Understanding Cryptocurrency Mining
Cryptocurrency represents one of the most exciting technological innovations in many years. It contains the potential to possibly revolutionize the world in much the same way that the smartphone or the personal computer once did. On top of all that, these digital tokens that can be used for buying and selling also make for great investments, with many coins rising in value to impressive levels.
If you have read about cryptocurrency only casually, you may be at a loss to understand how they come into existence. Or you also might have heard something about mining and the potential for it to make you rich if you get involved. It actually isn't as simple as all that, but it is true that mining cryptocurrency can be a financially rewarding experience if done properly.
You might have to recalibrate your expectations, however, if you think you are just going to become rich instantly by putting out your mining shingle. To be done correctly and profitably, mining takes a significant beginning investment that buys pricey computer equipment. This is especially true if you want to mine Bitcoin, which is by far and away the most valuable cryptocurrency on the market.
If you set your sights a little lower, you can possibly make some decent profit by mining for some of the alternative coins, or altcoins, on the market. These won't make you rich, at least not immediately, but they might put you in the black in terms of profit in a shorter time and with a smaller initial investment. In any case, before you can mine cryptocurrency, you have to understand the tools and realize the process behind it all.
What Is Cryptocurrency?
You might think that money is already digital in a way, considering how you can buy products and services on the internet. But that money only changes hands thanks to a third party that makes it happen, such as a bank or a credit card company.
Without those entities getting involved, you couldn't take fiat money, which is a fancy term for the currency coined by a given country, and pay someone over the internet. Even a company like PayPal, which facilitates online payments, only does so by first taking a fee for their services. They also decide if and when the payment will go through, doing so by linking to your bank account. That adds another level of intermediary to the transaction.
Cryptocurrency doesn't go through any of those extra channels. It is simply transferred from one party to the next, which is why it is called a peer-to-peer payment system. There is also no overseeing organization making these transactions happen, just computer nodes across a wide-ranging network. That's why cryptocurrency is considered a decentralized entity.
But where do the coins come from, if they are not created by some organization or government the way that fiat currencies are? Well, that's where the miners come into play.
Bitcoin and the Role of Miners
The first cryptocurrency was known as Bitcoin, and it is still the most popular and valuable cryptocurrency offering on the market. Bitcoin came about when a mysterious individual named Satoshi Nakamoto issued a white paper explaining details for a peer-to-peer, decentralized currency. This was in 2009, which shows you how much Bitcoin and the rest of the cryptocurrency market has risen in such a short time.
The problem that had to be solved for the currency to work was one of trust. How would the people who were supposed to receive the money for their goods or services trust that they would get paid? And how could that same party ensure that the person doing the paying would not try to take their money back, a la charge-backs on credit cards?
Miners were the solution to this problem. Every time a transaction is made with Bitcoin, a network of miners must verify it. They do this by rushing to solve a complex mathematical problem before any other miner can do it. The reward for their efforts is a specified amount of Bitcoin, an amount that changes as the supply increases.
What this process does is ensure that the transaction can be trusted. Each part of the transaction is validated, verified, and added to a digital ledger known as the blockchain that can be seen by both parties. The blockchain is the technology that drives cryptocurrency, but it is only as good as the miners making it work.
Why Bother Mining?
There are basically three ways that you can gather Bitcoin and other cryptocurrencies. You can buy them off an exchange, you can be paid them for some service rendered or goods sold, or you can mine them. However you manage to do it, you are essentially getting ahold of something that can be very valuable.
That's because the digital coins don't necessarily stagnate. Many rise in value in much the same way that a stock that you bought might. In the case of Bitcoin, the price has multiplied many times over from its early levels thanks to demand for the coins, which are limited in terms of supply.
Many people who grabbed Bitcoin and the other cryptocurrencies which followed in its wake in their earliest stages became rich from the rise in prices. Some think that the coins have the potential to go even higher, especially if they become as widespread in society as their proponents think they can be. That is why mining the coins, which is essentially a reward, holds appeal over paying a steep price to buy them.
The Two Main Methods of Mining
You might think that setting up shop as a miner is a license to print money. But mining cryptocurrencies is extremely involved, and it requires you to pay money up front no matter how you choose to accomplish it. Here are the ways you can make it happen.
