How does cryptocurrency mining work? Learn to mine crypto in under 5 mins today

Cryptocurrency Mining Explained

Cryptocurrency mining is the process of verifying and adding transactions on the blockchain  in exchange for new cryptocoins and transaction fees as rewards. Transactions are bundled in encrypted set of rules also known as the mining or hashing algorithm and each is a ‘block’. Cryptocurrency miners from around the world compete to find the 64-digit hexadecimal algorithm the fastest to validate the transactions.

Quick Overview

Here is how Bitcoin mining typically works:

  1. The user initiates a transactions by sending another user crypto.
  2. A group of transactions are bundled together in using a special encryption called ‘hash’
  3. These blocks of transactions are broadcasted to the entire network.
  4. Each user collects the bundles of transaction.
  5. The users compete to spend the energy required the fastest.
  6. The first user to find the solution then broadcasts it back to all the other users on the network.
  7. Everyone on the network validates the transaction by moving on to the new block of transactions by using the last algorithm as reference, hence the term ‘blockchain.
  8.  The transaction is recorded to the blokchain
  9. The miner is rewarded new cryptocurrencies for their hard labor.

Source: Bitcoin Whitepaper by Satoshi Nakamoto

cryptocurrency mining explained

How do miners get rewards specifically?

For a cryptocurrency miner to receive rewards, they need prove that the have spent computing energy to solve a block.

This is also called proof-of-work and commonly used in many cryptocurrencies.

The miner also has to be able to find the answer before everyone else.

For this reason miners receive cryptocurrency as reward for their “labor” in order to incentivize users to continue verifying transaction

A faster computer increases the speed of decryption as well as the probability of miner receiving a reward for his effort.

Satoshi Nakamoto explains in an excerpt of his book Duality that he worked with Adam Back, the creator of Hashcash, an anti-spam and cyber-attack system, to implement POW.

Techinical Note:
Some cryptocurrencies have a proof-of-stake system which means that users with the highest amount of coins in their wallet users have a higher chance of receiving the block rewards.
Some cryptocoins allow users to set a transaction fees to verify transaction. 

For this reason, is important to read the whitepapers to see which system is being

the importance of cryptocurrency mining

Why is cryptocurrency mining important?

Mining is what powers the ecosystem by helping the transactions go through.

Mining is the most important part of decentralization as their verification prevents the double spending.

Affiliate Disclaimer

Which type of mining is best for me?

First of all, I would like to congratulate you for making it this far!

Now, let’s find the best cryptocurrency mining method for your current situation 🙂

  • CPU Mining

Have an old computer lying around?

CPU Mining is an easy way for you to recycle old computers and earn passive income at the same time.

Though you can no longer mine cryptocurrencies such as bitcoin without damaging your PC, there are a few other coins which were created specifically to be mined from standard standard computers.

pc mining software

Which coins can you mine with an old computer?

  1. Monero
  2. Dogecoin
  3. XUN  (has its own software)

Tip: You are looking for Asic Resistant coins

Computer Mining Software

Option 1: Join a mining pool and mine from your laptop

Sign up and download the Minergate mining software with this affiliate link https://satoshilibrary.com/minergate

Option 2: Mine solo from your pc

Go to CPUMiner and and choose the software for your equipment

Is CPU Mining for you?

Computer mining is a great way to get started and learn about the system especially if you don’t mind burning a few processors in the process.

Warning: Even if your pc is powerful to enough mine certain cryptocurrencies, mining will cause it to overheat, put stress on the chips and damage it so be sure not to use your primary computer

(I lost two computers in this experiment 🙁 )

Though it was very profitable back in 2010,  with ASIC miners and increased difficulty, you would need more powerful equipment to increase your mining power.

  • USB Bitcoin Miners

USB miners are a mini version of ASIC miners geared towards novices.

They were very popular because they were very small, energy efficient and user just needed to plug it in.

They should not be confused with hardware wallets.

USB Miners are a great way to learn about bitcoin mining but not profitable at $50 per piece, you will be lucky if make $2 in year.

If you are serious about mining, you would eventually need to shift to more powerful mining solutions.

  • Virtual Machine

For the non-techs, this means mining from an online server or virtual computers.

Though you might be thinking that this would avoid blowing up your computer, here is are the problems with this and why it is not a popular solution.

PROS:

  • Less risks of damaging your computer
  • Allow you to multitaks

CONS:

  • Very easily hacked
  • Servers have restrictions to prevent abuse
  • Requires a bit of technical

I recently came accross a very good tutorial by Peerhash on how to mine on Virtual Machine

  • Cloud Mining

This is the most popular form of cryptocurrency mining for beginners and non-techs.

Cloudmining is comparable to outsourcing.

