they can print as many notes as they want. However, there is also the risk of hyperinflation. If corrupt or simply incapable governments print too much money, they can send the entire financial system of the country into collapse.
Fiat money puts the entire financial system in the hands of the government. Has the arrival of cryptocurrency and cryptocurrency mining changed this landscape? Does this new trend threaten the authority of the central banks and the government?
What is Cryptocurrency?
Cryptocurrency is a digital currency in which recordkeeping is accomplished on a decentralized ledger maintained through a protocol that uses multiple users to verify transactions instead of a centralized authority like a central bank or government.
Bitcoin is by no means the first of these cryptocurrencies. The first cryptocurrency was created by David Chaum’s company DigiCash in 1990. It was called eCash. However, it did not gain much traction due to major problems in the company. There were a lot of other subsequent attempts to launch digital currencies, like B-money, Bit Gold, and Hashcash, which never saw the light of the day.
Bitcoin, the first genuinely successful cryptocurrency, borrows a lot from these preceding projects. Let’s take a look at the first cryptocurrency, eCash, and see where it went wrong.
The Story of eCash
It was in 1983 that David Chaum came up with the idea of inventing digital currency. He was a cryptographer, and his ideas lay the foundations for the first cryptocurrencies in the world.
Chaum called his cryptography technique the “blinding formula,” a protocol that could encrypt and transfer information between individuals with an authenticity signature and yet be completely untraceable. DigiCash was, hence, founded, and eCash was eventually launched in 1990. Why did it fail?
Chaum’s digital currency revolution came to an abrupt end because he was a cryptographer and not a businessman. He wanted eCash to be perfect, and in his quest for perfection, he eventually led his company to bankruptcy in 1998.
What is Bitcoin?
The whitepaper for bitcoin was released in 2008, and the digital currency was launched in 2009 by an anonymous entity known only as Satoshi Nakamoto, a name that has since then passed into legend.
Bitcoin pioneered blockchain technology. The bitcoin blockchain is a decentralized ledger that maintains a record of every transaction of bitcoin that has ever been made. The cryptocurrency transactions are authorized and verified by thousands of computers all across the world in a process called crypto mining.
Mining bitcoin is a process that requires participation in a mining pool, but we’ll get to that shortly as we explain all dimensions of the mining process. Thus, the authenticity and fraud protection is maintained by many independent entities, rendering the system decentralized.
Of course, users need to invest considerable computing power to maintain the ever-expanding ledger and mint new coins. Therefore, users are rewarded with bitcoins for their efforts.
How does this cryptocurrency mining work in practice?
How Do the Bitcoin Rewards Work?
The first bitcoin block contained the message “The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks”. It was a subtle attack on the instability of the current financial system and perhaps a premonition of the coming of something better (cryptocurrencies) in the near future.
The difficulty of mining a bitcoin increases with every block that is mined through the mining process (more computing power is required) but we’ll expand more on that later. As the difficulty increases, the rewards of the mining pools decrease. The rewards are halved for every 210,000 blocks that are mined. In 2009, the reward for mining a block was 50 bitcoins. In May 2020, the third halving took place, bringing down the reward for mining a block to 6.25 bitcoins, something which is a sore thumb for bitcoin miners.
Bitcoin is currently divisible to eight decimal places. The smallest unit of a bitcoin is known as a satoshi. It is possible that as the value of bitcoin grows and the rewards for successive blocks continue to decrease, bitcoin could see even smaller denominations.
Bitcoin’s Algorithm
Bitcoin uses the SHA-256 hashing algorithm to encrypt its data.
What exactly does that mean? That simply means that the data is encrypted into a 256-bit hexadecimal number. All the transaction data is stored in a block, and it also contains information linking it to all the blocks that came before it.
All bitcoin transactions are put into a queue on the blockchain. They are verified by bitcoin miners. All miners active in the network try to simultaneously verify transactions by using their computing power. These miners might be working individually or at dedicated crypto mining facilities, where they used specialized mining hardware for crypto mining.
A block header is a 4-byte number known as the nonce. The miners generate different numbers in an attempt to solve the code. The loop goes on until a specific random number is reached. After the block is solved, rewards are doled out, and a new block is generated.
It’s the storing of information in blocks, and then the successive connections between blocks, that gave the decentralized ledger the name ‘blockchain.’
Bitcoin Mining
In the early days of bitcoin mining, you could easily mine it on a simple PC, since the mining difficulty was very low. Today, doing so is so unrewarding that it’s almost pointless to do so. There are entire server farms with specialized mining equipment where corporations pour quintillions of processing power into solving bitcoin hashes.
Currently, around 220 quintillion hashes per second are solved by the miners in the bitcoin mining network. There are specific machines made for bitcoin mining. They are called Application Specific Integrated Circuits (ASICs), and they can hash about 255 trillion hashes per second. They are giving average crypto miners a run for their money.
