How to Mine Cryptocurrency: Beginner’s Guide

07.02.2020

If you thought about starting to mine cryptocurrency but know only a little about it, you have come to the right place. In this feature, forklog.media will explain the basic terms of mining, show how it works, and help you understand whether the juice is worth the squeeze.

What is Mining

Mining is the process of recording cryptocurrency transactions onto a blockchain. People involved in mining are called miners. And so are the devices that perform mining itself.

Miners check transactions and record them in a block. Those blocks connected to each other form a blockchain, hence the name. When most miners copy the most recent block, the transaction becomes effective.

For this, miners get a reward. Its amount depends on the complexity of mining and the price of the cryptocurrency they are mining. Usually, this is how new crypto-coins are minted.

Additionally, miners store a full copy of the blockchain. This way, if someone hacks one of the copies, it will not affect the system.

Types of Mining

There are different kinds of mining out there. They differ in algorithms of consensus, which are basically the rules of recording blocks onto a blockchain.

In PoC, we summed up the market cap of 12 PoC-based cryptocurrencies and divided the sum by the entire crypto-market cap. We used Cryptoslate.com as the source for market cap data for cryptocurrencies based on other algorithms.

Mining on Proof-of-Work

The miner checks transactions and signs the block. The signature here is a hash sum of the block’s header. The header includes the number of transactions, the previous block’s signature, and a random number. The signature must be lower than the network’s condition.

How Bitcoin’s algorithm compares a signature to a condition

In Bitcoin, miners search for a signature for around 10 minutes regardless of the mining speed. For comparison, it may take a living human being around 17 minutes to calculate a single hash sum on a piece of paper.

A cryptographic round by Ken Shirriff. Source: Righto.com.

Still, if you want to mine Bitcoin, you need to calculate trillions of hashes per second. It requires very powerful equipment, so mining BTC at home is no longer viable unless you are a member of a mining pool.

A hash sum or a hash is the information processed under a hashing algorithm. The result obviously depends on the initial data. If you change the original information, the hash will change as well.

How the change of the original information impacts the hash sum

Here’s an example of PoW mining:

You have one job: press a button on a box with a screen. When you press it, the screen displays a random number from 0 to 100. You get the reward if the number is less than 10.

Thousands of other people have similar boxes. The faster you press the button, the higher are your chances to win.

In general, you and other people find the “winning number” roughly once every 10 minutes. In order to earn more, they “press the buttons” two times as fast and get the “winning number” once every 5 minutes.

And then the employer narrows the winning corridor: only numbers under 5 are winning. Therefore, miners do more work for the same reward. In Bitcoin, this is called halving.

In 2019 alone, Bitcoin miners have spent 58 terawatts of power, which is the same as the average power consumption of the entire nation of Switzerland. This huge consumption caused cryptocurrency developers to offer another consensus algorithm: Proof-of-Stake which consumes just 1% of PoW expenditure.

Mining on Proof-of-Stake

Here, users freeze cryptocurrency in their wallets to create a stake. The more coins there are in the wallet, the higher is the chance to mine the next block. It’s like buying lottery tickets without an expiration date. The prize drawing occurs every 10 minutes. The more tickets you have, the more often you will be winning.

Delegated-Proof-of-Stake is different from the regular one. There, users delegate the right to mine blocks to other miners in exchange for a partial reward for the mining.

There are downsides to this model, though:

There is no block reward, only transaction confirmation fees. The developers removed the reward to stop users from rapidly accumulating coins.
The minimum amount of a stake varies from $158 in QTUM to $449,000 in ATOM. This heightens the entry threshold.
The more coins are frozen by the users, the lower is the market supply. In cryptocurrencies like KAVA, SNX, and XTZ miners have staked over 75% of all coins.

Cryptocurrency Mining Equipment

Back in 2009, it was easy to mine Bitcoins with CPU and GPU. In order to mine more, miners made up farms of several units. In 2012, miners switched to FPGA (field-programmable gate arrays) that worked faster than GPUs but were hard to adjust. It all ended in 2013 when Canaan Creative produced the first ASIC for Bitcoin mining.

ASIC (application-specific integrated circuit) is a chip created for just one very specific purpose, in this case, to mine Bitcoin. And it truly is way more efficient. A 2013 Avalon A3256 mines Bitcoin 12 times faster than a 2019 RTX 2080 GPU.

Mining speed or hash rate is the number of hashes a device can calculate per second. If all Bitcoin miners unite, they will be able to calculate a billion hashes in just 0.00000009 seconds. Even though it never happened, this is one of the reasons miners gather in mining pools: this seriously enhances their chances for a reward. The hash rate of their own equipment put together builds a virtual ASIC. The pool then distributes the reward between all participants.

What Kinds of ASIC Miners Are There

ASIC devices are different in their hashing algorithms. An ASIC miner can support just one algorithm, so you can’t use a Bitcoin ASIC to mine Ethereum and vice versa.

Here are the mining algorithms of major cryptocurrencies.

SHA-256—Bitcoin, Bitcoin Cash, Bitcoin SV.
Ethash—Ethereum.
Scrypt—Litecoin.

There are three China-based companies that, when combined, manufacture 73% of all ASIC miners:

Bitmain produces ASIC since 2013. Experts believe that Bitmain was responsible for 75% to 85% of all ASIC miners in 2018.
Canaan Creative was founded in 2013. They created the first Bitcoin ASIC, Avalon A3256. Now it controls 21% of the global ASIC miners’ manufacturing capacity.
Whatsminer produces ASICs since 2017. Their equipment is popular with China’s industrial miners. Their share among new ASIC devices is 35%.

How to Start Mining With ASIC

Choose the cryptocurrency you want to mine.
Learn about the price of electric power in your area.
Choose an ASIC and write down its hash rate and power consumption.
Calculate the profitability of mining with a special calculator like this one or this one. Enter your power tariffs, hash rate, and the ASIC power to find out the tentative profit in USD.

Here’s how it works.

The calculator divides the ASIC miner’s hash rate by the network’s hash rate. Thus it determines how many coins it will mine in an hour.
Then it multiplies the number of mined coins by the current exchange rate. Thus it gets the gross yield.
Then the calculator multiplies the ASIC’s power consumption by your local power price to know how much you will pay for its operation.
Finally, it subtracts your power expenses from the profit you get by selling your crypto. This is your final profit.

For example, if you use the first ASIC miner, Avalon A3256, and you don’t have to pay any electricity bills, you will earn $3.09 a year. Impressive, huh?

How to Make Mining More Profitable

Buy a more powerful ASIC.
Reduce your expenses on electric supply.

This is the reason why industrial miners build their farms near the sources of cheap electricity. Also, it is the reason why 65% of all Bitcoins are mined in China, and in Canada, they build farms next to hydropower plants.

There are other things to consider like regular reward halving in Bitcoin or the dissipation of heat from the mining equipment. This makes mining a little more complicated. So, if you decide to try yourself at mining, make sure you have taken everything into account. But first of all, make sure your country does not ban cryptocurrency mining.

Written by Pavlo Skoroplyas, edited by Jenny Aysgarth

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Tags: mining, Proof Of Stake, Proof Of Work