Why crypto mining is considered to be a big deal? Crypto mining started with Bitcoin way back in 2009 and since then it has created a lot of buzz among the crypto miners and investors, and even among the cybercriminals!
It is quite a big deal and there are several good reasons to say so.
You may have come across several articles on the internet speaking about crypto mining which might have left you craving to know more about this process.
Well, this is the right place to be for that.
To say in simple words, crypto mining is a term that signifies the process in which you earn new coins as a reward for your efforts.
If you contribute to Bitcoin, the process is called Bitcoin mining specifically.
Each subsequent transaction is linked to the previous one which forms a chain and is time stamped and hence the name ‘blockchain.’
This public ledger is open and distributed which means that anyone can see it.
Crypto mining needs a lot of effort and involves a considerable amount of investment.
These are the two primary reasons to consider it to be a big deal.
Another good reason is that it consumes a lot of electricity which has a serious impact on the environment as well as on the already depleting natural resources.
So, you may wonder why people mine crypto then.
However, there is more to it to know which you will find in this article.
Why Crypto Mining is Considered to be a Big Deal?
Irrespective of the reasons behind it, crypto mining is a process that has gained a lot of traction from the technophiles.
This is because blockchain, the underlying technology of cryptocurrency, is a distributed public ledger wherein every entry made needs to be validated before that in order to prevent fraudulent transactions.
But, who will do that given the fact that crypto is not controlled by any central authority. Well, it is done by the crypto miners.
Anyone can become a crypto miner provided they have the money in hand to foot the bill of hardware and energy consumed for the process.
And, this amount can be really high and recurring. However, nowadays, this cost can be reduced somewhat by the miners by using a more positive solution – the cloud services.
Alternatively, the miners can also hire a black market botnet.
Cloud mining is now quite popular because it allows the users to rent a rig or a dedicated mining machine.
This means that they do not need to invest in a costly crypto mining machine.
They can also keep the crypto coins in the rig mines but have to pay a fee for it in addition to the cost of maintenance of the rig.
If you want to know why crypto mining is considered to be a big deal, you will need to look into the matter in detail and start from the basics which involve the psychology and the changed behavioral nature of the people today.
It is easy and fast to send money to your friends, family members or to a merchant or receive money from them.
This has saved them from dealing with the hassles of using paper money and coin currencies which is extremely cumbersome and inconvenient today when the next-day delivery services and e-Commerce sites are reigning supreme.
Now, you may wonder how this relates to people getting involved in crypto mining.
Well, here are a few reasons though these do not signify that there is a one-size-fits-all response to the question.
This is because everyone has different needs, goals, and interests.
- Privacy and control – People today want to have more control over their money and a lot more privacy when they transfer funds digitally. The existing traditional financial payment systems and conventional banking systems can hardly provide them convincingly. This is where mining and using crypto comes in since this offers a specific level of privacy by keeping the transactions anonymous by using the hashing functions and public key encryption.
- Profitability – If you look at different data of the mining market you will know how it has grown over time as well as its prospects. Most of the miners think that this process is extremely profitable as an investment. However, all may not think the same because a lot of resources go into it and the return may not always be as high as expected.
This new and exciting technology has added a new level of experience to the crypto users.
There is a surge of people who want to be a part of this big thing and get involved in the process.
In fact, the number of Bitcoin miners only crossed 10 million two years back, according to some reports.
And, note that, this is just the number of Bitcoin miners in the world.
Over the years, the competition of miners as well as the level of complexity in mining has increased with the process of validating the transactions becoming more complex.
The mathematical problems that are used for POW or Proof of Work consensus seem to be almost impossible to solve without the use of brute force.
This force is required because there are multiple permutations of solutions and none of it will work by chance.
Along with these benefits, just like with any money making process, there is a criminal element included in the crypto mining process as well.
This process is called crypto-jacking in which the malware is induced to the networks or computers of the people.
This causes slower mining results because the efficiency of the computer is reduced so that it is not at par with the efficiency required for actual use.
Equipment can also be damaged so that it cannot process the level of work needed to mine a coin.
Both these increases the power bill along with the frustration of the victims.
It is for this reason you are advised to be very cautious with your crypto mining process and experts advise not to use dark web for this process at all.
This is because there are limited laws that govern cryptocurrency and those that are available vary internationally.
Moreover, depending on the jurisdiction, mining can be completely illegal or you may need to obtain a permit to use the power required for it which may be illegal, difficult, or impossible to get.
Understanding Crypto Mining
In simple words, the crypto mining process is complex and the miners need to solve mathematical problems and complex algorithms in order to validate a transaction.
Not one but several miners compete with each other in order to be the first one to solve this mathematical puzzle.
This creates a network of computers involved in the mining process.
The computer or the miner that solves the puzzle of a transaction and posts it on the ledger first wins the reward.
This typically is a financial reward and is usually paid in that particular crypto coin that is ‘mined.’
However, if you consider crypto mining in a more technical sense, it is a transactional process that uses a set of computers and cryptographic methods.
