As you begin to learn more about the basics of cryptocurrency, you’re almost certain to find out that some types of new crypto coins are typically “mined.” Mining is the process of bringing new amounts of these cryptocurrencies formally into existence — but the process itself is a bit more complicated than you might anticipate.
Overall, the procedures involved in mining cryptocurrency can be complex and technical. But, the concepts surrounding the activities are reasonably straightforward, as is the process when you break it down into steps. If you’re curious about crypto mining, here’s what you need to know to get familiar with what mining is, why it’s necessary and what the cryptocurrency mining process involves.
Why Does Cryptocurrency Have to Be Mined?
While it’s easy to assume that the mining process solely exists to slow the release of coins, that isn’t the case. Instead, the processes involved in mining are a critical part of the broader cryptocurrency system. Mining serves as a security and verification mechanism to ensure the integrity of the coin’s associated ledger.
In most cases, cryptocurrencies are based on blockchain, a technology that records all transaction activities relating to a specific cryptocurrency. Each type of crypto has its own blockchain, which you can think of like a digital bank ledger that creates a new record each time an amount of a cryptocurrency is bought, sold or used to support a purchase. All of a crypto’s users’ transactions are entered onto the same central blockchain. But because there isn’t a central bank involved with cryptocurrencies, the transactions need validation from another source to ensure they’re accurate and legal. With crypto, that source is other coin users.
For the crypto to be viable, users need to take part in the verifications. While the bulk of the process is automated and relies on user-supplied computing power, it is resource-intensive. The computer itself is functionally dedicated to performing the verifications, so it can’t always support other activities at the same time. Additionally, it requires resources – such as electricity and a suitably capable computer – to participate in the verification, both of which can be costly to obtain and run.
Generally, users need an incentive to handle the verification tasks. Otherwise, they wouldn’t choose to dedicate the required resources to participate. As a reward for completing the verification process, the user involved gets rewarded with cryptocurrency. It’s the reward part of the concept that led people to refer to this activity as “mining.”
While mining mainly serves as a verification process, it also supports broader crypto concepts. For example, it ensures that everything in a coin’s digital ecosystem remains decentralized, so there isn’t a single issuing or controlling entity, like a bank, involved in the release of coins or the processing of transactions.
What Does Crypto Mining Involve?
As mentioned, cryptocurrency mining requires a capable computer. The verification process the system takes on involves solving highly complex mathematical equations to generate cryptographic hashes. Those hashes serve as unique digital signatures that secure and record the data from each crypto transaction and verify the user.
During the early days of cryptocurrency, the process of completing the calculations wasn’t overly resource-intensive. As long as they had the right software downloaded, many users were able to mine crypto using the same CPUs you’d find in a fairly standard home-computer build. However, as time has passed, the equations have become increasingly challenging to solve. As a result, basic computers are typically no longer capable of processing these high-level equations.
Today, people who want to participate in crypto mining need higher-powered machines, usually one featuring either a robust – and potentially specialized – graphics processing unit or an ASIC miner, which is a special type of computer chip designed only to process crypto functions. Additionally, a reliable, high-speed internet connection is essential.
This equipment (and the power required to run it) can get expensive. If purchasing the systems to mine cryptocurrency isn’t in your budget, there is an alternative option. Some cloud-based services allow people to rent a mining-capable computer operated by a third party. These are often located within large cryptocurrency mining facilities that have many computers set up to process crypto equations on an ongoing basis. The costs for these services can vary, but this option does allow you to access the mining space without making a large upfront investment.
The Role of Blockchain in Crypto Mining
As mentioned, most cryptocurrencies are based on blockchain, a distributed ledger technology that creates a list of every transaction that takes place with a specific cryptocurrency. When a new transaction takes place and is verified, a block is created. Then, that block is attached to the previous one, creating a chain that represents the full history of all associated activity with that particular coin.
The mining process is what verifies the authenticity of a block before it gets attached to the ledger. It’s a process that maintains the integrity of the chain by ensuring each transaction is legitimate and correct. This provides a higher level of security while limiting interference from outside actions, such as hacking.
Essentially, mining is a foundational part of blockchain operations. It verifies the authenticity of any transaction. Plus, it allows the system to remain decentralized, creating an incentive for users spread all across the globe to participate in the security measures.
An Overview of Mining Pools
As cryptocurrency mining became more resource-intensive, the process of handling the equations on home computers became less viable for individuals. It’s difficult for most people to commit the required computing power, especially because mining can be a competitive process. While many users can work on the same equation at the same time, only the user whose system actually completes the calculation is rewarded with coins. Others who attempt to verify the transaction but don’t finish the equation don’t receive anything for their effort.
In many cases, the most competitive mining operations are large-scale. They may comprise buildings full of computers committed to doing nothing but mining. Eventually, however, some people found a way to increase their odds of receiving rewards: They joined mining pools.
Mining pools are groups of smaller crypto mining operations, such as a collection of people with just a few computers each. They work together to increase their odds of solving equations first and receiving rewards for their efforts. Whenever any computer in the pool completes the verification and receives crypto in return, the reward is divvied up among the members of the pool. While that means each member gets a smaller amount of cryptocurrency per verification, it increases everyone’s odds of being part of a successful verification. That can lead to a steadier income stream from mining.
The Benefits and Risks of Crypto Mining
Generally, the main benefit of crypto mining is that it can give you the ability to acquire cryptocurrency without having to buy it. Instead, by dedicating other resources, you can generate new coins, all while supporting the overall security of the system.
While cryptocurrency mining does allow you to boost the value of your crypto wallet, there are also some risks involved. The investment in the required technology is substantial, often costing thousands of dollars. Additionally, crypto mining machines draw a significant amount of power and throw off a lot of heat, impacting your electricity spending and comfort.
Since the cost can be high, there’s no guarantee that mining will actually turn a profit. The cryptocurrency market is volatile, meaning that the values of coins can rise and drop quickly and without much warning. As a result, the crypto you mine may or may not have a value high enough to cover the costs of the mining itself. Additionally, it isn’t clear if the future trajectory of cryptocurrency will yield gains, so even a hold strategy isn’t guaranteed to generate a profit for you.
Even if you do secure a profit, there are other points to consider. The tax implications of mining are complex. Miners usually have to record the value of any coins when they’re mined, and then again when the coins are sold or traded later, to ensure they’re properly reporting any earnings.
Additionally, regulations regarding crypto could change. If that happens, a coin that once had a solid value could crash quickly. However, depending on the laws that develop, regulatory changes could also cause the values of some coins to rise.
Finally, in some areas, mining cryptocurrency is also banned. This is mainly because of the strain it places on electrical grids. If you attempt to mine in an area that doesn’t allow it, you could face legal and financial consequences.
Ultimately, mining cryptocurrency is a risky venture. If you’re thinking about getting involved, consider whether you’re comfortable with the potential drawbacks. That way, you can make a decision that’s right for your financial situation and goals.