Here’s a list of currently popular ASICs for Bitcoin:
- Antminer S19, hash rate 95 TH/s, price $10-12k, profitability $8.19/day
- WhatsMiner m30S+, hahsrate 100 TH/s price $8500, profitability $8.62/day.
- AntMiner S19 Pro, hash rate 110 TH/s, price $15-17k, profitability $9.48/day.
Individual miners compete with big server farms by forming mining pools, in which all users contribute whatever processing power they can, and when a block is mined, they get paid according to the amount of processing power they contribute.
Bitcoin Mining in China
Bitcoin mining is responsible for 0.3% of global electricity consumption. That is enough electricity to power a small country or a US state. Realizing the negative impact this had on the global footprint of the country, China imposed a ban on cryptocurrency mining in 2021. However, mining is still in full swing, with server farms using off-the-grid electricity to mine cryptocurrency. They also used cloud mining hosts to avoid detection.
In December 2021, it was noted that China was responsible for 21% of the bitcoin mining in the world. While 38% of the mining takes place in the US, putting it at number 1 for bitcoin mining, is it really legal in the US?
Is Bitcoin Mining Legal in the US?
One of the biggest questions that people have today is that “is crypto mining legal?”
Bitcoin mining is legal in many states in the US. In April 2022, Fort Worth, Texas, became the first city government in the US to start its bitcoin mining pilot project. Three Bitmain Antminer S9s have been installed in the climate-controlled information technology wing of Fort Worth City Hall.
According to the city’s mayor, Parker, “For Fort Worth, a lot of people don’t know who we are. We want to change that conversation, and we believe that tech innovation, including cryptocurrency, is the way we’re going to do that.” Of course, installing only three mining rigs is not going to make a lot of money for Fort Worth, but it’s the right step towards becoming a part of the cryptocurrency future.
Fort Worth joined forces with the mining pool at Luxor Technologies to get their mining rigs ready. The city is growing really fast in the United States, and Parker wishes it keeps going that way by putting money into cryptocurrencies and other digital stuff.
What is CPU Mining?
There are three ways that you can mine cryptocurrency today: CPU mining, GPU mining, and ASIC mining. CPU mining is a form of mining that uses your computer’s processor. It used to be the go-to mining technique to mine bitcoin when the concept of mining was relatively new.
However, it has become obsolete in recent times due to the fact that it is extremely slow. The average hash rate is 0.7 MH/sec, which is nothing compared to what you can get with ASICs and GPUs.
Does that mean an average crypto miner cannot compete with people using ASICs?
Currently, individuals who do not want to make the expensive move of investing in a machine specifically dedicated to crypto mining, like an ASIC, for example, can opt to mine cryptocurrency with their GPU.
What is GPU Mining?
A GPU is a graphics processing unit. It renders everything that you see on the screen of your phones and computers. You might have heard the term GPU in conjunction with “Gamers,” “Nvidia,” and “AMD.”
GPUs are not only used for gaming, they have many other important roles too! Artists and CGI professionals rely on GPUs to create and produce movies and cartoons with stunning visual effects. But wait, there’s more! GPUs also play a significant role in mining activities. So, you might wonder, how does a GPU come into play when it comes to mining?
GPU mining became popular as the technology behind GPUs became phenomenally better with time. A GPU has a lot more processing power than a CPU, making it ideal for solving hashing algorithms that are required to mine cryptocurrencies. A very average GPU like Radeon HD 5970 can execute 3,200 32-bit instructions per clock, 800 times faster than a quad-core CPU that could only execute four 32-bit instructions per clock.
The reason why a GPU is so good at mathematical calculations is that it has a lot of integrated Arithmetic Logic Units (ALUs). The bull run in 2020 increased the demand for GPUs, causing their prices to skyrocket as thousands of people flocked to GPUs to set up their personal mining rigs. This created a problem for professionals as well as gamers who needed those GPUs. The two main producers of GPUs (Nvidia and AMD) countered that by releasing GPUs that could not be used for mining.
Bitcoin Mining vs. Ethereum Mining
A lot of miners shifted towards Ethereum because of the huge competition in bitcoin mining. Since Ethereum is relatively newer than bitcoin, it has undergone fewer halvings. Thus, the rewards are greater, and it is easier to find an online crypto mining pool for Ethereum.
Just to give you an example, an Ethereum mining pool currently known as the Ethermine, on average, generates a hash rate of 263.2 TH/s, has more than 220,000 active miners and over 1,080,000 workers with 77.58 blocks/h.