Companies such as Genesis Mining and Hashlare gained a lot of popularity in 2017 because of the cheap fees and user friendly platforms.

How does cloud mining work?

Cloud mining is essentially like outsourcing all the labour costs, maintenance, installation fees and equipment in exchange for the profit.

In other words, you buy ‘mining contract’ from a cloud mining company and they will allow you to rent “hashrate” and receive the output once all the maintenance fees have been deducted

If you think it sounds to be good to be true, you’re right…

Here is the catch:

All of the above-mentioned costs are pretty expensive so you will need to buy enough hashpower to cover your investment and the expenses.

Cryptocurrency mining explained

Advantages of Cloudmining:

  1. Users can focus on choosing the right coins to mine
  2. No need to worry about energy costs
  3. Contracts can be bought with with a credit card or debit card
  4. Saves time: The mining rig has already been set up for you
  5. Saves Money on maintenance fees
  6. The users can easily switch from various coins

Risks:

  1. The companies can terminate your contract if they the contract is not ‘profitable’
  2. Cryptocurrency is very volatile
  3. No refunds
  4. The mining company can decide to change its term of services, for example Hashflare changed all of its lifelong contracts to yearly contracts

Genesis Mining Vs Hashflare

Some people will say that Geneisis Mining is the best and other will say Hasflare.

The best one for you is the platform which you can use and understand faster.

I tried both, invested the same amount and made the same amount of both despite the bullrun of 2017 and bear market of 2018.

I would recommend first creating an account on Genesis Mining and Hashflare and compare which one makes more sense to navigate.

(By entering the following Affiliate Code: FaUSrN, you get a 3% discount on each of your purchases with GenesisMining)

  • GPU Mining

(Graphics Processing Unit) GPU Cryptocurrency mining is the first choice for miners who are just starting out.

The is usually the next step after computer mining or USB mining.

In some cases, gamers have jumped directly over to GPU mining because they had the equipment available

PROS:

  • More efficient than computer mining
  • Cheaper than ASIC Miners
  • Hardware can easily be sold if it doesn’t work out for you
  • Easily expandable

CONS:

  • Noisy
  • Good airconditioning is required
  • requires a bit of setting up and maintenance

cryptocurrency mining with a GPU

If you plan on bulding a GPU Mining rig here are the basic equipment to get started excluding the graphics card :

  1. CPU (a mininum of 4 GB)
  2. Motherboard
  3. RAM (DDR4)
  4. Hardrive or SSD which is more energy efficient

If you plan to expand and depending on your finances:

  • Open air case to store your graphics card

The equipment should cost around $250 minus the price of the graphics card and electricial cost.

  • ASIC Mining

An ASIC (Application specific integrated circuits ) miner is a powerful mining machine whose sole purpose is to decrypt the algorithm of the cryptocurency as fast a possible

Who are they for?

Serious miners

PROS:

  • Powerful
  • Very efficient when done correctly
  • You get an advantage over other miners

CONS:

  • Require a lot of energy
  • Not recommended for users from tropical climates
  • Loud
  • May be unprofitable
  • Become inefficient after a few months
  • No refunds

PROTIP: Only purchase the first batch because the second batch becomes inefficient as they will be more

Why?

Though the second or third batches of ASIC miners are cheaper, this also means that there will be more people mining cryptocoins and mining difficulty increase.

Bitcoin Mining Hardware

Bitmain offers two options for Bitcoin Antminers:

The Antiminer offering power supply is more expensive, however, it will provide the optimum mining conditions

  1. With power supply ( view on the following affiliate link) : https://SatoshiLibrary.com/bitcoinminer+psu
  2. Without power supply (affiliate link):
    https://SatoshiLibraary.com/bitcoinminernopsu
 ASIC Miners
ModelAntminer S9j-14.5T
Hashrate (TH/s)14.50TH/s ±5%
Power on Wall *1350 Watt ±10%
power supply efficiency on wall at temperature 25℃93.12 J/TH ±10%
Adapted AC/DC output requirement1650 /12.00 Watt / Volt
Weight5.5kg
  • Power on wall – Refers the maximum capacity of the miner before it loses efficiency to to over heating.
  • Hash rate- The measurement of how powerful your mining machine is.
  • Sha-256 – It is the algorithm used to mine Bitcoin and cryptocoins with the similar algorithm

Note: This table may contain errors as prices and measurements might have changed by the time you read this blog post

Cryptocurrency Mining Profitability: Is it worth it?

There are 3 things to take into account when you are choosing a cryptomining solution

  • Electricity and Energy costs

Mining is basically computation and you would need to keep your miner running 24/7 for maximum efficiency.

As the reward systems are usually random*, keeping your miner on 24/7 will allow you to maximize your chances of getting a reward.

