Are you looking into seeing your legs in the world of cryptocurrency and you are wondering what is cryptocurrency mining or what is bitcoin mining?
Well. in this blog post we are going to be talking about cryptocurrency mining in detail. I will be giving you an overview of it and how does it work, the different type of mining rigs and what impacts your mining profits as well as giving you my opinion on the eighth 2.0 and the EIP-1599.
There will be a lot of information in this post. I hope you enjoy it and you get something useful out of it.
In this article, I do have a lot to talk about and explain, but the first thing I should cover is cryptocurrencies. If you are new to mining I would assume you’re fairly new to the crypto world in general and maybe you came across it once the prices skyrocketed in recent months.
What is cryptocurrency?
Let me briefly run down what cryptocurrency is.
Cryptocurrency is a digital asset just like your dollars except that it runs fully digital. It does not have a bank or any central entity that controls it hence why it’s called decentralized and that is one of the main pros of cryptocurrency.
There are many cryptocurrencies that are newly released, but generally, as a miner, we only focus on the profitable ones. I will touch more on that later on.
With cryptocurrency, your money is your own. You keep your cryptos in a wallet that is made of a public and a private key. Imagine your public key to be your email address and your private key is your password.
To receive or send money you will be using the public address. Now that means if you lose your money or send it to the wrong address you don’t have a way back.
As for anonymity, cryptocurrency is fairly anonymous but not hard to track down the source of the transaction and the receiver.
There are some cryptocurrencies intended for further privacy and such, but to achieve nearly as full anonymity as possible, you will definitely need to do more work from burner phones to bitcoin ATMs.
One of the main things that you should know is how to buy cryptocurrency and how to sell your cryptocurrency. There are different regulations for every country but I have written about the different wallets and the best exchange sites.
I do hope these two sense of an explanation was sufficient for some background information.
What is cryptocurrency mining?
Now let’s talk about cryptocurrency mining.
Cryptocurrency mining is the process of validating transactions and minting new coins from blocks.
What is Bitcoin mining?
Is it still profitable to mine Bitcoin these days? Does it mean I can generate free Bitcoin from my computer?
Bitcoin was created as a decentralized alternative to the banking system. This means that the system can operate and transfer funds from one account to the other without any central authority.
With a central authority, transferring money is easy: Just tell the bank you want to send $70 from your account and add it to someone else’s account.
In this case, the bank has all the power, since the bank is the only one who is allowed to update the ledger that holds the balances of everyone in the system.
But how do you create a system that has a decentralized ledger?
How do you give someone the ability to update the ledger without giving them so much power that they will become corrupt or negligent in their work?
Well, the rules of the Bitcoin system, known as the protocol solves this in a very creative way.
Anyone who wants to participate in updating the ledger of Bitcoin transactions, known as the blockchain, can do so.
All you need to do is guess a random number that solves an equation generated by the system.
Sounds simple, right?
Of course, this guessing is all done by your computer. The more powerful of a computer you have, the more guesses you can make per second, thus increasing your chances of winning this game.
If you managed to guess right – you earn Bitcoins and get to write the “next page” of Bitcoin transactions on the blockchain.
Here’s a more detailed breakdown of the mining process:
Once your mining computer comes up with the right guess, your mining program determines which of the current pending transactions will be grouped together into the next block of transactions.
Compiling this block represents your moment of glory as you have now become the temporary banker of Bitcoin who gets to update the Bitcoin transaction ledger known as the blockchain.
The block you’ve created, along with your solution is sent to the whole network so other computers can validate it.
Each computer that validates your solution updates its copy of the Bitcoin transaction ledger with the transactions that you chose to include in the next block.
Since mining is based on a form of guessing; for each block, a different miner will guess the number and be granted the right to update the blockchain.
As mentioned earlier the miners with more computing power will succeed more often, but due to the laws of statistical probability, it is highly unlikely that the same miner will do so every time.
After this stage is complete, the system generates a fixed amount of Bitcoins and rewards them to you as compensation for the time and energy you spent in solving the math problem.
