Mining cryptocurrency is a painstaking and costly business and, moreover, unpredictable in terms of profit. Nevertheless, many investors interested in cryptocurrency cannot resist mining.
Perhaps the fact is that an enterprising speculator sees in him the opportunity to earn out of the blue, approximately as during the Gold Rush in California. And if you are technologically savvy, it’s almost impossible to avoid the temptation.
But before you spend money on equipment, read this guide – it will help you understand whether mining really suits you. We will focus primarily on Bitcoin.
Of course, in order to simply use a cryptocurrency, it is not necessary to be a miner. Digital tokens can be purchased for fiat money exchanged through the exchange for other cryptocurrencies.
You can even earn money by playing video games or publishing materials on resources that pay their users in cryptocurrency. For example, Steemit, a platform like Medium, works, except that users can support their favorite bloggers using their own cryptocurrency called Steem. Then Steem can be safely exchanged for bitcoins.
But the meaning of mining is not only in filling the miners’ pockets; this is the only way to issue new lots of cryptocurrency into circulation. In other words, miners, in essence, “minted” cryptocurrency.
For example, on October 25, about 16.6 million bitcoins are in circulation. Apart from the coins issued with the primary block (created by Satoshi Nakamoto), all these bitcoins appeared as a result of the activity of miners. Without mining, Bitcoin will not disappear – it will even be possible to use it – but new coins will not appear anymore.
In 2009, when Bitcoin mining began, the block reward was 50 Bitcoins. In 2012, the reward was reduced to 25 coins, and in 2016 m – to the current level. Such a double decrease occurs regularly the next is scheduled for about 2020 – then the amount of remuneration will be reduced to 6.25 Bitcoin.
A number of sites, including Blockchain.info, provide this information in real-time. The current block number at the time of this writing is 491,642.
In essence, miners act as auditors in the course of mining new coins, while all previous transactions are verified. Thanks to this system, invented by the creator of Bitcoin Satoshi Nakamoto, users are interested in the stable operation of the network.
By verifying transactions, miners help prevent the “double spending problem”. Double spending is a situation in which the user gets the opportunity to spend the same amount twice.
With the physical currency, this can not happen as soon as you give the seller a 100-ruble banknote to buy a bottle of vodka, you no longer have it, and you can’t buy another 100 rubles more snack.
However, in the case of digital currency, there is a risk that the holder will be able to make a copy of the digital token and send it to the seller or another party while retaining the original.
Suppose you have a bill of 100 rubles and a very good photocopy of the same bill. If you try to spend it, someone can look at the serial numbers and see that they are the same, which means that one of the bills is fake.
Something similar and miners do they check transactions to make sure that users did not try to illegally spend the same amount in bitcoins twice.
As soon as the miner verified transactions for 1 MB, he gets the right to get 12.5 bitcoins. The threshold of 1 MB was set by Satomi Nakamoto, and now some miners believe that the block size must be increased to fit more data. It is worth noting that, theoretically, one MB can fall into a single transaction (although this almost does not happen), or several thousand — it all depends on how much data is included in a specific transaction.
Good news Higher mathematics you do not need. In fact, each miner tries first to guess the 64-digit hexadecimal number (hash) that is less than or equal to the target hash. This is where the main work lies.
The bad news Hash is chosen by random search, and if you want to be the first, you will need a huge computational power. In order to work successfully, you need to have a high hash rate – the hash coefficient, which is measured in mega hash per second (MH / s), Giga hashes per second (GH / s) and trash a second.
If you want to understand how many bitcoins you have a chance to get with the hash rate available to you, try using a calculator on the Cryptocompare website.
Either video cards (graphics processing unit, GPU), or specialized devices – ASIC, special-purpose integrated circuits, which can cost from $ 500 to tens of thousands of dollars, are suitable for mining.
In the photo below you can see a homemade installation for mining. Video cards are rectangular blocks with fans. This is not the most effective way to mine, and, as you can guess, many miners see it as more fun than a way to make money.