However, the caveat is that when these mining machines run at full capactity, they tend to overheat, so if you live in a warm country, you need to factor in cooling costs.

The lower the costs, the faster you get your ROI (return on investment) and make profit.

So it important to factor in energy costs on top of maintenance.

Protip: Though there are profitability calculators online, I would recommend giving your local power company a call and ask them how much the energy is going to cost you.

They will not only give you a more reliable figures but might also give you efficiency tricks which may apply only in your region.

  • Budgeting

How much money do you have to invest in equipment.

Ideally, you would want the cheapest investment for the quickest ROI and eventually scale as you start making profit.

  • The Cryptocurrency Market

The cryptocurrency market is extremely volatile so always position yourself where you can afford the loss if the market goes down.

And as we witnessed in the beginning of 2018, this can extend a few months.

If the cost to mine is more than the market value, then the machine needs to be switched off 🙁

Which coins to mine?

The basically means which coins are the most efficient to mine on which algorithms.

Firstly, is not all crypto coins are profitable to mine from a computer while others are not efficient to mine from an ASIC so it is important to identify the most profitable coins with your equipment.

Secondly coin generation, depending on the cryptocoins, for example Bitcoin, coin generation is halved every 4 years which makes it more difficult to mine.

Also the more miners, the more the mining difficulty.

Is Bitcoin Mining Profitable?

If you plan to mine Bitcoin with a standard computer or basic mining rig, probably not.

For you to efficiently mine bitcoin, you would need be ready to invest in a proper mining installation as well as have enough capital aside in case to survive in case of a bear market.

During a bull run is more profitable to simply buy the dips and hold rather than mining depending on your location.

Choosing the best algorithms for your hardware

Miners , essentially ASIC miners, can only decrypt one algorithm so when opting for a mining solution it is important to be aware of the algorithms so that you can easily switch to the most profitable coins:

AlgorithmNumber of coinsPopular CoinsASIC Resistance
Script193Litecoin, DogecoinNo
X1175DashNo
SHA25669Bitcoin, BitcoinCash, No
CryptoNightMoneroNo
Equihash9 ZcashNo
Dagger-Hashimoto 3UBQYes, best for GPU mining
Ethash10Ethereum, Ethereum Classic, Walton ChainNo

Source: Crosslytics

Cryptocurrency Mining Strategy

Are you going to be selling the cryptocoins to flip or do you plan on keeping them for the longterm?

Many miners say that they are betting on the longterm value of a coin, meaning they mine coins with low difficulty and sell them at a higher price.

However, if you plan on becoming a serious miner, you will have bills to pay and need to look into coins which will cover those costs.

Cryptocurrency mining is not a get-rich quick solution but a gamble because it is depending on many uncontrolable factors.

Solo Mining vs Pool Mining

Solo Mining vs Pool Mining

Joining a mining pool increases your probability of earning a reward and once a block is completed the rewards are shared.
However, mining pools also require users to pay a fee.

Choosing a mining pool

Here are the main to consider when choosing mining pool:

  • Reward structure
  • Reliability/trustworthiness
  • Mining Fees

Top mining pools

  1.  Slush Pool
  2. AntPool
  3. BTC.com
  4.  KanoPool
  5. F2Pool

Solo mining means that you do not have pay mining pool fees, however, it could take months before you complete a block, but you get to keep all the rewards.

Cryptocurrency Mining Hashrate distribution
Global Hashrate Distribution

Source: Blockchain.info

Final Thoughts

Cryptocurrency mining is a great way to earn passive income with from the comfort of your home.

There is no guarantee that you will receive a reward, so it’s important to carefully calculate the costs of investment.

Your biggest enemy is time, the more you wait, the more the cryptocurrency mining difficulty increases and less efficient the solution becomes.

The reason cryptocurrency mining is so popular is because you can potentially make a lot of money if you choose the right coins and sell them at the right time. 🙂

However, it is important to remember that cryptocurrency mining is not the only way to make money and buying bitcoin at low prices and  holding on is just as profitable 😉
Let me know if this info was helpful for you 😉
Cheers,
Marie
Founder of Satoshi Library

Owner of SatoshiLibrary

PS
Thank you for visiting!
And also, if you feel comfortable enough to give me your email, just enter it below and I just might send you an email one of these days 😉

Disclaimer: I am not a financial advisor and the information provided does not replace professional advice. Cryptocurrency prices are highly volatile as well as evolving very quickly. This post may contain inaccuracies, so please do your own research before placing money in any website. Thanks!

Marie is a crypto-enthusiast who was born in the Seychelles and is currently living in Mauritius. She has 13 years experience in the BPO and the teaching industry. She specializes in keeping things easy and simple.