Cryptocurrency mining is a procedure that satisfies two primary needs of any Proof of Work blockchain network. These needs include the adding of new verified blocks to the blockchain ledger and the creation of new coins.
Every time a transaction is executed on a crypto network, miners go into a contest to secure and verify the transaction. To do this, miners will have to solve a complex mathematical problem that regulates its difficulty to maintain a steady issuance rate. Once a miner finds a hash that is lesser than the mark specified by the blockchain protocol, that miner is entitled to receive a reward embedded in the block. This reward is usually in the denomination of the cryptocurrency being mined.
As more and more miners join a crypto network, the mining difficulty is automatically adjusted by the algorithm, making it even harder to be a miner. This rise in difficulty makes mining more time and energy-intensive. As a result, miners are always on one lookout for cheaper electricity rates and more sophisticated mining equipment.
What’s In Mining for You?
Cryptocurrency mining provides 3 primary benefits which include the crypto reward, transactional freedom, and the explicit functionalities of the cryptocurrency being mined.
1- Crypto reward
Mining provides miners with the possibility of obtaining crypto rewards when they devote time and hashing power towards the crypto’s blockchain. As with other financial assets, the crypto rewards are valuable in the open market. Also, cryptocurrencies that have achieved widespread adoption can be used as a mode of payment.
2- Transactional freedom
Cryptocurrency mining provides transactional autonomy as it removes the need for middlemen or intermediaries. By default, blockchain technology gives cryptocurrencies a decentralized attribute as it is governed by the participants and not an external body, government, or financial authority.
3- Explicit functionalities of the cryptocurrency being mined
Miners can enjoy the unique attributes of the cryptocurrency they are mining. For example, Monero has a discrete currency feature which hides your account balances and activity footprints. Another example is LBRY which allows a content sharing and publishing platform that is controlled by its user instead of a third party.
Costs Involved in Mining
While mining has numerous benefits, it does come with some trade-offs including electricity and hardware costs as well as diseconomies of scale.
Cryptocurrency mining requires a serious amount of electricity as a result of the intensive amount of computational tasks being carried out. Although electricity costs vary across countries, researchers found that miners who situate their mining hardware in low-cost areas like Venezuela or Eastern Europe are significantly more profitable compared to miners in other areas. However, finding mining farms in the mentioned areas can be tasking.
Aside from that, the upfront cost of purchasing hardware is quite hefty. On average, the cost of setting up a top-notch cryptocurrency mining rig costs as much as $5,000. This amount could take months to break-even depending on the network’s hashing power, prevailing market prices, and electricity costs.
Lastly, miners are faced with diseconomies of scale. As more miners come aboard a cryptocurrency network, the limited amount of remaining blocks reduces thereby causing the normal payout per volume of hash power spent to decrease significantly. Also, increasing demand for electricity due to the growing influx of mining activities will undoubtedly cause electricity costs to soar which will cause the profit margins for miners to decrease even further.
Cryptocurrency Mining Hardware
In cryptocurrency mining, there are two basic types of mining hardware currently in existence. They include Graphics Processing Units (GPUs) and Application Specific Integrated Circuits (ASICs).
GPU Miners
When mining a coin, the miner needs to use an algorithm that matches the uniqueness of that coin. The level of mining efficiency that GPUs exhibit when mining certain algorithms are dependent on the GPUs’ specifications. That said, miners who use GPUs should select their hardware while considering the type of algorithm they would want to mine with.
Subsequently, miners can choose hardware based on the level of brand trustworthiness, power or electricity requirements, and price. Let’s take an example, AMDs are considered as the best options when mining with cryptonight or cryptonight-heavy algorithms for coins like Monero and Loki, while NVIDIA is best suited with Equihash and Ethash algorithms used for coins like Zcash and Ethereum.
GPU Rig Options
GPU mining rigs can either be custom made or bought whole. For those who’d like to build a customized GPU rig, the components to consider include graphics processing unit(s), a power supply unit, a motherboard, risers, and a rig frame.
However, for those who may not have the time or knowledge to build a GPU rig, there’s the option of purchasing a pre-assembled rig. Several pre-assembled mining rig producers give as much as a year’s warranty on their products. Pre-assembled rigs are more expensive than custom made rigs, however, it is worth the convenience and ease.
