Understanding Cryptocurrency Mining

Cryptocurrency represents one of the most exciting technological innovations
in many years. It contains the potential to possibly revolutionize the world in
much the same way that the smartphone or the personal computer once did. On top
of all that, these digital tokens that can be used for buying and selling also
make for great investments, with many coins rising in value to impressive
levels.

If you have read about cryptocurrency only casually, you may be at a loss to
understand how they come into existence. Or you also might have heard something
about mining and the potential for it to make you rich if you get involved. It
actually isn’t as simple as all that, but it is true that mining cryptocurrency
can be a financially rewarding experience if done properly.

You might have to recalibrate your expectations, however, if you think you
are just going to become rich instantly by putting out your mining shingle. To
be done correctly and profitably, mining takes a significant beginning
investment that buys pricey computer equipment. This is especially true if you
want to mine Bitcoin, which is by far and away the most valuable cryptocurrency
on the market.

If you set your sights a little lower, you can possibly make some decent
profit by mining for some of the alternative coins, or altcoins, on the market.
These won’t make you rich, at least not immediately, but they might put you in
the black in terms of profit in a shorter time and with a smaller initial
investment. In any case, before you can mine cryptocurrency, you have to
understand the tools and realize the process behind it all.

What Is Cryptocurrency?

You might think that money is already digital in a way,
considering how you can buy products and services
on the internet. But that money only changes hands thanks to a third party that
makes it happen, such as a bank or a credit card company.

Without those entities getting involved, you couldn’t take fiat money, which
is a fancy term for the currency coined by a given country, and pay someone over
the internet. Even a company like PayPal, which facilitates online payments,
only does so by first taking a fee for their services. They also decide if and
when the payment will go through, doing so by linking to your bank account. That
adds another level of intermediary to the transaction.

Cryptocurrency doesn’t go through any of those extra channels. It is simply
transferred from one party to the next, which is why it is called a peer-to-peer
payment system. There is also no overseeing organization making these
transactions happen, just computer nodes across a wide-ranging network. That’s
why cryptocurrency is considered a decentralized entity.

But where do the coins come from, if they are not created by some
organization or government the way that fiat currencies are? Well, that’s where
the miners come into play.

Bitcoin and the Role of Miners

The first cryptocurrency was known as Bitcoin, and it is still the most
popular and valuable cryptocurrency offering on the market. Bitcoin came about
when a mysterious individual named Satoshi Nakamoto issued a white paper
explaining details for a peer-to-peer, decentralized currency. This was in 2009,
which shows you how much Bitcoin and the rest of the cryptocurrency market has
risen in such a short time.

The problem that had to be solved for the currency to work was one of trust.
How would the people who were supposed to receive the money for their goods or
services trust that they would get paid? And how could that same party ensure
that the person doing the paying would not try to take their money back, a la
charge-backs on credit cards?

Miners were the solution to this problem. Every time a transaction is made
with Bitcoin, a network of miners must verify it. They do this by rushing to
solve a complex mathematical problem before any other miner can do it. The
reward for their efforts is a specified amount of Bitcoin, an amount that
changes as the supply increases.

What this process does is ensure that the transaction can be trusted. Each
part of the transaction is validated, verified, and added to a digital ledger
known as the blockchain that can be seen by both parties. The blockchain is the
technology that drives cryptocurrency, but it is only as good as the miners
making it work.

Why Bother Mining?

There are basically three ways that you can gather Bitcoin and other
cryptocurrencies.
You can buy
them off an exchange, you can be paid them for some service rendered or
goods sold, or you can mine them. However you manage to do it, you are
essentially getting ahold of something that can be very valuable.

That’s because the digital coins don’t necessarily stagnate. Many rise in
value in much the same way that a stock that you bought might. In the case of
Bitcoin, the price has multiplied many times over from its early levels thanks
to demand for the coins, which are limited in terms of supply.

Many people who grabbed Bitcoin and the other cryptocurrencies which followed
in its wake in their earliest stages became rich from the rise in prices. Some
think that the coins have the potential to go even higher, especially if they
become as widespread in society as their proponents think they can be. That is
why mining the coins, which is essentially a reward, holds appeal over paying a
steep price to buy them.

The Two Main Methods of Mining

You might think that setting up shop as a miner is a license to print money.
But mining cryptocurrencies is extremely involved, and it requires you to pay
money up front no matter how you choose to accomplish it. Here are the ways you
can make it happen.

