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How does crypto mining work?

How does crypto mining work?

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Cryptocurrencies broke through the consciousness of larger and smaller investors around the world, and the astronomical growth of the most popular one – Bitcoin – has made it the number one investment of the last decade. How to mine Bitcoin, how it works and for whom is it profitable? Find out from our article.

The term cryptocurrency mining was borrowed from the American period of the so-called gold rush, where fortunate prospectors made huge fortunes in a short time. Intuition did not disappoint the creators of Bitcoin in this regard as well. The price of a single BTC coin reached a dizzying value of 63 thousand USD in 2021, and the Bitcoin market capitalization exceeded one thousand billion US dollars, while the entire cryptocurrency market is currently worth around 2.5 trillion USD. Mining Bitcoin, Ethereum and other cryptocurrencies has become a modern goldmine for many.

How does mining Bitcoin and other crypto work?

What is Bitcoin mining? Mining is a form of remuneration for administering a payment system. Cryptocurrencies are a record of the so-called blockchain, which is a form of public transaction register where each subsequent operation overwrites the previous one, creating a new block. The purchase or sale transaction is reported to the mining computers, which then verify its correctness. If an objection is raised, the operation is canceled.

Part of the transaction verification process is solving a mathematical puzzle. Computers that generate the most relevant answer can participate in the proof of work distribution, i.e. with a bit of luck, they will receive new Bitcoins.

What equipment is needed for successful crypto mining?

In the past, when the cryptocurrency market was known only to a handful of enthusiasts, an ordinary PC “employed” as a cryptocurrency excavator was enough to play the role of a computer-miner. However, over time, both the number of tokens (cryptocurrency coins) and the transactions themselves have increased. On the other hand, Bitcoin’s rule is that the number of new coins introduced into circulation decreases over time. As a result, Bitcoin mining requires more and more powerful computers.

Digital entrepreneurs have started a race for stronger “mines”. Today, money is earned by those who have entire halls of working computers, preferably far north of the globe, to save on costly cooling systems. Such a “mine” can overwhelm the largest server rooms hosting popular websites, and its security often has automatic weapons and live ammunition. Monthly output? A few to a dozen Bitcoins.

What is Cloud Mining?

Cryptocurrency mines faced a dilemma at one point. Electricity bills must be paid, “production capacity” must be expanded, otherwise the cryptocurrency mine will lose the fight against other “miners”, and the competition never sleeps. Meanwhile, the Bitcoin model (which is the king in the crypto market) assumes falling profitability from mining as the number of new cryptocurrencies paid out in exchange for administering payments decreases over time.

In response, the miners began selling some of their computing power to external customers. Each of us can open an account and purchase a subscription, allowing us to become a “digital gold seeker”. From a business perspective, it is a type of lottery in which the sum of payments from subscribers is higher than the statistical value of cryptocurrencies earned in such a way. From the customer’s point of view, this money is low enough that it can be lost in exchange for a chance to win. Such a crypto-lottery ticket.

What is a mining pool? 

Another way to deal with the problem of decreasing mining rewards is to join forces. Instead of dividing your power into subscribers paying fixed monthly rates, you can come to an agreement with another mine and create a kind of consortium. Then, several independent entities operate together to achieve a common business goal. Increasing the computing power in this way allows breaking through the market to the “prize pool”, which is a statistically higher chance of mining bitcoins.

What affects the profitability of mining cryptocurrencies?

The shortest answer is – time. Bitcoin has been designed so that the benefit of mining new coins decreased over time, and thus the growth of new money was naturally limited (process of halving). By doing so, it was expected to preserve the value of money and prevent it from being diluted in an endless stream of supply. This solution, brilliant in its simplicity, could not fail. In a world where ordinary money in daily circulation comes from pure money creation (fiat-money), and the banking system has to increase the money supply to stay afloat, a currency that retains its value and is compatible with the internet had to become the king. Bitcoin was born for its role.

The current profitability of mining Bitcoin and other cryptocurrencies

Any market that is capital will sooner or later become dominated by sharks. Why? Because a large scale of operations is rewarded with profitability, and a small scale is punished with its lack. If we think of bitcoin mining as a business venture, then we can let that thinking go. When it comes to bitcoin mining, big fish are involved and blood is poured. If we think about it as a lottery, on which we spend pennies, hoping for our luck, then “cloud mining” is a good solution. Of course, we should then treat it as “fun”, because no one serious treats the lottery as a way to live.

However, if we are going to invest seriously, then buying cryptocurrencies at a low price and hodling it until the value goes up is the best solution. When does the low occur? When big investors have an interest in it. This means capitalizing lucrative investments and selling some cryptocurrencies, and provoking a drop in the rate. Where does this action come from? Because they want to buy more, and they know that it should not be done on the high. A model example is the recent moves of Tesla, the company waited for the right moment and then bought Bitcoin for $1.5 billion. The rate skyrocketed.