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this article will help you to study cryptocurrency mining

What Is Mining in the Cryptocurrency World?

Published On: August 28, 2022
The concept of mining in cryptocurrency is as old as the existence of cryptocurrencies themselves. 

When Bitcoin was created in 2009, it introduced blockchain to the world. The blockchain is the underlying technology behind cryptocurrency, and mining plays an important role in ensuring the system both runs and remains secure. 

Since the blockchain is a decentralized ledger, it needs to have multiple computers to maintain the network and verify transactions. Blockchain removes the dependency on one centralized entity by creating a system that allows everybody to trust the validity of the entire network without relying on a single entity.

How Does It Work - Cryptocurrency Mining

crypto mining and how it supports the blockchain
The main point behind Bitcoin blockchain is its consensus algorithm, that's called Proof-of-Work (PoW). In the PoW system, you have miners who have to solve computational puzzles to basically crack codes and authorize transactions. So, what is mining? Cryptocurrency mining is the process of solving these computational puzzles

When a miner successfully solves the computational puzzles and proposes a block, the same miner will add the block to the blockchain, which is fully encrypted and secured. In return, the miner will be rewarded with newly minted cryptocurrency.

The reason why these miners and computational puzzles are needed in the first place is to prevent double-spending attacks. These are exploits that require control of over 50% of a blockchain’s computational power. When you need heavy computer resources just to solve computational puzzles, it becomes extremely expensive to try and trick the system into doing something it shouldn’t do.

You can imagine how expensive it will be to try to control over half of the Bitcoin blockchain’s computational power. If it was cheap and easy to manipulate Bitcoin's transaction records, everybody would have attempted to do it. 

In simple words, the crypto mining process keeps the players honest. As a result, the valuation of the entire system itself goes up as the system becomes more and more popular.

What About Other Cryptocurrencies and Their Mining Processes?

Above we have talked about the Bitcoin blockchain and the importance of the crypto mining process to secure its network, but what about mining in other cryptocurrencies? 

These processes vary from one to another, but the main concept remains the same. If these other cryptocurrencies use the same Proof-of-Work (PoW) as their consensus algorithm, they still have miners and mining processes.

However, if a cryptocurrency uses Proof-of-Stake (PoS) or Delegated Proof-of-Stake (DPoS), or other similar consensus, the crypto mining process is usually called a validation process. They are technically different from mining processes because validators don't need to use resource-intensive computers to solve anything. 

The validators in a Proof-of-Stake system just need to stake the native cryptocurrency of the blockchain while providing a lightweight computer to process the transaction verification inside that same blockchain. This is because a block proposer is randomly selected from the pool of computers with stakes attached, rather than requiring miners to compete to solve a challenging computational problem.

Because this mechanism is less resource intensive, a PoS blockchain is significantly more eco-friendly when compared to a PoW blockchain.

Examples of cryptocurrencies utilizing PoS or DPoS or other similar variations are Polkadot, Cardano, Tezos, and also Ethereum, which is currently in the process of fully transitioning from PoW to PoS through a mechanism that is known as "the Merge."

The Differences of Mining in Cryptocurrency

There are a lot of different methods of mining in the cryptocurrency world. The two biggest categories of crypto mining are ASIC mining and GPU mining. There are also other categories we will discuss shortly, such as cloud mining and CPU mining.

ASIC Mining

ASIC mining equipment
ASIC stands for Application-Specific Integrated Circuit. Its a specialized and integrated circuit chip, specifically designed for a very specific purpose and not used for general computer usage. In our context, ASIC mining is specifically designed to mine a cryptocurrency. The most popular example of this is the Bitcoin blockchain. ASIC rigs are usually more expensive and require more investment to buy than standard computers, but they produce far better results.

The popularity of ASIC mining in the crypto space has caused a lot of controversies because they increase the barrier entry for new miners to get into the business. It's hard to compete against ASIC miners if you don't use an ASIC rig yourself. On top of that, the fact that they are more powerful also means they require a large amount of energy to maintain. This has been the cause of a lot of environmental concerns.

GPU Mining

GPU mining equipment
Different from ASIC Mining, Graphics Processing Unit (GPU) mining utilizes computational power from the set of graphics cards in a dedicated rig. This setup requires only a motherboard, a very high-level cooling system, and a set of GPUs inside the same rig. They have to be connected to a stable internet connection 24/7, and often each GPU crypto miner is a member of a larger mining pool.

The most famous example of GPU mining is Ethereum. Many big miners in Ethereum's PoW blockchain are basically utilizing high-end GPUs to mine Ether (ETH). However, the Ethereum Merge will forcefully change Ethereum's PoW mechanism to PoS, effectively ending these types of mining activities on Ethereum.

Cloud Mining

Another category of crypto mining is called cloud mining. It has been steadily increasing in the past few years due to its cost-efficient mechanism. In a cloud mining system, the miners can pay bigger corporations and "loan" their mining facilities to start mining cryptocurrencies. The idea here is that you don't need to buy a dedicated rig if you can just pay a larger corporation to do the job for you.

However, of course, cloud mining also comes with disadvantages. Since you are not using your own rig and paying your own electricity bill, you won't make as much money. These corporations who rent their rigs to you will take some profits for themselves. The advantage is that you don't need to pay a lot of money in the first place.

CPU Mining

The last and least popular crypto mining category is Central Processing Unit (CPU) mining. CPU mining is basically utilizing your CPU to solve the computational puzzles in the blockchain. The problem is that CPUs usually don't have enough power to compete with GPU mining or ASIC mining. 

Since it's not fast and efficient enough, CPU mining is considered too slow and is only suitable if you try to mine newer cryptocurrencies without much competition from other miners. However, you can try to do this if you believe a particular cryptocurrency can make it big in the future (which means you’ll probably need to HODL after you mine the tokens and only sell when the price increases significantly).

How to Be a Profitable Cryptocurrency Miner

crypto mining can be a profitable business
Above, we have answered all the common questions related to what is mining in cryptocurrency space. And by the way, you may have heard a lot of crypto mining success stories on the internet. There are plenty of cryptocurrency miners who make a serious amount of money just because they have been mining BTC or ETH for a long time. However, you need to keep in mind that things change very rapidly in the cryptocurrency space.

Nowadays, it's not easy to be a profitable cryptocurrency miner. The cost to buy dedicated rigs is expensive and electricity bills only go higher every year. On top of that, you also need to know when to liquidate those newly minted coins that you get as rewards for your crypto mining activities. You can't just dump them all the time when prices are very low. 

These factors mean that there’s still a speculation and trading aspect to crypto mining activities. If you’d like to start mining, the best advice we can give is to get a mining rig in a bear market (due to lower demand and thus lower cost) and make sure you mine in countries with cheaper electricity costs. Keep in mind that every country also has different regulations and rules when it comes to cryptocurrency mining.
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