Additionally, you get paid any transaction fees that were attached to the transactions you inserted into this block.
It’s called mining because of the fact that this process helps “mine” new Bitcoins from the system.
Proof Of Stake vs Proof Of Work
I will further explain what blocks are and how they work, but first, let’s look at two different ways to mine:
- one is proof of work and
- the other is proof of stake
Proof of work is what all the different mining hardware falls under such as GPU rigs, FPGAs, ASICs, etc. The mining hardware solves randomly generated complex puzzles using electricity and computational power and then you’ll get compensated once you find the right solution.
Proof of stake is a way of being a shareholder so it’s owning a certain number of a certain cryptocurrency to then be able to launch a node that will be validating transactions and minting new coins out of the blocks.
Usually, these nodes need a minimum number of coins to create one. In some scenarios, your coins are locked out and you can’t move them around, but there’s also soft staking which is more flexible.
Your pc needs to be on 24/7 to keep your node online with a stable internet connection.
There is more to staking than what we’ve mentioned here, but I think it would need its own article to be fully covered.
Now let’s get back to the main focus of the majority of miners and newcomers and that is proof of work.
Proof of work has much more to it. There are many different algorithms that cryptocurrencies fall under. Algorithms are basically different arenas of puzzles. Some mining hardware can excel better at certain coins with certain algorithms more than other coins.
The measurement for your mining power is your hash rate. The hash is considered the solution attempt to the puzzle. For example, if your hash rate is 30 mega hash then you’re doing 30 million solution attempts a second.
There is a lot more complexity to it regarding solving the block, but I don’t want to get too technical in this article I just want you to have an idea.
Evolution of Mining Rigs
Satoshi Nakamoto, who invented Bitcoin, crafted the rules for mining in a way that the more mining power the network has, the harder it is to guess the answer to the mining math problem.
The difficulty of the mining process is actually self-adjusting to the accumulated mining power the network possesses.
If more miners join, it will get harder to solve the problem; if many of them drop off, it will get easier. This is known as the mining difficulty.
So why on earth did Satoshi do this?
Well, he wanted to create a steady flow of new Bitcoins to the system. In a sense, this was done to keep inflation in check.
The mining difficulty is set so that on average a new block will be added every few minutes on average.
This type of self-adjusting mechanism created some sort of a mining race to get the most efficient and powerful miners as soon as possible.
Back at the time, Bitcoin was invented it was easier to mine using your personal computer. Using your CPU, meaning your Central Processing Unit or your computer’s brain, was enough for mining Bitcoin back in 2009 since the mining difficulty was low.
As Bitcoin started to catch on people looked for more powerful mining solutions. Gradually people moved to GPU mining.
A GPU or Graphics Processing Unit is a special component added to computers to carry out more complex calculations. GPUs were originally intended to allow gamers to run computer games with intense graphics requirements.
Because of their architecture, they became popular in the field of cryptography and people also started using them to mine crypto.
Another evolution came later on with FPGA mining. FPGA is a piece of hardware that can be connected to a computer to run a set of calculations. The downside is that they are harder to configure, which is why they weren’t as commonly used in mining as GPUs.
Finally, a new breed of miners was introduced – the ASIC miner. ASIC stands for Application Specific Integrated Circuit, and these were hardware manufactured solely for the purpose of mining crypto only.
Unlike GPUs, CPUs, and FPGAs they couldn’t be used to do anything else. Their function was hardcoded into the machines. ASIC miners are the current mining standard.
Different Types Of Mining Rigs
As I mentioned before, there are different types of mining rigs. Let’s go ahead and go through these different types of rigs and explain them briefly.
ASICs are known as Application Specific Integrated circuits and they are mostly used to mine certain coins with a high output of computational power as well as high electricity consumption.
By mining a specific coin I mean that if you buy for example MicroBT Whatsminer M30S++, it provides a computational power of 112 Terahash and consumes 3 472 watts, but it can only mine coins that use the shot 256 algorithms such as bitcoin.
With such an immense hash rate, your profits will still seem low due to the network difficulty which we will explain later on in the section of what impacts your mining profits.
