‘Mining’ is the term used to describe the creation of cryptocurrency units. There isn’t an infinite source of these to go around.
For example, Bitcoin is probably the best known cryptocurrency around. But there will only ever be 21 million Bitcoins in circulation, in total. Not all of these have been created (or ‘mined’) at the time of writing.
There are many other currencies now in circulation. These include Ethereum, ZCash, Ripple, Monero, and many others which are quickly becoming household names.
To take part in the creation process yourself, you’ll need cryptocurrency mining software. But what is it, and how does the process work?
How Are Cryptocurrencies Mined?
Cryptocurrencies are mined in ‘blocks’. Each block is made up of pending transactions across the network. This is packaged up by the system itself and is then presented to miners as a mathematical puzzle to solve.
The first miner to solve the puzzle is rewarded with cryptocurrency after their solution has been checked by the network of users.
Of course, this is all automated. People buy powerful specialized machines, or modified home computers, and set them off to mine by themselves. Cryptocurrency mining software is necessary to allow your computer to access the blockchain network and participate.
You can see recently mined blocks using tools like Block Explorer.
Looking down the ‘mined by’ column on this site, you’ll see a few names repeated often, including Antminer and SlushPool. These are mining pools – which we explain a bit more about in the next section.
Cryptocurrency Mining Software and ‘Mining Pools’
Mining pools are groups of miners who get together to use their pooled hardware to solve blockchain equations.
You can set up your cryptocurrency mining software to take part in one of these networks if you’d like.
The benefit is that when the pool solves a block, you’ll get a share of the reward. This will be proportionate to the ‘effort’ your computer put into solving the problem.
If you mine alone, there’s actually no guarantee (although it’s highly likely that it will happen at least once) that your hardware will ever pull that rabbit out of the hat. So pooling with other users reduces risks and gives you a more steady return on your investment.
Costs Vs Returns
Mining for Bitcoin and other cryptocurrencies can be hugely profitable.
But there are some costs to it. Firstly, you’ll need a powerful enough machine to make the mining process worthwhile, as well as paying for a great internet connection.
Mining is an intensive process, so you’ll need high-end components. It’s likely that these will burn out a lot faster than they would under regular use, too.
And you’ll probably be looking at quite a high electricity bill, depending on where you live.
However, given that Bitcoin is now worth over $10,000 apiece. In its early days, it cost 10,000 Bitcoin to buy a couple of pizzas. So there is an investment opportunity here beyond the nominal price when you obtain the coin.
How About Cloud-Based Mining?
Of course, not many of us can afford the thousands of dollars it would cost to buy a whole brand new system, just for mining with.
You select the ‘hash rate’, and pay a set fee. To be clear, a hash rate is the speed at which a computer attempts to solve problems on the blockchain.
Cloud mining is where you pay a mining operator to mine on your behalf, using their equipment. There’s no electricity bill for you. And you won’t have to worry about the complication of setting up and maintaining an expensive computer system at home.
You won’t even have to bother installing cryptocurrency mining software yourself.
It’s a really cost-effective method and allows you to invest in mining networks with minimal financial outlay. You can participate with just a few hundred dollars, with a potentially impressive return on your investment!
Where Can I Keep My Cryptocurrencies?
Here’s an important point. You need a digital wallet in which to store your cryptocurrencies.
Each wallet has a unique identity code. You can use this code to send or receive currencies from other users.
Cryptowallets synchronize with the blockchain network. This means that users can’t place ‘fake’ coins in their wallet by any means. And to use the coins in your wallet, you need to enter another unique identifying ‘key’. This keeps your coins as safe from cyber attacks as possible.
When you want to sell or buy coins, you can visit an exchange to do so, trading with other users on the market. However, you should always remove your coins from an exchange immediately and not leave them stored in the exchange wallet.
Exchanges can, and have shut down. The well-known and previously well-respected Mt Gox exchange, for example, ceased allowing new trades suddenly and unexpectedly in 2014.
Its ex-head is on trial for embezzlement and data manipulation, charges which he denies. So don’t leave your coins hanging around, just in case another worse-case scenario happens in the future.
I’m Looking To Get Started
That’s fantastic news! Welcome to the exciting world of cryptocurrencies.
Cryptocurrencies are the hot topic of the decade. By taking part you’re not only going to make money, you’re supporting a community of intelligent and forward-thinking people.
To get you up to speed, here’s everything you need to know about the current state of the cryptocurrency market.
If mining individually isn’t for you, get in touch with Genesis Mining. We offer to mine on your behalf across a range of hash rates at very competitive rates.
Remember, the blockchain equations are only becoming more difficult to solve as time goes on. Maximize your potential returns by starting today!