It solves the complex functions and all data related to it is recorded on the blockchain.
In this process an entire network of computers can be involved because the records are shared via the blockchain and can be viewed by anyone.
At this point, it is good to understand the crypto market and its mechanism itself which is considered to be an alternative to the global traditional banking system.
The main point of difference is between the decentralized and centralized working process of these two systems.
The crypto space is decentralized and uses distributed systems.
This means that there is no central authority to govern it and there is also no central ledger. It essentially works on blockchain technology.
The record is distributed which means that it is accessible and available to any participant of a network.
All these transactions made by different participants are verified by the cryptographic algorithms before these are included in the blockchain.
The miners do the necessary calculations in this case for every transaction.
They use a lot of computing power and effort for which they are rewarded with new coins.
Both the crypto mining setups as well as the people involved in the mining process play significant roles. And, this is performed in a very organized process.
Whenever a new transaction is made on the blockchain, it is sent to the memory pool and it lies pending there for verification.
Here the miner gets involved in verifying the validity of the pending transaction and organizes it into blocks or a page of the blockchain.
This page contains the records of data of several transactions along with other data.
In this process the mining node plays an important role in collecting all the transactions lying pending and unconfirmed in the memory pool.
It then assembles these unconfirmed transactions in the candidate blocks.
Then comes the role of the miner to convert these candidate blocks into a confirmed and valid block and for this the miner needs to solve a complex mathematical problem.
The miner has to perform several different tasks during the mining process. This includes:
- Hashing the pending transactions in the memory pool one by one and submitting them through a hash function. The hash of each transaction is of fixed size and contains a string of letters and numbers. These work as the identifier and contain all info related to that transaction.
- After hashing each transaction, the next step involves creating a Merkle Tree. It is also called the hash tree. In this step, the transaction hashes are organized into pairs. These are then hashed once again. This process is repeated until there is only one single hash. This last hash created is called the Merkle Root or root hash and this represents all those hashes that were used previously to generate it.
- The next step involves looking for the block hash or the valid block header. This functions as the identifier of all individual blocks. This means that for every block there is a unique hash. This is a complex process and needs combining the hash of the preceding block with the root hash of the candidate block. In addition to these two elements, a nonce or an arbitrary number is also needed to be added. The main objective is to create a valid hash by changing the value of the nonce several times since the hash of the previous block and the root hash cannot be changed. Typically, the block hash must be lower than the specific target value determined by the protocol. For example, in Bitcoin mining, it starts with a definite number of zeros. This is called mining difficulty.
- The final step involves broadcasting the block that is mined to the network and therefore makes it available to all the other nodes within the network. All these nodes check the validity of the block as well as the hash individually. If they find that it is valid then the block is added to their respective copies of blockchain.
It is only after all these steps are performed correctly, the miners can move on to mine the next block.
The unsuccessful miners discard the candidate block and take part in the competition once again.
The entire process of crypto mining, if you look into it deeply, is pretty complex and therefore is a big deal.
You will need to understand the technology underlying this process very clearly before starting mining or else suffer huge setbacks and incur huge losses.
The first, and perhaps the most important, thing to know is there are two primary concepts of blockchain. These are:
- Public key encryption and
Next, you should understand the roles of the different key components of the entire blockchain network. These are:
- Nodes – These are the devices or individuals forming the network and exist within the blockchain. Miners are specific nodes that solve or verify unconfirmed transactions in the blockchain using the hashes to create and add new blocks.
- Transactions – This sets the process of crypto mining rolling. In simple words, a transaction refers to the exchange of crypto coins between two parties within the network.
- Hashes – These are the one-way cryptographic functions. These hashes are the vital components of each block in the blockchain that help the nodes to verify the validity of a transaction.
- Nonces – This is actually an abbreviation of ‘Number that is used only once.’ This is a non-repeating and random value and is added to the hash of each block in the blockchain during crypto mining. It is this particular number that the miners try to solve for.
- Consensus algorithm – This refers to the blockchain protocol. It helps the nodes within the network to come to an agreement while verifying the given data. One example of a consensus algorithm is the Proof of Work or PoW.
- Blocks – This term indicates the individual sections of the blockchain. Each of these blocks contains the list of completed and verified transactions. These blocks, once verified, cannot be modified, at least it is virtually impossible. This ensures more transparency.
- Blockchain – This term refers to the series of blocks listed in a chronological order. It is for everyone to see because it is a distributed public ledger.
It is a common misconception among people that crypto mining is no big deal. All they have to do is verify and validate a transaction.
Well, take it written in stone, creating new coins is not at all simple.
This is because the process does not only involve validating transactions before these are added to the blockchain but it must also prevent the network from double spending.
Though the accounting process is similar to physical currency ledger where one account is debited by a specific amount and another is credited with the same amount, it is easy to manipulate these transactions in the case of digital currency.
Hence, the distributed ledger of digital currencies can only be updated by the verified crypto miners when a PoW consensus protocol is in place.
Therefore, it is the responsibility of the miners to prevent double-spending.