FPGAs are basically what’s in between the ASICs and the GPU miners. They’re made for a handful of algorithms.
They can’t mine every coin but some of them can. They’re very similar to GPUs but they are more efficient and more profitable to some extent but they can also get very very expensive.
I have no experience at all with any FPGAs. One day I will probably write a blog post covering them in detail.
- GPU Miners
GPU mining use graphic cards to be able to get more computational power. The more and better GPUs that you have, the more mining power you have.
This option is the most residential friendly because ASIC miners do produce a lot of heat and noise while FPGA miners are very similar to GPU miners. These two options are residential-friendly.
There are different types of mining such as USB mining, CPU mining as well as storage mining where you can mine with your hard drive.
Different Types Of Mining Services
Now that we wrapped up the different types of mining rigs, we can go ahead and move on to the different types of mining services.
There are several types of mining services and that is:
- cloud mining
- Web mining
- Mobile mining
- pre-built rigs or GPU rental
I’m just going to give you my opinion on them. This should not be considered a piece of financial advice, but it’s only my opinion on these platforms and maybe you can benefit from it.
The first thing I want to start off with is:
- Cloud mining
Cloud mining means that you do not buy a physical mining rig but rather rent computing power from a mining company and get paid according to how much mining power you own.
At first, this sounds like a really good idea since you don’t have to go through all of the hassles of buying expensive equipment, storing it, cooling it, and monitoring it.
However, when you do the math it seems that none of these cloud mining sites are profitable.
Those that do seem profitable are usually scams that don’t even own any mining equipment, they are just elaborate Ponzi schemes that will end up running away with your money.
As a general rule of thumb, I would suggest avoiding cloud mining altogether.
If you still want to pursue this path make sure to make the right calculations before handing over any funds.
Cloud mining to the most part it’s usually unreliable. There are many scenarios that people get scammed by cloud mining services since your money is going to a third-party service that should be giving you hash power in return. But you never know when these services will close or leave.
There’s a lot of cloud mining services that are scammy. They would take your money and promise you a certain return such as $10 a month or such, but then you’ll never get your money back.
You’re probably going to be asked to pay more to be able to withdraw your funds and then you’ll never be able to withdraw them either way whether you pay or not.
Just be careful with these services for cloud mining most of them are scams. I honestly wouldn’t use a service for cloud mining. It’s better to just build your own rig.
2. Web Mining
Web mining allows website owners to hijack, to speak, their visitors’ CPU and uses them to mine Bitcoin.
This means that a website owner can make use of thousands of “innocent” CPUs in order to gain profits.
However, since mining Bitcoins isn’t really profitable with a CPU, most of the sites that utilize web mining mine other coins instead.
The concept of web mining is very controversial. From the site’s visitors’ perspective, someone is using their computer without consent to mine Bitcoins.
In extreme cases, this can also harm the CPU due to overheating. From the site owner’s perspective, web mining has become a new way to monetize websites without the need for placing annoying ads.
Also, the site owner can control how much of the visitor’s CPU he wants to control to make sure he’s not abusing his hardware.
Hosting can be useful if your electricity is very expensive. For example, I’ve seen a lot of comments from Germany and they’re all talk about how expensive electricity is.
In that case mining, cryptocurrency can be a little bit tough for you if you have to pay the electricity bill and it can get really hefty.
What you’ll need to look for is somebody credible or somebody that you trust that can host for you. What this means is that you’ll basically have your rigs run at someone else’s place.
If you know somebody for example in Iceland or Canada and they have a fairly decent electric price, you can have your rig built there by the person or ship them the rig, whichever way is comfortable for you.
Then from there, you’ll have your rigs running thereby covering your own electricity costs as well as giving the person that’s hosting it for you a little bit of commission.
As for what services can you use for hosting I honestly don’t know. There aren’t many out there but I would just look around and try to find a friend or family member that you can trust because that is much more reliable than putting your rigs with somebody else that you don’t know.
