You know how new money gets made — paper printers run by central banks create new supply as old bills fall out of circulation. But what if your currency is digital and has no central bank? That’s the idea behind cryptocurrencies: no authority backing them. Instead, the control over transactions and production of coins is decentralized in many nodes around the world. So how are crypto coins created?
The truth is you can own or invest in crypto without even understanding how any of this works. But if you’re serious about investing in crypto, it doesn’t hurt to inform yourself on the technology behind it. Plus, you could end up making money!
In a previous post, we explained to you the basics of how cryptocurrencies work. If you don’t remember, don’t hesitate to go back and read it again here.
Let’s tackle the obvious question first: is it worth mining rather than buying crypto? The short answer: nope, at least in 2021 – unless you are willing to make a big investment.
Mining cryptocurrencies is the process of guessing the result of a complex mathematical problem. Actually, the miners -not people, but powerful processors- don’t really do the math by solving for X as we learnt at school. Instead, they try combinations of 64 digits, number and letters, called “hashes”, until someone gets to the one that matches. Try raising 64 to the 64th power and to realise how many different combinations there can be. If your calculator can do it, it will give you a very very long number. With this, they confirm that a bunch of transactions are correct –for example, there are no duplicates, no one is overspending, etc.– and can be converted into a block and added to the chain.
This process is essential, but it is also costly because it requires very powerful computers, so the miners get new coins as a reward. This way, mining has a double purpose: to ensure the proper functioning of the chain and entering new coins into circulation.
In the case of Bitcoin, there is a maximum amount of 21 million coins that can be mined. A new block is generated every 10 minutes and the miner who verifies it first receives 6.25 BTC in return at the moment. In the beginning, back in 2008, the reward was 50 BTC, but this amount gets halved every four years, to control the supply and increase the price. Ethereum, for example, doesn’t reduce its rewards.
Out of the 21 million, 18.6 have already been mined since it was created in 2008, but it is estimated that the remaining ones won’t be circulating until 2140.
No, not all cryptocurrencies are created by mining. All crypto assets need to have their transactions verified and new coins generated, but there are a couple of systems to do it: Proof of Work and Proof of Stake.
Proof of Work (POW) is the method that involves mining. It is also most common.
With the Proof of Stake (POS) consensus, the coin holders are chosen randomly to verify the transactions and create the blocks. Instead of miners, the nodes of this network are validators, and they mint or forge blocks, not mine them. Coins are not mined but staked. To be a validator, it is essential to have some coins in an online wallet, as a stake or deposit. This is meant to make sure validators are trustworthy. In case they approve a fraudulent transaction, they’ll lose the stake. So not doing their job correctly will cost them money. The main advantage of POS is that it needs fewer resources, so it’s cheaper and more sustainable. However, it also has its risks, which we won’t explain now.
Examples of cryptocurrencies working with POW, besides Bitcoin, are Dogecoin and Ethereum. Although this last one is planning to upgrade to Ethereum 2.0 and move to POS. Cardano, Polkadot and Algorand are some of the cryptocurrencies using POS.
A reminder on the differences between cryptocurrencies here.
Yes and no. First of all, you need to figure out if it is legal in your country. In Germany, France, Spain and Italy, it is. Secondly, you need a suitable wallet for the coin you want to mine. Thirdly you need compatible hardware. And lastly, you have to install the mining software.
In the early days of Bitcoin, it was possible to mine a block with your home computer, with a regular CPU and a graphics card. Nowadays, you can also try but won’t be profitable.
To process all the calculations involved in mining, you’ll need a GPU (graphics processing unit). Brands like Nvidia and AMD are creating new models especially for this purpose, removing all that is not necessary from a graphics card.
But if you really want to start being competitive, you can go for an application-specific integrated circuit (ASIC) and set up a mining rig. Those are the ones you see on mining farms. The prices for this equipment ranges from $500 to tens of thousands.
The more miners in the game the higher the cost and smaller the profit. Keep in mind that the number of miners competing is growing steadily. So the best option is to join a pool and to work together with other miners. You will share your resources and also the rewards proportionally to your contribution.
There are very big mining pools worldwide, most of them in China. Currently, the six main pools control more than half of the Bitcoin mining and three or four together can mine half of the worldwide coins on a regular day, which goes against the original concept of creating a network with decentralised control. Imagine a hypothetical case where the biggest pools get together and start verifying fraudulent transactions.
This depends on the cost of the hardware, how much electricity you’re going to need, the pool fee and, of course, how generous the rewards would be. There are profitability calculators for each crypto on the Internet depending on the graphic card you have, like this one. In any case, we can tell you that getting good profitability, especially in the case of Bitcoin, is very complicated, as the cost of mining could be even higher that the reward.
Unlike the stocks in the exchange, crypto is traded 24 hours a day. Also the difficulty increases the more miners are trying to guess the right hash, which requires more computing. All this has a high energy consumption. There is a debate out there on whether this is a waste of electricity. Nevertheless, traditional banking also consumes many resources.
If you want to jump on the cryptocurrency bandwagon but find the whole thing too complex, investing crypto from your Vivid app will take you seconds.
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