Cryptocurrency mining is the process of getting digital coins from nothing – at least this is what many people think. How does it really work and how much can you earn on mining? Let’s figure out.
- What is cryptocurrency mining?
- Principle of work
- How much can you earn on cryptocurrency mining?
What is cryptocurrency mining?
First of all, mining does not get crypto coins from nothing. Most cryptocurrencies are built using the blockchain algorithm that is programmed to generate coins every time a miner meets certain requirements and performs certain computer work. Most cryptocurrencies have limited numbers of available coins, which will never refill after the last coin is found.
For example, the maximum number of Bitcoins available for mining is 21 million. As of January 2020, there are less than 3 million Bitcoins left to mine. The last Bitcoin will be received by the miners in approximately 2140, and after that there will be no Bitcoins left to mine. Bitcoin is often referred to as the “Digital Gold”, and just like gold it is valuable because it has limited availibility and price determined by the supply and demand, and not by the government. This is why mining is a very precise word for obtaining cryptocurrency.
Principle of work
In order to perform cryptocurrency mining, you will require to set up certain hardware and software. The setup depends on the cryptocurrency that you would like to mine, but the mining process is about the same for most blockchain-based cryptocurrencies.
Mining is a never-ending process of decoding the blocks of the cryptocurrency’s blockchain. To decode a block, you will need to solve a complex mathematical problem. The problem itself is different for every block and is based on the calculations made during discovering the previous block. The miner’s task is to verify the calculations made for the previous block and to make new calculations that will need to be verified when the next block will be mined. This algorithm is called “proof of work”.
The calculations themselves are not only hard, but also strongly depend on luck. According to the blockchain’s algorithm, there can be lots of solutions that satisfy the given mathematical task, but only one of them is considered correct. The first miner who comes up with the required solution gets to add a block to the blockchain and is rewarded with a set number of coins. Other miners who were working on solving the same problem will have to wait until the next block is generated to start solving another problem. Different cryptocurrencies have different time of generation of new blocks. For example, Bitcoin’s (BTC) blocks are generated every 10 minutes, while Monero’s (XMR) block generation time is about 2.5 minutes.
Since there is huge competition in cryptocurrency mining, it is essential for the miners to get the best equipment and to keep it updated all the time.
How much can you earn on cryptocurrency mining?
Cryptocurrency mining can be considered a risky venture because the miners’ earning depend on many factors. No one can guarantee any particular outcome from the mining, so if you are planning to start mining, you should carefully consider all of the factors below.
- Type of cryptocurrency. Different cryptocurrencies have different mining algorithms. Most blockchain-based cryptocurrencies are designed to make mining harder with time. For example, mathematical problems to be solved by the miners can get harder every time a certain number of blocks are added to the chain. This forces the miners to constantly add processing capacity to keep up with complexity of mining. Different cryptocurrencies use different types of hardware for mining, and therefore adding some extra power to a mining farm can cost from a little to a lot.
- Halving. Many cryptocurrency’s algorithms will reduce the rewards to the miners over time or after a certain number of blocks has been discovered. This is done to increase the public’s interest in cryptocurrency. For example, when Bitcoin was first released, the reward was 50 BTC for the miner who added a new block to Bitcoin’s blockchain. In 2012 the reward was halved to 25 BTC and then in 2016 it was halved again to 12.5 BTC per block. In 2020 the world expects the next halving of Bitcoin. This way the reward per block reduces while the price of equipment, electricity and overall competition keeps rising.
- Exchange rate. This is the most obvious and the most important factor of all. One cryptocurrency can be extremely hard to mine, but one successfully added block can bring you a dozen thousand dollars. At the same time, other cryptocurrency can be easy to mine, and the rewards can be huge, but you will get nothing but losses if the price of each coin is less than a dollar.
- Expenses. Even with good profitability you need to plan ahead and consider the expenses. If you calculate the price of the mining equipment and the monthly cost of electricity you may discover that it will take several years to cover the expenses and gain actual profit provided that the price of the cryptocurrency you mine will not significantly reduce.