To mine cryptocurrencies, you must first consider what digital currency you want to generate and what consensus algorithm it uses. If it is a network that, as is the case with Bitcoin, employs proof-of-work (PoW), specialized hardware or powerful video cards may be required. On the other hand, if it operates with proof-of-stake (PoS), as is the case with Ethereum, a certain amount of tokens will be required, in addition to running the corresponding node software.
Key facts:
- It is necessary to know the consensus algorithm of the cryptocurrency you want to mine.
- There are web portals that allow you to compare the profitability of various networks.
- Although it is possible to mine solitarily, there are more cost-effective alternatives.
- Mining equipment requires maintenance and this cost should be evaluated before investing.
1.Bitcoin and cryptocurrency mining with proof-of-work.
PoW is a consensus algorithm that is based on solving a riddle using mathematical calculations. The miner tries to get as quickly as possible the answer to that riddle, which will allow him to attach a new block of transactions to the chain.
A lottery that gives security to Bitcoin
The probability of two miners coming up with the same answer simultaneously is practically nil, if not impossible. The riddle of each block requires a different and random solution, so that it cannot be easily predicted. This mechanism seeks to prevent double spending of coins; that is, that someone who has already transferred a cryptocurrency can transfer it back to someone else as if they had never spent it.
2. What is needed to mine Bitcoin and other cryptocurrencies?
First and foremost, it will take a lot of willingness to learn and patience. In addition to these two fundamental elements, some hardware and software, electricity, Internet and a cooling system according to the type of mining hardware and the place where it is located are required.
The most essential thing is to have stable electricity and Internet services for mining. Otherwise, the work of the equipment will be constantly interrupted and the expected profitability of mining cannot be obtained.
3. The hardware
Hardware refers to the equipment needed to mine the cryptocurrency. This can be generic hardware such as processors and graphics cards (GPUs), as well as equipment dedicated specifically for mining (ASICs). The choice of one or the other depends mainly on the mining algorithm with which the cryptocurrency to be mined is programmed.
For example, if you want to mine Bitcoin, you will need a specialized ASIC device to mine the SHA-256 algorithm.
If you want to mine Ethereum Classic (ETC) or zcash (ZEC), then you will need at least a dedicated graphics card (GPU) and a computer with a certified power supply.
Ethereum miner.
On the other hand, if you want to mine Monero (XMR), a computer’s processor (CPU) may suffice.
What does the mining algorithm do?
The mining algorithm is in charge of establishing the rules in which the information of each transaction of a cryptocurrency is going to be encrypted and decrypted. In other words, he turns an easy-to-understand message into something indecipherable. In addition, the algorithm must ensure that it is impossible to repeat the same result with another message. This provides security to the network and seeks to ensure that no cryptocurrency can be “counterfeited”.
4. The software
There are different types of software or computer programs needed to mine cryptocurrencies such as Bitcoin. First, there is the mining software, a program that allows the hardware to interact with the cryptocurrency’s network and to mine it. There are different types of software that vary depending on the hardware used and the cryptocurrency to be mined.
Among the most recognized are CGMiner, Claymore and T-rex Miner. The first is popular among Bitcoin and Bitcoin cash miners, while the second is usually used to mine cryptocurrencies such as Ethereum Classic, Zcash, Decred and Siacoin, among others. The third, meanwhile, focuses on mining with GPU cards, mainly from the Nvidia brand.
A program is also needed to monitor the behavior of the hardware and configure it. ASIC devices, such as Bitmain’s AntMiner, usually include their own software to configure them and monitor their performance. While GPU miners may need to download programs such as MSI Afterburner or GPU-Z for that purpose.
As for monitoring the performance of a mining rig, you can do it through the website of the mining pool where you are mining or using software that allows you to access the rig remotely from another device.
5. The wallet
Another important element is the wallet that will be used to receive payments for mining. This can be hardware or cold wallets (Trezor, Ledger, KeepKey, OpenDime, etc), or software or application wallets (Coinomi, Wasabi, Exodus, Metamask, Trust, Muun, etc).
Cold wallets can be purchased directly from the manufacturers, while software-type ones are downloaded from the mobile device app store (App Store or Google Play Store) or directly from the wallet’s official website, where you could also find versions for desktops and laptops.
If it’s not your keys, it’s not your coins
There are many wallets that do not grant the user access to private keys. For example, bitcoin (BTC) and cryptocurrency exchanges or some so-called “escrow” platforms. In these cases, the coins do not really belong to the user but to the organization that manages these platforms. It is not recommended to use them to store cryptocurrencies because their use carries a high risk of loss of funds.