Suppose I told three friends that I planned a number from 1 to 100. I wrote this number on a sheet that I hid in an envelope. My friends do not even need to guess the exact number – it’s enough to be the first to call a number that is less than or equal to the number in the envelope. The number of attempts is not limited.
Suppose I’ve conceived 19. If friend A says “21”, he loses, because 21 is greater than 19. If friend B says “16” and friend C says “12”, both answers can theoretically be counted, because both 16 and 12 are less than 19. Friend B does not receive any additional advantage, although his answer was closer to the target number — the one who offers his first choice wins.
What happens if friends B and C answer at the same time? In the Bitcoin network, simultaneous answers occur regularly, but only one can receive the reward. In this situation, decide which of the miners deserve a reward, should the whole network. The decision is made by a simple majority of votes – 51%. As a rule, the reward goes to the miner, who performed more useful work, that is, he verified the most transactions.
Now imagine that I have significantly more than three friends, and the planned number is not limited to the range from 1 to 100. Millions of miners act as friends, and the planned number is 64-digit, and also in the hexadecimal number system. As you can guess, guessing the correct answer will be very difficult.
As you know, we use the decimal number system, which means that it is based on the number 10. This, in turn, means that we have 10 separate numbers, from 0 to 9.
The “hexadecimal” system, in turn, is based on the number 16. There are 16 separate digits in the hexadecimal system. But in our alphabets there are only 10 “digital” characters (0-9). Therefore, we have to use the letters – a, b, c, d, e and f. Each of them is assigned a numeric value.
Monstrous devices from video cards and fans are needed by miners only to find the target hash by brute force. To do this, the system randomly generates as many “nonce” as possible. This word is formed from the phrase “number only used once” (“number used only once”) and means a short digital key that can be used to generate the notorious 64-digit hashes using a specific algorithm.
In a bitcoin system, the nonce size is only 32 bits – much smaller than the hash (256 bits). The first miner, whose nonce generates a hash that is less than or equal to the target hash, receives a reward of 12.5 bitcoins.
This is a complete summary for block 490,163. The winning hash was found using nonce 731511405. The target hash is shown above. The phrase “Relayed by Antpool” refers to the fact that this particular block was added by AntPool, one of the most successful mining pools.
They confirmed 1768 transactions for this unit. If you really want to see all 1768 transactions for this block, go to this page and scroll down to the “Transactions” heading.
All target hashes start with zeros – there are at least 8 and not more than 63. The minimum hash is formally unlimited and can be equal to one, but the maximum target hash is strictly defined by the protocol. Target hash cannot exceed this number.
You need to get a powerful installation for mining or, more realistically, join the mining pool – a group of miners who combine their computing power and share the extracted bitcoins. A disproportionately large number of blocks are mined by pools, and not by individual miners.
In other words, it is literally a guessing game. You cannot open a pattern or make a prediction based on previous target hashes. The complexity level of the latest block at the time of this writing is 1 196 792 694 098,793 – that is, the probability that a randomly taken nonce will give a hash lower than the target value is less than 1 in 1,000,000,000,000.
On the already mentioned site Cryptocompare, you can find a calculator that allows you to estimate costs and possible profit, taking into account such parameters as hash rate, electricity costs, etc. Read more about the profitability of mining in the article “How to calculate the profitability of mining”.
Of course. As we have said, the easiest way to buy bitcoins is to buy them on the stock exchange, such as Coinbase. As an alternative, you can always use the old adage “During the gold rush you need to sell pickaxes.” Or, if you adapt it to modern conditions, invest in companies that produce these picks.
In the world of cryptocurrency, the closest equivalent of a pickaxe is the equipment used to extract bitcoin. Perhaps you should pay attention to the companies that produce ASIC devices or video cards – for example, AMD (NASDAQ AMD) and NVIDIA (NASDAQ NVDA).