Here’s a list of some top ASIC miners and their profitability for mining Ethereum, according to the most recent data by ASIC miner value:
- iPollo v1 – released June 2022 – hash rate 3.6 Gh/s, power 3100w, noise 70 dB, Algo EtHash, profitability $85.38/day
- Jasminer x4 – released November 2021- hashrate 2.5 Gh/s, power 1200w, noise 75 dB, Algo EtHash/EtHashETC, profitability $62.04/day
- Bitmain Antminer E9 (2.4Gh) – released July 2022, hash rate 2.4 Gh/s, power 1920w, noise 75 dB, Algo EtHash, profitability $57.34/day
- Innosilicon A11 Pro ETH (1500 Mh) – released November 2021, hash rate 1.5 Ghs/s, power 2350w, noise 75 dB, Algo EtHash, profitability $32.53/day
- iPollo v1 Classic – released June 2022, hashrate 1.55 Gh/s, power 1240w, noise 70 db, Algo EtHashETC, profibtaility $28.32/day
Now, let’s explore some other coins you can mine in 2023, besides bitcoin and Ethereum.
RavenCoin
RavenCoin was made available to the public on the ninth anniversary of Bitcoin (3rd January 2018). Like most cryptocurrencies, RavenCoin was designed to make instantaneous and seamless payments. In just about a year, the developers introduced a multitude of features like voting using RavenCoin’s native currency (RVN) and a mobile wallet that could be made with a seed phrase and enabled messaging.
RavenCoin uses the X16R algorithm. X16R is special due to its high ASIC resistance. It uses 16 hash functions and the order of usage changes with each new block of RavenCoin. The previous block’s hash value plays a key role in determining the hash function of the next block. Each of the 16 hash functions has a 4-bit value that is assigned from a final 64-bit value. This makes it very arduous for developers to implement X16R in ASIC machines.
The total supply of RavenCoin is capped at 21 billion, and its current market capitalization is more than $135 million. RavenCoin has given more than 39% ROI since its launch. The block mining reward is 5,000 RVN.
Monero (XMR)
Monero is a lot older than RavenCoin. It was launched in 2014, and it uses the RandomX algorithm for its hashing. Monero is configured to be completely private, with transaction details, identities of senders and receivers, and transaction amounts hidden in a strict layer of anonymity.
The team behind Monero wanted everyone to take part in mining activities equally. To take away the advantage that high-powered systems and mining machines like ASICs have, they introduced the RandomX protocol. The RandomX protocol uses random execution techniques as well as memory-hard techniques to allow regular processors to compete with high-end machines. The results of the hashing are computed into a 256-bit outcome using the hashing function Blake2b.
The current mining reward of Monero is 21.15 XMR/block. The maximum supply of the coin is currently unknown.
LiteCoin
LiteCoin is technically identical to bitcoin, and it was released in October 2011. It was released under the MIT/X11 license. LiteCoin is one of the biggest cryptocurrencies today. Thus, investors always flock to it. It uses the SCRYPT protocol, which favors GPU mining over ASIC mining.
The Scrypt protocol was designed to be ASIC resistant and energy efficient. It requires rapid random number generation. The numbers are stored in the RAM of the processor since continuous access is required for them before the final result can be achieved. SCRYPT requires a lot less power than bitcoin. LiteCoin has a hash rate of 138 TH/s, whereas bitcoin has a hash rate of around 93,000,000 TH/s.
LiteCoin has had a whopping increase of 743% in its ROI since its launch. The current mining reward is 12.5 LTC per block.
Why is ASIC Mining a Problem?
In the previous paragraphs, you’ve seen a lot of mention of how new hashing algorithms are trying to be ASIC resistant. Why are ASICs bad for the cryptocurrency world?
Cryptocurrency works on the idealogy of decentralization. It aims to be a system that is owned and run by millions of common people. However, with machines like ASICs, large corporations can set up huge server farms where they can mine cryptocurrencies at a rate that far exceeds the mining power of all individual miners combined. This means that they get all the rewards, and they, in turn, control the blockchain. It starts making a decentralized system more centralized by concentrating power in the hands of a few and the rich.
If nobody does anything about this, cryptocurrency will just become like the current financial system, except for the fact that instead of the money printing machines being owned by the government, the mining machines owned by corporations will control the financial markets.
The Future of Cryptocurrency Mining
The future of crypto mining does not look completely bright. Mining is a very energy-intensive process, and with the current global need to shift towards more sustainable practices, cryptocurrency is also trying to become more sustainable.
There has been a gradual but sure shift from Proof-of-Work protocols to Proof-of-Stake protocols. POS uses a fraction of the energy that POW does because it uses a consensus algorithm to maintain the blockchain instead of requiring constant work from machines and waste of resources.
This means that mining will slowly but surely come to an end. Would it still be wise to invest in a mining rig? That is up to you to decide.
Skrumble.com provides all its content for informational purposes only, and this should not be taken as financial advice to buy, trade, or sell any investment instruments or products, including but not limited to cryptocurrencies, or use any specific exchange. Please do not use this website as investment advice, financial advice, or legal advice, and each individual’s needs may vary from that of the author. Investing in financial instruments, including cryptocurrencies, carries a high risk and is not suitable for all investors. It is possible to lose the entire initial investment, so do not invest what you cannot afford to lose. We strongly advise conducting your own research before making any investment decisions. This post includes affiliate links with our partners who may compensate us.
To view our privacy policy read here.