Mining on Your Own

To mine for cryptocurrency, you need to buy computer hardware which is
powered by expensive computer chips. To give yourself a chance to possibly be
the first miner to solve one of the problems given out to the network, you have
to have extreme amounts of lightning-fast processing equipment. You can’t do it
in your head or even on a laptop, at least if you ever want to grab some
cryptocurrency for your efforts.

Think of mining in terms of a lottery. In order to give yourself a better
chance to win, you buy a lot of tickets. The more power that your computer
hardware can generate, the better the chance that you can possibly be the first
to validate a cryptocurrency transaction.

It is a costly endeavor, and it is not something that you can usually do out
of your own home, not unless you have ample space. The equipment is bulky and
will overheat quickly without a properly cool environment. Many cryptocurrency
miners rent or buy specialized spaces to maximize their efforts, which adds to
the overhead of the whole endeavor.

In addition, cryptocurrency also requires a lot of power to make all that
equipment work. Be prepared to pay hefty electric bills as a result. As you can
see, it all leads to a significant financial commitment without any possible way
of knowing when or if you will ever see any profit from all of that.

Piggybacking on the Mining of Others

If all of this sounds like an involved process, it is. And even if you could
afford the equipment and the power bills, you would still be going up against
some pretty stiff competition in the form of the mining pools. By having many
miners all working toward the same goal, the larger pools on the market dominate
the cryptocurrency that is mined.

To get involved in mining without actually doing all the work, you can pay
money to a company that will do everything for you and allow you to reap the
financial rewards. You are essentially renting their equipment and their
computing power so that you have a legitimate shot at getting some
cryptocurrency out of the deal.

The financial equation concerning these companies is relatively simple. The
more money you pay for equipment and mining speed, the better the chance you
will be able to get some cryptocurrency in return for your efforts. What you
need to decide if you use this method is whether or not you can afford what it
will take to make money on the back end.

That means that you have to keep in mind the fluctuating prices of the coins,
ideally getting involved right when the market is in an upswing. You’ll also
need to decide if the costs you put up right at the beginning will include
joining one of the large mining pools. That will increase your chances of
cryptocurrency actually coming your way, but it doesn’t guarantee that the value
of the return will ever match your investment.

Altcoin Mining

While the different coins in the cryptocurrency market might diverge very
subtly in terms of the technical process by which the coins are mined, the basic
setup is the same. You’ll be paying up front to either buy what is necessary or
rent it, along with paying for the mining expertise of others. And then you just
have to sit back and hope that what you get in return will make it worth your
while.

By mining altcoins, which include all of the coins besides Bitcoin, you are
changing the mathematics up a little bit. Since these coins aren’t as popular as
Bitcoin, which means that there aren’t as many miners competing for coins, you
have more of a fighting chance of coming out on top and getting some coins. And
you also won’t have to pay quite as much up front no matter the method you
choose.

The only problem is that

these coins aren’t nearly as valuable as Bitcoin. As a result, you might get
more in terms of the amount of coins that you successfully mine. But the value
of those coins might not approach what even a few successfully-mined Bitcoin
could fetch you on the market.

Mining Versus Buying

The bottom line is that it is not easy to be a cryptocurrency miner in this
day and age. In the infancy of the coins, you could get away with less money for
equipment and the like because the competition for coins wasn’t as stiff. You
could also get coins in your supply that were bound to shoot up in value,
meaning that you didn’t need to be successful with your mining efforts nearly as
often to still turn a big profit.

As for now, the cat, so to speak, is out of the bag.

That means that miners have flooded into the market from all corners.

Think of it in terms of a ball thrown up into a sea of hands. If there were
only a couple people standing near you, you’d have a pretty good chance of
catching that ball. A thousand people standing around you would dramatically
reduce the odds of your making that catch.

If that cryptocurrency ball is too tough to catch, you can still get
involved. And that is by simply picking out a coin exchange, buying or
downloading a digital wallet for storage, and buying some coins on your own.

That still requires an investment. But it also means that you can ensure that
you will end up with some coins in your possession.

Conclusion

The bottom line is that you most likely have very little chance of turning
cryptocurrency mining into a well-paying occupation at this time in history. You
might be able to receive a little bit of passive income over time. But the days
of miners getting rich quick are long since past, unless you somehow stumble
upon a coin that rises from nothing to the upper echelons in the market.

Cryptocurrency miners are extremely valuable to the entire process of
creating these fascinating digital coins. It’s just that the actual value
derived from the effort of mining is not nearly what it used to be.