What is cryptocurrency mining
To bring new cryptocurrencies into circulation, the digital currency has to be ‘mined’. Cryptocurrency mining is also a key way to validate new transactions that are recorded on the blockchain. It is also important for maintaining and further developing the blockchain ledger.
Cryptocurrency mining requires a system to solve complex mathematical problems and to do this, elaborate as well as sophisticated hardware is needed. In the system, the first computer or node which solves the problem gets a subsequent crypto block kickstarting the process all over again. Successful miners receive a reward which is usually a cryptocurrency. This often incentivizes the entire process and so many miners also go on to assist fellow miners.
Generally, miners work together in a pool to oversee and verify transactions. What makes cryptocurrency decentralized is that the responsibility of ensuring transparency and maintaining validity is shared among the users globally. Unlike traditional forms of investment/trading, there is no central authority such as a bank or government body that regulates the system.
Is cryptocurrency mining something for you?
Read on and find out!
Why does cryptocurrency need miners? Essentially, ‘mining’ refers to the largely technical and computational tasks that the computers in the blockchain network perform in order to earn new cryptocurrency tokens. In this process, miners work as system auditors and hence are paid handsomely for their efforts. This is because they play an important role in verifying whether or not the cryptocurrencies are being legitimately traded. This not only helps in maintaining user honesty but also ensures that the ‘double-spending problem’ is avoided.
What is double-spending?
It refers to the situation where a cryptocurrency owner ends up spending the same coin more than once, often wrongfully. With fiat currencies that also have a physical presence, this is unlikely. A $20 bill can be spent to buy a variety of things from vodka to lotto tickets, but you wouldn’t be spending the same bill for both transactions. This is somewhat similar to fake currency notes but again, you’re not spending the exact same note. But in the case of cryptocurrencies, someone could possibly make a copy of the cryptocurrency token and use it for a transaction while actually holding on to the original digital currency.
How does mining work?
You can get Bitcoin or any other cryptocurrency through three different means. Either you can buy them directly from an exchange, or you receive them in exchange for a service or goods you provide and thus it becomes a mode of payment, or of course, you ‘mine’ them. Have you ever tried bitcoin mining or at least considered dabbling with it? If this was 10 years from now, anyone with a good computer could start blockchain mining. However, blockchain has risen exponentially over the years and thus it requires a lot of computational energy to keep the blockchain up and running. To put this into perspective, the computing power needed to mine a single bitcoin grew by 12 trillion from January 2009 to October 2019. Therefore, if you want to take up blockchain mining as a hobby, you may want to reconsider your decision. Bitcoin mining is now the domain of experts and organizations who can pool their resources.
• The calculations needed to record bitcoin transactions and make sure that the blockchain’s safety is not compromised, demand specialized computers also known as nodes. They’re equipped to deal with the volume of transactions that are processed while also having the computing power required that’s often pooled in by the miners.
• In theory, it is fairly simple: organizations and companies have to buy expensive mining hardware and also incur the cost of the electricity needed to keep these systems up and running. Practically, these are like big data centers which become profitable when the mining cost is less than the actual value of the mined coins.
• How do miners stay motivated? Through an exciting lottery that’s hosted on the network. To put it simply, each computer on the network has to guess a 64-digit hexadecimal number which is called a “hash”. The first computer to guess it correctly wins the reward.
• This new, verified block is then added to the shared blockchain ledger and the winner is then given a pre-decided sum of the latest mined bitcoin, which usually happens once every 10 minutes! Currently, the reward for successful mining is 6.25 bitcoin which has come down from 12.5 bitcoins and is going to be halved once every four years. So the next change is likely in 2024 and the reward would only fall in the coming future as the total number of bitcoins left keeps diminishing.
• Since Bitcoins mimic gold, there are only 21 million bitcoins in total. Therefore, in theory, the final block would be mined by 2140. After this, the only way miners can earn a reward from bitcoins would be through transaction fees.
How much does mining earn you? Roughly, every four years, the reward for bitcoin mining is halved. In 2009 the reward was 50 bitcoins which came down to 25 in 2012. In 2016, this was further reduced to 12.5 BTC and as mentioned above, it stands at 6.25 BTC today.
So how much do you earn for one successful mining? As per the records for March 2022, a single bitcoin’s value stood at $39,000. Therefore 6.25 BTC would earn you about $243,750!
It is very intriguing that Bitcoin’s market price has a trend of being aligned to the gap (if one may say so) of new coins in circulation. Thus, the inflation rate lowered but scarcity and price increased.
Downside of mining Mining risks are mostly financial and sometimes even regulatory. You could end up losing all your investment despite spending a fortune and time on buying high-quality equipment needed for mining. However, that should not discourage you from mining as this can be curtailed by entering mining pools but if your government considers bitcoin mining illegal, you should think again.