Crypto Mining: the Basics

crypto mining

Satoshi Nakamoto’s blockchain technology is revolutionary, but as with most revolutionary ideas, it is based on a simple set of rules. A blockchain is just what its name implies, a chain of blocks each of which contains a set of information. This information is a string of numbers and letters that represent transactions, including the parties to the transaction, the amount of units (in Bitcoin, for example) transacted, and the direction of the transaction. In other words, a block is a virtual ledger that records Bitcoin payments between participants in the digital ecosystem. 

Mining Concept & Tech

Before we describe the particulars of blockchain technology, you should remember that all you need to take away from this description is that blockchain technology is extremely secure, but requires a lot of computing power to operate and maintain. Now, each block in the chain is a bundle of roughly five hundred transactions, and when a block is verified it is added to the chain — hence blockchain. A block is proposed by providing a solution to a simple yet daunting cryptographic mathematical formula, which is then verified. 

There are few correct answers to the difficult mathematical problem generated by the blockchain, and the only way to solve the problem is by trial and error, often by inputting trillions of guesses until the correct answer is offered. The answer is difficult to reach, but once an answer is offered, it is trivial to verify that the answer is correct. In this way, once an answer is found, everyone can plainly see that the transactions in the proposed block are verified, and the block is added to the blockchain. 

The technology as described thus far is powerful, but the real upshot of Nakamoto’s brainchild is decentralization — the Bitcoin blockchain is not operated or maintained by some company or institution. Instead these jobs are performed by participants in the blockchain economy. These participants are called miners. Nakamoto may have been a revolutionary, but he was not naive. He knew that in order for a decentralized platform like a blockchain to survive, miners needed to be provided with the incentive to operate and maintain the blockchain. Performing the mathematical and cryptographic operations necessary to operate the blockchain requires an enormous amount of computational power. And computational power costs money. Without an incentive, miners would not utilize the computational power necessary to operate the blockchain. 

So Nakamoto devised a brilliant plan: the miner who solved the mathematical problem first, thereby verifying transactions and adding a new block to the chain, would receive a certain number of Bitcoin. At first, the mining award was 50 Bitcoin, but Nakamoto programmed the Bitcoin blockchain to halve that number after a certain number of blocks were added to the blockchain. After the most recent halving, the mining award for adding a block stands at 6.25 Bitcoin, a tantalizing reward of $125,000 USD as Bitcoin’s price as of this writing is roughly $20k USD. However, before you get too excited by the prospects of such a reward, there is a lot you need to know about mining prior to stepping into the fascinating world of mining. 

How To Mine Crypto

There are two methods to mining crypto. One method involves utilizing your own resources to mine on your own. The other method involves a group of people pooling their computing resources together and then splitting the crypto reward proportionally amongst all members of the pool based on how much computing power they contributed. The obvious benefit of solo mining is that you get to keep the reward for yourself, all $125k of it if you mine Bitcoin. However, these days it is exceedingly difficult to compete with the machines used by high tech and institutional miners, so your chances of verifying a block and receiving a crypto reward are not very high, and are nearly zero for Bitcoin. That is why most miners, especially novices, often begin their mining journey in mining pools, and if they have the technical and financial resources, they may build up to mining on their own.

So how exactly do you mine crypto? There are a variety of ways to make money through mining, varying from simply downloading some software and running it on your computer to buying heavy duty equipment specifically designed to maximize computational output. While heavy duty equipment will obviously yield the highest return, it requires a significant initial investment and a lot of research. With mining software, on the other hand, you can start mining crypto in minutes, but your return will be minimal. 

Mining Software

In today’s market, there are an overwhelming number of options for mining software. Some of the most popular options include CGMiner, BFGMiner, and EasyMiner, all of which can run on Windows, Mac, and Linux. All you have to do is download one of these softwares, follow the easy steps laid out by the software’s website, and run the software. But if you simply use your personal computer to mine, you will not make much money, likely a few cents each day. Instead, it is ideal to couple this software with robust mining hardware — computers designed specifically for mining — to maximize your profits. 