In addition to that, this specific requirement also ensures that the network is not affected by any external attacks.
Apart from the complexity of the process, crypto mining also involves a lot of effort and costs.
You will need to buy specialized mining hardware which is quite expensive and different from any ordinary desktop or laptop computer.
Next, you will need to set up your rig and install the specific software for mining to connect your machine to the blockchain of the specific coin you want to mine.
You will also need to join a mining pool online for additional computing power if you want to compete with the large miners with the combined computing power of each of the members in the mining pool.
Now you are ready to mine. Simply plug in your rig to an electrical outlet, browse the blockchain using the chosen software, enter your wallet details, choose a mining pool, and off you go.
Not for All
The costs and complexities involved in crypto mining do not make it a feasible and productive option for all crypto investors. It is for this reason you will not find every crypto user opting for crypto mining.
First, it is extremely resource-intensive. This means that the process will consume a lot of electricity and computing power both.
Remember, this is a continual process and not a 9 to 5 job. Therefore, you will need to keep your computer on 24/7/365.
This means that you should have quite a good amount of cash in hand to foot the monthly bills unless you live in an area where electricity is dirt cheap or free!
As said earlier, crypto mining would need specialized computers that come with an exceptionally hefty price tag. Therefore, not everyone can afford it.
You will also need a constant power supply and a strong and continual internet connection for crypto mining.
If you stay in a place where these things are not guaranteed, think about anything but not mining crypto coins.
The continual mining process will also generate a lot of heat, and if you use multiple computers, it will be more.
This will have a three-fold effect. One, system failure may happen which means you will need to maintain your systems well and also keep a considerable amount in hand for their repair.
You cannot afford to delay in repairing and lose your opportunity to earn new coins.
Two, you will also need a large and well ventilated room to ensure proper airflow and three, you will need to invest in a proper and more efficient cooling system unless you live in Iceland or in the Arctic.
And, after all these, the return on your investment may not be as high as expected if you are not good at solving complex math puzzles.
Moreover, as time goes, more and more people who can afford it will get involved in crypto mining which will also decrease the return ratio.
Also, you should keep in mind the halving effect where the returns are halved, for instance after every four years in the case of Bitcoin.
The Legal Factor
Crypto mining may not be allowed in the region you live in.
In some countries, such as in the US, crypto mining is allowed but there are some riders attached to it, especially when it comes to taxes.
China, on the other hand, has banned crypto mining and there are other countries that consider crypto mining as capital gains and therefore are a taxable income.
Therefore, before you get indulged in this process, make sure you check with the government regulations so that you do not get involved in legal hassles, penalties, and even criminal charges.
Apart from the geo locations, crypto mining may also be considered to be illegal if you mine the coins using illegal means.
Since these are the common processes followed by the cybercriminals to crypto-jack processing power of others’ devices, the legal authorities may think that you too are trying to do so.
The Cost and Return Ratio
Now, finally consider the cost and return ratio. This will enable you to know how much you can make from crypto mining on an average.
If you are into crypto mining, even Bitcoin mining, on your own then the rate of return will be much less in comparison to the return you would have made if you joined a Bitcoin mining pool.
If you mine Bitcoin individually you may even struggle to make profits more often than not due to shortage of computing power which will pull you back from competing with other miners involved in the process who may have larger computing power and resources.
However, no matter how you intend to go ahead with the process, the amount of money that you can make may vary because it is determined by quite a lot of external factors.
If the amount invested initially and the recurring cost of electricity in the region you live in are high, then obviously the return will be less.
If the return does not cover these costs, you will incur losses.
Therefore, it is prudent to go for a low cost technology and low cost power along with a reliable mining pool to get higher returns and enhance your chances of success from crypto mining.
The next important factor to consider is the tax rules in your country for the mined coins.
Depending on the laws of the jurisdiction you may have to pay taxes even if it is unlikely that you will make a profit.
The rate of return will also depend on the price in the market of the specific crypto coin you mine.
These prices typically govern the profitability of a mining process.
Usually, Bitcoin maintains a higher price which is why Bitcoin mining is so popular among the people.
It is easier for them to compensate for the power bills and mining equipment costs with the returns offered by it.
The fees charged by the crypto exchanges when you want to sell the coins you have mined may also eat up your profits if these are high.
Even if the fees charged are modest, you should always include it when you calculate the total cost of mining in order to find the most accurate cost and return ratio.
Therefore, you can see that crypto mining is a crucial part of PoW blockchain networks.
It keeps the network safe and secure. It also ensures steady and valid issuance of coins.
However, it involves high costs but the potential earnings may not be constant or high since it depends on several external factors.
As a result crypto mining is considered to be a big deal which is why you should think twice, if not several times, before jumping into it.
You must do your own research and evaluate the potential risks in the process and then start investing your money, time and effort in crypto mining.
Crypto mining is an appealing alternative to the conventional centralized systems. However, as you have come to know after reading this article, it is very demanding in terms of resources and computing power and so it is not an option for all.