4. Mobile Mining
Some mobile apps claim to mine Bitcoin on your phone. While in theory, this is possible, due to the low processing power phones have compared to ASIC miners, you will probably end up draining your phone’s battery much faster and make a very small fraction of a Bitcoin in return.
The apps that allow this, act as mining pools for mobile phones and distribute earnings according to how much work was done by each phone.
Remember, mining is possible with any old computer, it’s just not worth the electricity wasted on it since the slower the computer, the smaller the chances of actually getting some kind of reward.
5. Pre-built rigs
Sometimes people would want to buy just a rig that’s pre-built and ready to go plug just to save money and to avoid the hassle of having to build it yourself.
Honestly, my tip to you is to figure out how to do it yourself because you will be in such a hard time later on.
For example, let’s imagine that you did buy a pre-built rig and then eventually you run across an issue or instability problems and your rig starts acting up, if you don’t know how it’s built and you don’t know how it works you will be investing a lot more time trying to figure out what the problem is.
Some pre-built rigs that you can buy off of people might offer you support or service but still, I honestly recommend you to avoid that, but if you’re a big investor and you’re looking to build out a big farm then maybe you can look into hiring a person or two to do it for you and then that will be a better option.
That wraps up the types of mining services. All these were just my opinions. I’m letting you know through my experience and through seeing other people’s experiences.
Let’s get to the important part.
Now that you know what miners are, let’s talk a bit about mining pools.
Assuming you’re just entering the Bitcoin mining game, you’re up against some heavy competition. Even if you buy the best possible miner out there you are still at a huge disadvantage compared to professional Bitcoin mining farms.
That’s why mining pools came into existence.
The idea is simple – miners group together to form a “pool”. Meaning they combine their mining power to compete more effectively. If the pool manages to win the competition, the reward is spread out between the pool members depending on how much mining power each of them contributed.
This way even small miners can join the mining game and have a chance of earning Bitcoin, even though they get only a part of the reward.
Today there are many mining pools that compete for the chance to mine Bitcoin and update the ledger.
I know you might be thinking, “ok, all this theory stuff is very nice, but is Bitcoin mining actually profitable today?”
Well, the short answer is “it depends on a lot of factors”.
When calculating Bitcoin mining profitability there are a lot of things you need to take into account. Let’s go over them quickly:
- Hash Rate
A Hash is a mathematical problem the miner’s computer needs to solve. The Hash Rate refers to your miner’s performance or how many guesses your computer can make per second.
Hash rate can be measured in Mega hash per second (MH/s), Giga hash per second (GH/s), Terra hash per second (TH/s), and even Peta hash per second (PH/s).
- Pool Fees
If you’re mining through a mining pool, and you should, then the pool will take a certain percentage of your earnings for rendering their service.
- Electricity Cost
How many dollars are you paying per KiloWatt? You’ll need to find out your electricity rate in order to calculate profitability.
This can usually be found on your monthly electricity bill. The reason this is important is that miners consume electricity – whether for powering up the miner or for cooling it down as these machines can get very hot.
- Block Reward
This refers to the number of cryptos generated when a miner finds the solution. This number started at 50 Bitcoins back in 2009 and is halved every four years.
- Mining Difficulty
This is a number that represents how hard it is to mine Bitcoins at a certain moment according to the amount of mining power currently active in the system.
- Power Consumption
Each miner consumes a different amount of energy. You’ll need to find out the exact power consumption of your miner before calculating profitability.
This can be found easily with a quick search on the Internet. Power consumption is measured in Watts.
- Bitcoin Price
Since no one knows what Bitcoin’s price will be in the future it’s hard to predict if Bitcoin mining will be profitable.
If you are planning to convert your mined Bitcoins in the future to any other currency, this variable will have a significant impact on your profitability.
- The Difficulty increase per year
This is probably the most important and elusive variable of them all. The idea is that since no one can actually predict the rate of miners joining the network, neither can anyone predict how difficult it will be to mine in the future.
In fact, in all the time Bitcoin has existed profitability has dropped only a handful of times, even at times when the price was relatively low.