6. Cooling and conditioning
The conditioning of the place where the mining equipment will be located cannot be overlooked, especially with regard to its temperature. As a consequence of the high level of processing that mining requires, mining hardware tends to become hotter and runs the risk of overheating. The temperature can be so high that it accelerates the deterioration of the device, and can even reach the point where it stops working altogether.
To avoid a tragedy like the one just mentioned, you should investigate the temperature limit that the hardware can withstand, evaluate the temperature that the equipment reaches while mining, and find a sweet spot where it is profitable to mine while keeping the equipment safe from overheating.
There are a couple of things you need to take into account to prevent hardware overheating. The first is the cooling of the space where the equipment is located, for which you can use air conditioners, fans or heat extractors, whichever is more appropriate. In addition, there is also a way to cool the equipment with liquid cooling systems, which are quite effective as long as they are properly maintained.
Example of home Bitcoin mining equipment with liquid cooling.
Added to what has to do with cooling is the configuration of the miner itself. By this we mean both the power allocated to the heat extractors integrated into the hardware, as well as the processing power demanded of it. Sometimes it may be more convenient, for the sake of the mining device, to lower the mining power a little so that the equipment works optimally for a longer time, instead of having it at its maximum and suffering early failures that affect profitability more dramatically.
7. “Mining” of Ethereum and other coins with proof of stake.
There is no unambiguous agreement on whether or not staking can be considered a form of mining. But, since it is a way to generate cryptocurrencies and validate transactions (just like proof-of-work mining), it is included in this article.
Among the cryptocurrencies that employ proof-of-stake are Ethereum, Cardano, Solana, BNB Chain, Avalanche, Polygon, Polkadot, Tron and Cosmos.
PoS, as defined by the corresponding CryptoNews article, is the system that rewards its participants for accumulating and holding cryptocurrencies of a particular network.
The PoS protocol does not consume as much energy as PoW for validating transactions and issuing new cryptocurrencies, as proof-of-work does instead. Proof-of-participation uses a number of cryptocurrencies accumulated for this purpose.
To participate as a validator in a network with PoS, it is necessary to acquire the cryptocurrencies that will be used for this purpose. For example, in Ethereum, 32 ethers (ETH) are required, which is the native currency of that network.
Then it is necessary to block those cryptocurrencies by depositing them in a certain address or smart contract. This certifies that these funds will not be used for any purpose other than transaction validation. In addition, in the event of acting irresponsibly or in a manner that is harmful to the ecosystem, the user may lose part or all of the blocked cryptocurrencies.
The selection of the validator node that will add the next block to the chain is semi-random, but the more cryptocurrencies you have assigned for this purpose, the greater the chances of being chosen. Consequently, you will earn more money.
PoW or PoS mining?
No one-size-fits-all answer can be given. To determine this, the person interested in mining will have to evaluate his or her possibilities, technical capacity, and the price of electricity he or she can afford, among other factors. As will be seen below, there are portals that help to calculate the profitability of mining in different cryptocurrencies, both those using PoW and those using PoS.
8. What is needed to mine cryptocurrencies using PoS?
The validation of transactions with PoS does not require the high power consumption involved in mining Bitcoin, nor does it require specialized hardware. A computer with a hard drive capable of storing a copy of the network blockchain and a stable Internet connection is sufficient.
Although, you don’t need to manage an entire node to make money with cryptocurrencies using PoS either. As detailed below, there are pools for this type of cryptocurrencies that work in a similar way to proof-of-work mining pools, in the sense that they distribute the profits obtained according to the participation of each of their workers or members.
There are other requirements that each particular network may have for choosing and maintaining its validator nodes. But, for the most part, these are rules imposed to offer a level of security and/or scalability in accordance with the values and expectations of each cryptocurrency.
9. How to choose which cryptocurrency to mine?
An important point to consider is the mining profitability offered by cryptocurrencies. For this purpose, different essential variables can be analyzed, such as: the current price of the cryptocurrency in the market (for bitcoin and ether you can consult the CryptoNews Price Calculator); the cost of electricity; and the mining power of the hardware to be used. This data can be very useful to consult the profitability of mining and can be found on websites such as WhatToMine and CoinWarz.
Profitability calculator.
The WhatToMine website includes a profitability calculator for various proof-of-work networks.
