What is cryptocurrency mining?
Cryptocurrency mining is how Bitcoin, Monero, and other proof-of-work cryptocurrencies verify transactions, keep their networks secure, and produce new coins. For a more in-depth look at how mining works, check out our other guide.
Understanding the basics
What is proof-of-work?
Proof-of-work is a consensus mechanism, meaning that it is a process through which a system (i.e. blockchain) gains agreement on sets of data values or on the state of the network itself. In the Bitcoin network, proof-of-work requires difficult puzzles to be solved for the chance to add new blocks to the blockchain, which in turn requires the use of computational power and energy.
How does proof-of-work relate to Bitcoin mining?
Bitcoin miners are the ones who are vying to solve those difficult proof-of-work puzzles in order to validate blocks for the blockchain and earn rewards (in the form of Bitcoin). The more computing power that a miner has, the more likely it is that they will complete the puzzle faster than other miners and earn that bitcoin reward.
Ways to mine cryptocurrency
Individual mining rigs
The original method of mining Bitcoin and other proof-of-work cryptos is to use equipment already owned or purchased individually. This method used to be more plausible for Bitcoin miners, as a run-of-the-mill laptop could handle the computer power needed to mine. Nowadays, buying the equipment needed to operate as a solo miner can cost thousands of dollars, and as technology improves, that equipment could become outdated sooner rather than later. A quick search returned prices of around $500 for a low-end mining rig and prices as high as $14,000 for more powerful rigs.
Mining pools
One solution to the costs associated with cryptocurrency mining is the creation of mining pools. A mining pool is a group of miners who ‘pool’ their computational power together. Doing this gives them a greater chance of solving the cryptographic problem needed to create a block and being rewarded with whatever crypto they’re mining. Because the processing power is shared between the pooled miners, the rewards are split accordingly between the participants. While the rewards may be smaller because of this, it’s counterbalanced by the increased chance of actually earning rewards. Two popular mining pool platforms are Poolin and F2Pool. Both services allow miners to pool resources to mine Bitcoin and other proof-of-work cryptos like Litecoin and Dash.
Hosted mining
Hosted mining is another solution to the costs that come with mining as an individual. With hosted mining, a company leases or sells mining hardware to customers, which can then be sent to a data centre or mining farm. In this model, the customer pays for any costs associated with storage and electricity. In return, the customer doesn’t have to worry about storage space, running up their electricity bill, or maintaining the hardware itself, as that’s handled by the hosting company. Hosted mining customers can choose the exact specifications of their mining equipment but are expected to pay the full cost of the equipment, either upfront or in instalments.
Is it still profitable?
Since miners largely switched from using CPU to using GPU for cryptocurrency mining purposes, an arms race of sorts has taken place, driving up the cost of entry into the industry. A CPU is the central processing unit of a computer and is fine for mining cryptocurrency when the difficulty is low. As the difficulty of mining increases, more powerful hardware is needed – hence the shift to GPUs or graphical processing units, which are far more powerful than CPUs. Other types of hardware used to mine are FPGAs (field programmable gate arrays) and ASICs (application specific integrated circuits). FPGAs are similar to GPUs in terms of mining capabilities. The most powerful and efficient of these options are ASICs because they’ve been specifically customized for cryptocurrency mining. Due to the increasing difficulty of mining Bitcoin, as well as high energy prices, it can be extremely difficult to turn a profit as an individual miner. This hasn’t gone unnoticed in the crypto mining industry, which has adapted by introducing different methods for beginners to get into mining – methods that aren’t as costly as throwing money at a top-of-the-line mining rig. Below we run through some general steps on how to take part in a mining pool using an ASIC miner.
Planning for Bitcoin mining with an ASIC miner
There are a few things to keep in mind when setting up an ASIC miner, whether it’s to be used individually or in a mining pool. The first issue is energy costs. Getting prices per kWh from local utility providers is key, as it will help determine if mining will actually be profitable or not. ASIC miners required a dedicated 220-volt electrical outlet as well. The electrical system planned on being used should first be inspected to determine if an ASIC miner will overload any circuits and cost expensive damage if utilised. Lastly, mining rigs put off a lot of heat. Individuals who live in hotter areas need to consider how to keep their location mining cool enough so that the miner isn’t damaged. These considerations could drive up the cost of operation too.
General steps for setting up an ASIC miner with a mining pool
Each ASIC miner may vary in setup, so it’s important to consult any instructions included with the equipment to avoid any mistakes. The following is a general setup guide for setting up an ASIC miner.
1. Connect the power supply First, securely connect any connections between the miner and its power supply. After that, plug the miner into the previously mentioned dedicated 220-volt outlet. At this point, depending on the miner, it will automatically turn on or will be ready to be switched on.
2. Connect the miner to the internet Directly connect the miner to the internet by using a CAT5 or CAT6 ethernet cable. It’s also possible to use a WiFi connection, but it might not be as stable as a direct connection.
3. Find the miner’s IP address and log in Using the configuration menu router that the miner is connected to, located the miner’s IP address. To do so, copy and paste each address into a web browser search bar until a login screen for the miner appears. Each miner, regardless of the make and model, should come with login credentials in the installation instructions.
4. Make a wallet for storing Bitcoin A wallet is required for storing block rewards. If you don’t already have one, make sure to create one.
5. Sign up for a mining pool The next step is to sign up for a mining pool. Some popular mining pools are Poolin and F2Pool.
6. Finish configuring the miner with pool and wallet details Now copy and paste the necessary details such as the mining pool’s URL address, the user ID associated with that mining pool, and the wallet address where rewards will be sent. Some miners may require more details before operating. Once those details are saved, all should be good to go.
Possible risks
There are quite a few risks associated with cryptocurrency mining that one needs to consider before jumping in. Earning a profit from mining, especially from Bitcoin, is becoming more difficult by the day. Lots of money spent upfront for a mining rig could turn out to be unprofitable in the long run. There’s always the chance of an unfriendly regulatory environment emerging towards crypto mining. All it takes is one law being passed in a country to leave all miners out in the cold – take China, for example. As previously mentioned, scams are common in cloud mining and also in hosted mining. Again, many of these stem from the difficulty of verifying the existence of mining hardware at these companies. Customers of these types of companies are also trusting them to operate soundly, which isn’t always the case. Even Compass Mining, a major hosted mining company, lost a mining facility after allegedly not paying utility bills and hosting fees. When doing anything in crypto, it’s important to do your own research and understand the risks with any action taken – this includes cryptocurrency mining.