To mine for cryptocurrency, you need to buy computer hardware which is powered by expensive computer chips. To give yourself a chance to possibly be the first miner to solve one of the problems given out to the network, you have to have extreme amounts of lightning-fast processing equipment. You can't do it in your head or even on a laptop, at least if you ever want to grab some cryptocurrency for your efforts.
Think of mining in terms of a lottery. In order to give yourself a better chance to win, you buy a lot of tickets. The more power that your computer hardware can generate, the better the chance that you can possibly be the first to validate a cryptocurrency transaction.
It is a costly endeavor, and it is not something that you can usually do out of your own home, not unless you have ample space. The equipment is bulky and will overheat quickly without a properly cool environment. Many cryptocurrency miners rent or buy specialized spaces to maximize their efforts, which adds to the overhead of the whole endeavor.
In addition, cryptocurrency also requires a lot of power to make all that equipment work. Be prepared to pay hefty electric bills as a result. As you can see, it all leads to a significant financial commitment without any possible way of knowing when or if you will ever see any profit from all of that.
If all of this sounds like an involved process, it is. And even if you could afford the equipment and the power bills, you would still be going up against some pretty stiff competition in the form of the mining pools. By having many miners all working toward the same goal, the larger pools on the market dominate the cryptocurrency that is mined.
To get involved in mining without actually doing all the work, you can pay money to a company that will do everything for you and allow you to reap the financial rewards. You are essentially renting their equipment and their computing power so that you have a legitimate shot at getting some cryptocurrency out of the deal.
The financial equation concerning these companies is relatively simple. The more money you pay for equipment and mining speed, the better the chance you will be able to get some cryptocurrency in return for your efforts. What you need to decide if you use this method is whether or not you can afford what it will take to make money on the back end.
That means that you have to keep in mind the fluctuating prices of the coins, ideally getting involved right when the market is in an upswing. You'll also need to decide if the costs you put up right at the beginning will include joining one of the large mining pools. That will increase your chances of cryptocurrency actually coming your way, but it doesn't guarantee that the value of the return will ever match your investment.
While the different coins in the cryptocurrency market might diverge very subtly in terms of the technical process by which the coins are mined, the basic setup is the same. You'll be paying up front to either buy what is necessary or rent it, along with paying for the mining expertise of others. And then you just have to sit back and hope that what you get in return will make it worth your while.
By mining altcoins, which include all of the coins besides Bitcoin, you are changing the mathematics up a little bit. Since these coins aren't as popular as Bitcoin, which means that there aren't as many miners competing for coins, you have more of a fighting chance of coming out on top and getting some coins. And you also won't have to pay quite as much up front no matter the method you choose.
The only problem is that aren't nearly as valuable as Bitcoin. As a result, you might get more in terms of the amount of coins that you successfully mine. But the value of those coins might not approach what even a few successfully-mined Bitcoin could fetch you on the market.
Mining Versus Buying
The bottom line is that it is not easy to be a cryptocurrency miner in this day and age. In the infancy of the coins, you could get away with less money for equipment and the like because the competition for coins wasn't as stiff. You could also get coins in your supply that were bound to shoot up in value, meaning that you didn't need to be successful with your mining efforts nearly as often to still turn a big profit.
As for now, the cat, so to speak, is out of the bag.
That means that miners have flooded into the market from all corners.
Think of it in terms of a ball thrown up into a sea of hands. If there were only a couple people standing near you, you'd have a pretty good chance of catching that ball. A thousand people standing around you would dramatically reduce the odds of your making that catch.
If that cryptocurrency ball is too tough to catch, you can still get involved. And that is by simply picking out a coin exchange, buying or downloading a digital wallet for storage, and buying some coins on your own.
That still requires an investment. But it also means that you can ensure that you will end up with some coins in your possession.
The bottom line is that you most likely have very little chance of turning cryptocurrency mining into a well-paying occupation at this time in history. You might be able to receive a little bit of passive income over time. But the days of miners getting rich quick are long since past, unless you somehow stumble upon a coin that rises from nothing to the upper echelons in the market.
Cryptocurrency miners are extremely valuable to the entire process of creating these fascinating digital coins. It's just that the actual value derived from the effort of mining is not nearly what it used to be.