The last two factors are the reason that no one will ever be able to give a complete answer to the question “is Bitcoin mining profitable?”
Once you have all of these variables at hand you can insert them into a Bitcoin mining calculator and get an estimate of how much Bitcoin you will earn each month.
If you can’t get a positive result on the calculator it probably means you don’t have the right conditions for mining to be profitable.
I assume by now you pretty much know if mining is for you or not.
What Impacts Your Mining Profits
What makes you make more money? What makes you lose money? The first thing about your mining profits is knowing what crypto coin you should mine.
Depending on what you’re using whether it’s Asics FPGAs or GPUs you’ll have a different coin of your own to pick and mine but for this post, we are going to focus on GPU mining since this is what many people use.
To know what cryptocurrency you should be mining with your GPUs that depends on what GPU you have.
There is this thing called the DAG file. The DAG file is basically a data set that’s stored on the rams of the GPU and these data sets size increases over time.
This means that some GPUs for example the four-gigabyte cards can’t mine Ethereum anymore because the DAG size is larger than four gigabytes even though you can still do them with zombie mode on but your hash rate will be drastically lower.
That’s the importance of the DAG file. That’s why it’s recommended to buy GPUs with six-gigabyte of ram or more to mine Ethereum. Ethereum is the most profitable coin for all GPU miners at the time of this article.
Ethereum will be moving to proof of stake and they were also going to be eliminating the mining fees that the miners get paid, but before I give you my opinion on that news, let me first explain to you what impacts your profits to you understand why it’s a big deal.
The way that your profits increase or decrease depends on three different factors to whichever coin you’re mining. To explain the three factors I will be using Ethereum as an example.
Let’s go back to the block. The block is what gets mined by your hardware and that block has a base reward of two Ethereum.
Let’s say 10 people with equal power in a mining pool end up mining that block and finding the right solution. That means that two Ethereum will be divided equally between all of them since they have the same amount of power.
If you’re a solo miner and you got lucky and then you solve the block all the incentives will come to you directly so the two Ethereum will be only yours.
But then with solo mining, your chances are much lower because the more hash rate you have the higher chances for you to solve a block is and comparing your hashtag to a mining pool then that would leave you at a very slim chance to be able to solve the block.
In some scenarios, solo mining can be good, but in most scenarios, pool mining is the way to go for stable incentives.
Now that the base reward of a block is to Ethereum you also need to add to it all the transaction fees that are within that block.
Let’s say I want to send Ethereum to someone, I would pay a small fee for that transaction to go there and that fee goes to the miner.
Let’s say there are 10 000 transactions that happened, all these small fees would end up being in this block which increases the block’s reward.
The two Ethereum based rewards will be there and that’s the two Ethereums that are going to be introduced to the network. These are the coins that are actually mined; the new coins and then there are the transaction fees.
These transaction fees will just increase the block’s reward and then it’s the same concept. Everybody that solved it with the amount of power that they have, will get the incentives according to how much effort they put into that block.
Sometimes you can see blocks with 3 Ethereum, 5 Ethereum, etc. It all depends on the volume in the network. The more transactions going on in the network, the more you get paid.
Generally, we don’t see high numbers that much usually it’s around three Ethereum or four Ethereum for a block reward.
There’s also one more thing that affects block rewards and that’s halving. Halving doesn’t happen on Ethereum but it’s basically what cuts down the base block reward by half.
This happens on bitcoin every four years. Every four years bitcoin will cut its block reward by half which makes mining the rest of the coin harder which in return increases scarcity and that’s usually good for the price.
Speaking about price, that is one of the important factors for your profitability if Ethereum’s price goes up, your profitability of mining Ethereum goes up as well and that works for every other coin because when you’re mining you’re getting paid with that Ethereum.
If you’re getting paid for example 0.1 a month and Ethereum is at a thousand dollars, then you’re getting paid a hundred dollars a month for mining, but if Ethereum drops its price to five hundred dollars and you’re still getting paid 0.1 Ethereum a month then you’re only going to be getting $50.
