What is cryptocurrency mining?
If you are interested in buying Bitcoin, you can easily become a digital currency owner. There are many different brokers that offer Bitcoin and other cryptocurrency, to a wide audience all over the world. However, these coins have to come from somewhere because the amount of coins keep growing every day. Not every crypto has the same properties, but with a large number of coins, new coins come into circulation with cryptocurrency mining. Miners use special equipment to verify and process transactions on the blockchain. In return, they receive a reward of new cryptocurrency. This is only the case with Proof of Work cryptocurrency, but more on that later.
No central bank but there are still checks
Many different cryptocurrencies are known to be decentralized systems. The purpose of these cryptocurrencies is to create a payment method in which central banks don’t play a role. The central bank that you know from our regular bank account, performs checks on all transactions that we do. This way we know for sure that everything is going well. Because cryptocurrency does not have a central party that verifies transactions and security, another system has been invented, it is called the blockchain.
The blockchain is a large ledger that contains all transactions performed with a certain crypto coin. These transactions are bundled in blocks and then added to the blockchain one by one. As the name blockchain suggests, it is a long chain of blocks containing transactions. Within the network of a digital coin like Bitcoin, each node in the coin’s network has a copy of the blockchain. This node can simply be a user’s computer with special software. When a new block is added to the blockchain, the blockchain can be compared to all other copies. If the copies match, the transactions are secure and approved. When something differs between the copies, it is immediately clear that something is not right. This is a pretty simple explanation of the blockchain, but the blockchain system is also in reality not even that complicated at all. You can read more about blockchain in our knowledge base.
Miners add new blocks to the blockchain
Now that you know how the blockchain works, it is good to know how these blocks end up on the chain. A block can contain many different transactions. When you, as a user, add a block to the blockchain, you get a reward in cryptocurrency. This sounds very good, because it sounds like free money, but adding a block to the blockchain is easier said than done.
When you want to add a block to the blockchain, you first have to solve a mathematical problem. These calculations need a lot of computing power. These mathematical problems are solved by so-called miners. Miners are people who have special computers to solve these problems as quickly as possible. If you are the first one with the right solution, you may add the block to the blockchain and you will get your reward. A simple laptop is by far not strong enough for these calculations. Many miners put thousands of euros/dollars in hardware to build the fastest cryptocurrency miner.
With Bitcoin, a new block is added to the blockchain every 10 minutes. So every 10 minutes, a miner finds a new block and can get his reward. Receiving free cryptocurrency sounds very attractive to many people. So, that is why there are thousands of miners who try to be the fastest in solving the mathematical problem. To ensure that blocks don’t get added to the blockchain faster than 10 minutes, the system adjusts the difficulty of the calculation. This has the advantage that the security of the network is also increased. For example, if you want to hack into Bitcoin’s system, you’ll need more than half the computing power of the whole network combined. This is almost impossible, that is why attacks on Bitcoin are almost impossible.
There are many miners at the moment and the difficulty level is very high, it is almost impossible for one party to find a block (the mathematical problem to be solved). As a result, mining is done in a mining pool. Miners offer their computing power to a mining pool and get a percentage of the yield. The percentage depends on how much computing power is offered to the pool. In this way, all miners join forces and are guaranteed to be paid out. Without a pool, a lot of computing power could be added to the network with the chance that the problem will not be solved. That means high costs, but no rewards.
Proof of Work
The question is why a calculation needs to be solved when a new block is found on the blockchain. This is a piece of security within the network of a cryptocurrency. The computing power of a computer must be high enough to be able to process all transactions in a block. These transactions must pass through an algorithm. By solving the calculation you prove that your computer is powerful enough to process everything properly. This provides security within the network. Because there is no central party that controls everything, users must be able to trust each other. So this test helps with that. Proving that you have enough computing power is called Proof of Work. If you want to know more about Proof of Work, you can read more about it on our website. There are many supporters and opponents of this system.
Every 10 minutes Bitcoin has a miner who gets his hands on new, fresh coins. But you will earn less and less Bitcoins per block as time goes by. Every 4 years Bitcoin halves the reward for adding a block to the blockchain. At the launch of Bitcoin in 2009, you received 50 Bitcoins per solution of the calculation. Nowadays, that’s a lot less (6.25 BTC).
When all Bitcoins are mined, there will no longer be a halving. So, the reward for adding a block will also disappear. However, the mining will remain popular, because you will also get the transaction cost per block as a reward.
Should you start mining yourself?
If you want to mine cryptocurrency yourself, you should take a good look at which coin is the most profitable. For mining you can’t just use a laptop, you will have to invest seriously in both hardware and power. Besides, a computer that is turned on day and night consumes a lot of processing power and is not very energy efficient. For Bitcoin to be mined, the investments for a starting miner are way too high. So, take a good look at the different mining options and various equipment.
By the way, we don’t recommend mining on your own with the goal of making a profit. It might be a fun hobby project, but it is going to be very difficult to make a profit out of it. To be in the plus, you will need to earn back your investment of the equipment. Besides, energy costs are relatively expensive in most countries. If you have an abundance of energy from your solar panels, for example, then it will be a lot more interesting, but still very difficult to get your investment out of it.
In recent years, the level of difficulty is and has been increasing rapidly for all cryptocurrencies. Because of this, it is possible that the profits will be lower than you had calculated beforehand. Also, keep in mind that the device often makes a lot of noise, so it is not convenient to place it in the living room or bedroom.