ASIC Miners
An ASIC is a machine developed to mine specific cryptocurrencies and algorithms. There are numerous ASICs in existence today and the options vary according to the demand for a particular coin. Bitmain is regarded as the largest producer of ASIC hardware, however, competitors like Innosilicon and Halong are starting to put up a good fight for market share by releasing updated models.
Define Your Objectives
When selecting an ASIC, you have to ensure your objectives have been premeditated. Your objective could either be to acquire/amass a specific coin or to purchase machines to take advantage of insanely high profits in the mining space.
If your objective for using ASIC is to amass holding in a specific coin, you would need to first choose the coin and then identify the underlying algorithm used in mining the coin. That said, if a coin’s algorithm is not supported by an ASIC producer, the only other option would be to mine using a GPU.
Forewarning for Prospective ASIC Users
Before purchasing an ASIC, it is advisable to first carry out a quick survey on available ASICs so you know you’re getting the best deal. Firstly, you’ll need to outline every ASIC available to mine the coin of your choosing. The key metrics for this comparison include hash rate (revenue capability) relative to electricity requirements (variable cost), initial equipment purchase cost, and the delivery date of the hardware.
Some miners acquire ASICs to realize substantial profit which is usually obtained by early purchasers of new ASICs. New ASICs are the most profitable machines and have the shortest breakeven timespan considering that they can out-hash top- notch GPUs.
Other miners observe a rather opportunistic approach by scooping up used or old machines at huge discounts. If such acquisition is done in a bear market where many miners are finding it unproductive to mine so they sell and the market rebounds, the new owners can realize massive returns regardless of the ASIC’s worn-out state or low hash rate-to-electricity cost.
Whatever your reason behind purchasing an ASIC might be, always be cautious of probable sticking points. One of such is the projected break-even time frame based on the hash rate relative to electricity cost. Another example is the probability of an ASIC producer releasing a new machine to mine a similar coin as yours in the near term. A newer version release could impede the profitability of your current ASIC as a result of an increase in the networ’s difficulty.
Differences Between GPU and ASIC Machines
Listed below are the key differentiating factors between GPU miners and ASIC miners:
1- Ability to mine multiple coins
GPUs were developed to mine multiple coins and algorithms, while ASICs can only mine a designated coin or algo. What this means is that GPUs can be adapted to mine whatever coin may be most profitable at any given time, while ASICs can become liabilities in a situation where its designated coin is underperforming.
2- Risk-reward preference
The added flexibility in GPUs causes it to have a lower risk attribute which automatically translates to lower yields in return. ASICs, on the other hand, have a higher yield considering it mines the same coin under the same market conditions.
3- Resale value
GPUs have a high resale value as they can be used in mining several coins. Also, GPU components can subsequently be reused for other computational reasons not relating to mining cryptos. ASICs, however, have a higher depreciation rate as their profitability wanes in just short periods.
4- Ease of use
When choosing between GPU and ASIC miners, another crucial factor to consider is the ease of use. Can these machines be used in your homes or offices? How portable are they? GPUs can be set up at homes or office spaces and are considered to be very portable. An ASIC, however, is very intrusive devices in private or small spaces as they require large amounts of power, create loud noises, emit a great deal of heat, and require proper ventilation.
Mining Pools
Simply put, mining is the process of using computational power (hash power) to solve blocks on a blockchain. Whenever a block is mined, the miner is entitled to the block reward and the underlying transaction fees in some cases. The more attempts (hashes) you can perform in a second the better your chances of solving a block and receiving the reward.
Many miners do not have enough hash power to compete for rewards in the ever- growing mining space, so they create mining networks in a bid to pool mining resources and power thereby increasing their chances of solving blocks. These networks are known as “mining pools.”
The reward is split amongst miners in a pool based on the miner’s contribution to solving a block. Pool operators usually charge a small fee for the service being rendered.
Features to Look Out For In a Quality Mining Pool
If you decide to join a pool, here are the key things to look out for to ensure you mine efficiently:
1- Payout structure preference
Mining pools pay out rewards to their miners based on two primary methods which include Pay-Per-Share or Pay-Per-Last-N-Share. Both methods have their different advantages and disadvantages so do well to evaluate which suits your style. Also, make sure you’re choosing a pool that offers a low minimum payout.