Mining Hardware

There are basically four different types of mining hardware out there — CPU, GPU, FPGA, and ASIC. A CPU is what you likely think of when you think about a computer. CPU stands for Central Processing Unit, and is basically as powerful as the computer you are probably using to read this article (a CPU will likely not be orders of magnitude more powerful than a standard MacBook Pro or Lenovo ThinkPad). While using CPUs was initially a popular mining option, they have quickly become obsolete, in the face of GPUs, FPGAs, and ASICs.

In order to solve the mathematical problem necessary to mine crypto, a computer must perform an enormous number of calculations. The most basic computer can carry out just a fraction of those calculations. The number of calculations a computer can perform every second is called the computer’s hashrate. For comparison, a standard CPU can perform calculations at 4 Megahashes per second (MH/s is the standard unit measuring how many million calculations a computer can perform in one second). A standard GPU, or Graphical Processing Unit, has a hashrate of 800 MH/s. In other words, for every guess at the right answer made by a CPU necessary to mine a Bitcoin, a GPU can make 200 guesses. Buying a GPU is a significant investment, as prices can range from a few hundred dollars to thousands of dollars. 

The success of devices like GPUs has bred mining farms, which are essentially warehouses containing hundreds or thousands of GPUs whirring away, all in an effort to reap a lucrative crypto reward. The majority of these mining farms are situated in China, but there are many in the US and other countries as well. These mining farms also take advantage of FGPAs (Field Gate Programmable Arrays), which are integrated circuits that can be specifically customized for mining cryptocurrency. While the hashrate of an FPGA is similar to that of a GPU, FGPAs consume significantly less power (up to five times less). And because electricity costs are one of the primary mining expenses, cutting down power usage gives FPGA miners a sizable advantage.

The most recent innovation in the field of mining is the Application-Specific Integrated Circuit (ASIC). One of the high-end ASICs, Ebit E10, boasts a hashrate of nearly 18,000,000 MH/s. ASIC technology, like GPUs and FPGAs, is quite expensive, with the most sophisticated models costing thousands of dollars. Whichever hardware you choose to buy, be sure to research the profitability of the hardware before laying out your life savings.

Electricity Costs And Other Inconveniences 

While electricity costs are not the most pleasant aspect of mining, research in this area often separates those conducting their mining operation at a loss and those operating at a profit. Electricity is by far the most sizable expense for miners once they’ve laid out all the money to buy the necessary equipment. In 2018, the Elite Fixtures platform ran a study calculating the cost of mining 1 Bitcoin in various countries. The cost ranged from $531 to $26,170. Considering the Bitcoin’s current price per token stands at roughly $20,000 (January 2021), the latter end of that range is actually losing money at the moment for each Bitcoin earned (unless, of course, you assume that the price of Bitcoin will go up).

While it is not always easy to calculate exact rates per token, potential miners have a variety of methods for ballparking their electricity costs. First, you can look to see where their country or area ranks in terms of relative electricity cost. Second, you can run a mining rig for a month and see how much your electricity bill has gone up. Third, you can look at the specs on a piece of mining equipment to see how much power it consumes, and then calculate the total based on your area’s rate per watt of power. 

There are tools and resources out there to help out with these calculations, such as the Bitcoin mining calculator at cryptocompare.com. These tools allow you to input the hardware you are using, the power consumption that hardware requires, and other specs, and it spits out your daily, monthly, and yearly profit rate. At the end of the day, your crypto mining profits will depend greatly upon your electricity costs on operating mining equipment.

There are two other inconveniences that come along with mining that are worth mentioning. First, more powerful equipment is often extremely noisy, so if possible, you’ll want to have a designated area of your living space, and perhaps seal if off with some sort of soundproof barrier. Second, mining equipment tends to overheat, so you will need to invest in some cooling fans to maintain your equipment and ensure that it operates at full capacity.

Bottom Line

If there is one thing you should walk away with from this piece, it is that you must do your research before investing your money in mining. While it can be highly profitable, you need to know your electricity costs, have the right equipment, download the right software, and properly maintain your equipment. We are fast approaching the days where only institutional miners will be able to compete with each other for the crypto rewards doled out multiple times a day. For enterprising crypto enthusiasts, the clock is ticking on mining opportunities, and every second counts.