In addition to the above, it is useful to project what the long-term result of mining a certain cryptocurrency will be. For this you can evaluate the white paper, which is the document that explains all the essential features of a cryptocurrency. In addition, the project’s code repository, along with its website, chats and forums in social networks are spaces where you can learn details about a given network.
10. Mining alone or being part of a mining pool?
As defined in a CryptoNews text entitled “What is a mining pool and how does it work?”, a pool is an entity that brings together a group of miners of cryptocurrencies such as Bitcoin. Through a mining pool, operators agree and pool their computing power with which they mine as one.
Bitcoin mining pools.
Major Bitcoin mining pools worldwide at the time of writing this cryptopedia (12/21/2022).
When choosing between mining alone or being part of a pool it should be kept in mind that, if you perform this task alone, you may never make any kind of profit. This is because the power of one mining device looks insignificant compared to the hashrate of the entire network. There are cryptocurrency mining farms that have hundreds, even thousands, of such devices working as a single node. Therefore, the possibility for a small miner to compete against these monsters is technically nil.
There are lone miners who take all the reward.
CryptoNews has reported several cases of lone miners taking the entire bounty for mining a block of Bitcoin. It should be noted that while it is tempting to do this practice, it can be compared to playing the lottery. The chances of being favored are minuscule. There is only one correct result for each riddle proposed in a cryptocurrency network and only one way to obtain this answer. The probability of a mining node solving such a riddle depends on its mining power compared to that of the other mining nodes in the network.
11. How do the pools pay?
As for the distribution of pool mined cryptocurrencies, there are different payment methods, among which are: PPS (Pay Per Share), PPLNS (Pay Per Last N Shares), FPPS (Full Pay Per Share), DGM (Double Geometric Method), among others. All of these seek to share the profits in an equitable manner, according to the mining power contributed by each participant.
It is important to mention that the reward received by the mining nodes consists of two parts: the new cryptocurrencies issued when adding a new block to the chain, plus the transaction fees corresponding to the same block. However, some pool administrators keep the collected commissions and only distribute the new cryptocurrencies issued among their workers.
Pool administrators also usually charge their members a percentage of the mined amount, which is used to finance the maintenance of the pool.
There are also staking pools
For Ethereum and other coins that work on a proof-of-stake basis, there are staking pools. These are entities that run validator nodes and “put to work” the cryptocurrencies delivered to them by investors.
Ethereum staking.
Ethereum’s main staking pools at the time of writing this cryptopedia (12/21/2022).
Source: screenshot by CryptoNews – beaconcha
With staking pools, the person interested in this activity does not need to have large sums of money (for example, with the 32 ETH needed to be an Ethereum validator). Moreover, it is also not necessary for him to run the software of a validator node or to have his computer turned on and connected to the Internet 24 hours a day. It is the pool administrator who will take care of all that.
The risk of using a staking pool is that the user cedes the custody of his cryptocurrencies to a third party. He must trust that the third party will act in good faith and allow him to withdraw the profit and the initial investment whenever he wishes.
13. What is cloud mining?
Basically, cloud mining is a service where the investor rents mining power, in order to receive the rewards generated. It is like mining through a third party, which, in this case, would be the platform offering a portion of its mining power.
The same factors that influence the profitability of traditional cryptocurrency mining, done with proprietary hardware, also influence the profitability of cloud mining. In other words, the profitability of both is equally relative.
Cloud mining increases the possibility of scamming
Cloud mining is a scheme in which there is a high risk of being scammed. This is because the mining power offered by these platforms to their customers usually comes from the company’s own farms; therefore, it is difficult to verify that they truly have all the mining power they offer. Added to this, their contracts usually include service cancellation clauses if the cryptoasset market prices are not favorable to them.
To confirm that the foray into cloud mining is a safe or reliable investment, it is crucial to thoroughly research the background of the cloud mining platform in which you plan to invest.
Binance Referral Countries
There is another business model similar to cloud mining in which the mining power is not rented from a company, but from other miners. These are platforms that act as intermediaries between users who want to acquire processing power and others who want to sell it (or rent it, actually).
There are people who want to mine Bitcoin or other cryptocurrencies, but do not have the resources to buy mining hardware. While other people have equipment suitable for mining, but are not interested in engaging in this activity directly. There are platforms that offer a kind of “hashrate market” where the two types of users described above coincide.
The main advantage of this type of platform over cloud mining platforms is that they do not have their own hashrate. Therefore, fraud with the negotiated hashrate would not be viable in this case. In addition, their reputation in the mining community is much better.
If you want to learn more about Bitcoin mining related topics, we invite you to read and share these articles from our article .