2- Pool trustworthiness and team reliability
Considering the decentralized nature and relatively new state of the cryptocurrency industry, it is open to abuse by service providers. This risk makes it even more necessary to choose credible and trustworthy pools with ethical teams.
3- Added features
Another marker that can be used to identify quality pools is the added features they offer. Some of the added features include upgraded UI and UX design which equips users with functionalities that help them evaluate their performance.
4- Fees
A mining pool’s service fees usually range from 1-3% of every reward realized by a miner to pay for overhead and the pool’s operating expenses. That said, the lesser a pool’s mining fee, the better for you.
Selling Hashing Power: A Pool Mining Alternative
In mining pools, miners make use of their hashing power. Rewards obtained from solving blocks are deposited directly into the crypto wallet of their choosing, where it can then be traded, spent, or held on to. However, an increasing number of people are choosing to sell their hashing power as opposed to using them to mine on pools. Such transitions can be facilitated over hash exchanges like NiceHash and Genesis Mining. Both platforms are exchanges that create a medium for people to buy and sell hashing power while charging a service fee. In return for selling hashing power, sellers are paid in BTC or with any other agreed currency.
Selling hashing power makes sense for those who do not have certain necessary cryptocurrency mining hardware.
Setting Up Your Mining Machine
As a prospective miner, after purchasing your ASIC or GPU miner and choosing whether you want to dedicate your hashing power to a pool or an exchange, the next step would be to set-up your miner. Listed below are the easy steps involved in setting-up:
1- Plug your miner into a power outlet to begin.
2- Connect your miner to the Internet using an ethernet cable.
3- Locate your miner IP using your router or an IP scanning software.
4- Input these necessary parameters:
Your mining pool address (if you are on one).
Wallet address (you should have gotten one by this point).
Password.
That’s it. You can now begin mining and, hopefully, start turning a profit.
Some Popular Profitable Mining Concepts
Colocation
ASIC mining is known to be very intrusive and incompatible with small or personal spaces, which can hamper productivity and profitability. A suitable method of hosting your ASIC is by doing so at a colocation regardless of how many machines you have. Colocations or “mining farms” are designated mining accommodations cited at low-cost electricity areas that offer conducive conditions for running your mining rig(s) profitably.
Cloud Mining
Cloud mining involves buying hashing power from hash power providers instead of purchasing real mining hardware. Cloud mining is similar to those buyers on NiceHash. Purchasing and maintaining a mining rig can be very expensive, cloud mining is a good way to offset that cost while still enjoying the benefits of mining.
This method is more stress-free and involves less risk. However, cloud mining poses as a limiting factor for those looking to mine on a large scale.
Tips To Improve Your Profitability in the Industry
As the cryptocurrency mining industry continues to grow and as the competition increases, it can get pretty difficult to be profitable as a miner. To avoid becoming a victim of obsolescence, here are some practices you could uphold to help you sustain a profitable mining career:
1- Try out colocation
Hosting your mining rig at a colocation (mining farm) can save you a lot on electricity bills and other overhead, thereby helping you improve your operating margin. An example of a colocation provider is Minery.
2- Maximize your “up-time”
In mining cryptocurrencies, up-time is one of the most important factors. Every minute your mining rig remains out-of-service translates to wasted electricity and several missed opportunities. Make sure to set up your rig using standard equipment to avoid scenarios where your rig crashes or goes offline. It is also advisable to have a backup plan if such scenarios were to play out.
3- Always be at alert
Make sure to always monitor your rig in case of damages or blackouts. Consider using software like AwesomeMiner to monitor your mining rig. Software like this alerts you when your rig is experiencing a fault or is down so you could carry out necessary remedies as soon as possible.
4- Thermodynamic efficacy
Always choose locations and conditions that ensure that your rig is cool and not overheated at all times.
5- Keep an eye out for discounted hardware
Look out for fairly used GPUs or ASICs to save on costs.
Final Note
Mining for several cryptocurrency assets will not last forever as some cryptocurrencies have limited supplies and others are moving to other operating systems that do not require mining. That said, it is best to get into the market as soon as possible. However, make sure to carry out thorough research before delving into this venture.
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