Cryptocurrency mining – you need to know this

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Although the current bitcoin exchange rate is far from the record, recorded in 2017, digging cryptocurrency still increases its popularity and there is an ever wider popularity. Most investors consider the subject of cryptocurrencies even a full-fledged branch of financial markets.

Although experts do not agree as to the moods regarding the future of this industry, it does not change the fact that it is still possible to make good money on them. Not only by trading them on the stock exchange, but also by digging them up. It still sounds very unbelievable to many people, so it is worth explaining how to practice such actions. However, let’s start with the absolute basics, which is to look at the concept of cryptocurrency.

What is cryptocurrency?

It is a mechanism based on peer-to-peer networks, i.e. connections between users. Each cryptocurrency holder is a communication node and has their own individual account, protected by an encrypted private key. There is no central unit or organization that controls cryptocurrencies, this is what is considered the greatest advantage of this innovative technology and attracts investors. They were developed without the involvement of financial institutions and are completely independent of them.

Another advantage is their security. Even personal data is not shared with cryptocurrency transfers. For example, Bitcoins are encrypted using advanced cryptographic methods, and their number is limited to 21 million, which is to eliminate the inflation phenomenon. The first cryptocurrency purchase was made in 2010. They ordered 2 pizzas worth around $ 25, for which 10,000 Bitcoins were paid.

What is cryptocurrency mining?

Cryptocurrency mining (from English mining) is a process performed by miners, i.e. owners of sufficiently strong computers. As part of their extraction, very complex mathematical calculations are performed, which only sufficiently strong graphics cards can handle. This whole activity is a distributed consensus system. This means that a huge number of people around the world form one network of miners. Digging is the term used to describe the approval process of transactions waiting to be added to the blockchain network .

The whole process makes it possible to achieve a chronological order of transactions. To be validated and added to a chain, it must be wrapped in a block that conforms to strict encryption guidelines. They are verified by miners in the network, therefore it is fully neutral and independent.

How to mine cryptocurrencies?

Before starting the process, the miner adds his transaction in which he sends himself a mining reward for mining the block. It is called the underlying transaction (coinbase in English) and it consists in the fact that cryptocurrencies are simply produced. In most cases, it is also the first transaction in a new block.

After the transactions are encrypted, they are collected in one block, then paired and mixed again until they form the so-called cipher tree (Hash Root from English). In the next step, the Hash Root along with the cipher from the previous block and a random number is placed in the block header. Then they are mixed, which serves to create the so-called an output value that serves as an identifier. It must be less than the specified target value established by the protocol. In other words, it must start with a given number of zeros.

The target value, also known as the difficulty, scales to ensure that the rate at which new blocks are created is proportional to the amount of power used for the encryption process in the miners' network. Then they continually scramble the header using the previously mentioned random numbers until one of them generates the correct cipher. The miner who dug it in this way transmits his block to the network. Meanwhile, the others validate it, add the block to their copy of the blockchain, and move on to the next one.

Cryptocurrency mining and mining pools

While the reward is given to the miner who first discovered the correct cipher, the likelihood of finding it by those with a small percentage of computing power is minimal. In order to solve this problem, mining pools have been established. In them, they combine their resources, and in the case of mining the block, they share the reward on the basis of even distribution – depending on the amount of work they have done to find the block cipher.

Cryptocurrency mining and the right equipment

The first step in mining cryptocurrencies is investing in the right equipment. In principle, anyone can try after running additional software, but you cannot count on any profits from using a regular computer.

The most effective are ASIC devices (specialized integrated circuits), colloquially called miners, which perform only specific types of computational operations required to mine cryptocurrencies. However, these are extremely loud and hot devices, they are not suitable for apartments.

For this reason, miners with a more affluent wallet came up with the idea of ​​combining this equipment, and thus entire farms of ASIC devices were created that could generate huge profits. Most of them are located in Asia, in countries with access to cheap electronics, or in the north, where due to lower temperatures, cooling costs are much lower.

Cryptocurrency mining equipment at home

If you want to mine cryptocurrencies in your apartment, you should get the best graphics card, preferably more of them. However, not every model is suitable for this, because we also pay for the electricity that is used during this activity. The Hashrate value, marked as MH, is helpful in choosing. The higher it is, the more profitable it is to dig with it.

However, it should be realized that starting the adventure with mining cryptocurrencies, regardless of the equipment purchased, is associated with increased electricity bills. It is therefore recommended to join a mining pool, which increases the efficiency of extraction and the likelihood of earning profits through regular payouts.

Cryptocurrency mining – is it worth it?

It is definitely worth taking a closer look at this issue as it costs nothing. However, cryptocurrency mining is not an activity for everyone.

First of all, at the very beginning you have to invest quite a lot in equipment. In addition, there is also the cost of electricity consumption. The rate of return on such an investment is also strongly dependent on the current rate of Bitcoin or other selected cryptocurrency and the effectiveness of a given mining pool.

So we come back to the issue from the beginning of the article – the profitability of such a project is closely related to the future of this market, so such a project is burdened with a high level of risk.