The price can’t be taken for granted because it all depends on when you decide to cash it out. For example, if you’re mining Ethereum throughout the month and throughout the month the price of Ethereum was high above a thousand dollars, but then the day that you want to cash it out Ethereum price drops, which means the price really didn’t have any effect there other than taking your profits down.
This is because the price went down the moment you wanted to take your money. That’s why you need to be careful with selling your cryptocurrency and finding the right time to sell them.
The last thing that impacts your profitability is the difficulty of the network.
To explain this, the best way possible is to use a metaphor. Let’s think of the block reward as a little snack bar that you have and you also have your friends around.
Since you’re a generous person you’re going to share it with them. You would generally share
this between all your friends equally and they all get a share of that candy bar, but now let’s say you have another candy bar and then you have more friends who came over.
You’d want to share that same candy bar with more people so you’d have to break it into smaller pieces. That goes the same way as the block reward.
When more miners come to the network, the difficulty increases because the total hash rate increases. That means everybody that’s eating from the same plate will have just a smaller portion and in some scenarios, the difficulty would decrease when the price of Ethereum goes down and in those times you’d be mining more Ethereum but the price of Ethereum is lower so your profits will look lower.
That’s what difficulty does it basically just changes how much you get from mining and now adding that to the two other factors which are the transaction fees and the price of the cryptocurrency.
That gives us the three factors that impact your mining profits. I hope it was all clear to understand.
EIP-1559 & ETH 2.0
Let us look at EIP-1599 as well as Ethereum 2.0 and whether GPU mining will be viable for a long time.
EIP-1599 will cut out all the transaction fees that are added to the block. If you remember before we talked about the block and how there’s a base reward of two Ethereum and then all these transaction fees will add up and increase the block reward.
Now if that transaction fee gets cut off, then we know that we’ll always be getting only two Ethereum per block. We’ll never see three Ethereum or five Ethereum and all these additional profits that we usually see when the transactions are getting really high.
That does suck. It is a bad hit for GPU miners that are mining Ethereum which is the majority of GPU miners.
What we can expect?
The profitability will drop by at least 30 percent since the average of a block reward is three Ethereum.
The reason that they are looking to implement the EIP-1599 and burn the transaction fees instead of giving them to miners is that they think it’s better for the Ethereum price and that it would be better against inflation and that is by reducing the amount of Ethereum that’s circulating.
The last thing we are going to look at is Ethereum 2.0.
It is mentioned that it will be going to proof-of-stake instead of proof-of-work. Before we mention that proof-of-stake is when you hold some cryptocurrency like you’re a shareholder and then from there based on how much you own you’ll be able to validate transactions and get paid.
Although the revenue from proof-of-stake is not as much as mining at all, either way, once Ethereum reaches that point I do still think there is going to be a long time until it reaches there at least a year for us miners to be able to mine with GPUs or even more.
I get a lot of questions about it but honestly as I said I don’t know what will happen in the future. We just know that there’s a possibility of Ethereum moving out of proof of work and then we also have the possibility of losing the transaction fees.
We will have two things that we need to worry about but if your electricity prices are fairly good and Ethereum remains at this price right now which is above a thousand dollars then the profits will remain decent until it moves fully to proof of stake and that can take one to three years.
To conclude this article, here is a question I get asked a lot:
Should I mine Bitcoins?
Well, now that you’ve finished reading this post, you should be able to answer this question yourself.
Keep in mind that sometimes there might be better alternatives to Bitcoin mining in order to produce a higher return on your investment.
For example, depending on Bitcoin’s price it might be more profitable to just buy Bitcoins instead of mining them.
Another option would be to perhaps mine altcoins which can still be mined with GPUs like Ethereum, Monero, or Zcash.
Hopefully, now you have a better understanding of what Bitcoin mining is, the process of updating the ledger of Bitcoin transactions incentivized with the rewarding of new Bitcoins to those who participate.
That will be it for this article. I hope you enjoyed it and I hope you found value in it. Thank you very much for reading and if you have any feedback leave it in the comments below and make sure to share if you enjoyed it.