The opportunity to make money with cryptocurrency is a conversation that will continue to pop up in the news.
There are only four legal methods of obtaining cryptocurrency:
- Buy/exchange cryptocurrency with a different type of recognized money
- Get paid for goods or services in cryptocurrency
- Get gifted cryptocurrency
- Become a miner of cryptocurrency
What Is Cryptocurrency Mining?
The imagery of mining cryptocurrency often gives people the idea that mining is to search for new coins. The reality, though, is that the purpose of crypto mining is to process and validate users’ transactions on the network and then contribute that information to the cryptocurrency’s permanent records, called a ledger.
The distributed ledger is how cryptocurrencies ensure that transactions are valid and money is not double-spent or claimed. Verified miners can only update the digital log as extra insurance that no records get falsified or altered.
How Does Cryptocurrency Mining Work?
Imagine that crypto miners are competitors in a math competition. Each competitor gets a chance to enter their crypto mining rig into the race to see who can finish the designated math problem the fastest.
The winner is the first rig to complete the math problem correctly. The crypto miner who owns the winning rig earns a cryptocurrency reward in return for their service.
The math problems represent transactions to complete on the cryptocurrency’s network. Every time a rig mines a block by completing the math problem, cryptocurrency gets released for the miner, and transactions are processed and confirmed for other crypto users. These transactions might be a buy or sell order for the currency or to pay for goods or services.
The Crypto Mining Process
Most cryptocurrencies follow the same mining process:
- A user with a private key requests a transaction.
- The transaction gets bundled into a block with other trades.
- The block gets broadcast to the mining nodes in the network.
- Mining rigs validate the transaction and complete the request by solving complex math problems using algorithms.
- The first miner that validates a new block receives a reward.
- The block joins the blockchain as a permanent part of the currency’s ledger.
- The requested transaction is complete (usually a request to process the cryptocurrency exchange).
Cryptocurrency transactions of any kind require a crypto wallet, including mining. Not every crypto wallet is the same, and finding a reputable agency to house your crypto wallet is a vital part of using crypto.
What Is Proof-of-Work (POW)?
Proof-of-work is the method by which a cryptocurrency confirms and validates the actions of a currency. Verification of account balances, monetary transactions, and spending all require a proof-of-work to verify that the transaction is valid and not fraudulent.
Is Crypto Mining Profitable?
Technically anyone can download software and mine cryptocurrencies. Even with every person running the software, that does not mean that everyone will profit from mining.
The ways to profit with crypto are limited to:
- Sell a cryptocurrency for more than you paid for it.
- Wait for the value to increase and cash it out.
- Process cryptocurrency transactions (mine) for a higher value than it costs you to complete.
If your cost of mining is higher than your rig can offset by rewarded block transactions, you couldn’t claim profits.
Suppose you mine a cryptocurrency for a lower value than it cost you, but you sat on that crypto until it reached a high enough value to pay for the mining operation. In that case, you could claim your cryptocurrency mining is profitable.
Part of what makes cryptocurrency profitable is time and interest. The more people interested in your specific cryptocurrency and the more people who use it, the more beneficial it will tend to be over time.
Determining whether or not crypto mining is a profitable business for you may depend on your available capital and the time you’ve got to wait for returns.
The Cost of Mining
It is essential to understand the different costs that come with mining for cryptocurrency:
- Cost of hardware for the mining rig
- Cost of powering and running the mining rig
- The energy cost for the machine and cooling units
- Maintenance costs and replacement parts
- Fees for block generations and pool mining
There are calculation tools online to help determine if the gain of mining your preferred cryptocurrency is worth the cost. One cryptocurrency, Ether, offers an Ether Mining Calculator to see the point at which your mining operation would become profitable.
Do All Miners Make Money?
The rewards from mining cryptocurrency are never guaranteed. There is no promise that the work done by your rig will produce monetary compensation on its own.
The miners that make money are the ones that complete the Proof-of-Work and find the blocks first. You can also make money as a crypto-miner by participating in a reputable mining pool.
Whether public or private, mining pools are mining units that agree to share pooled cryptocurrency rewards, usually split in a way that resembles the contributions of its members.
If using someone else’s software, you have to be wise and ask if that software could potentially be doing something else on your rig. If you are using your CPU with complete access to your network, consider what an outside person could access if linked to your CPU.
Mining Cryptocurrency vs. Buying Cryptocurrency
If you want to play with cryptocurrency, buying or exchanging cryptocurrency with other money is the fastest way. Mining cryptocurrency requires time and patience and may not produce any monetary gain right away, if at all.
What Cryptocurrency Should You Mine?
The type of cryptocurrency to mine will determine what software you will need to run and ultimately what kind of rig you will need to be an effective miner.
If you are looking to mine a coin that is of investment value directly, you may be looking at Ravencoin (RVN), Ethereum (ETH) or Ethereum Classic (ETC), Litecoin (LTC), Bitcoin (BTC), or Bitcoin Gold (BTG).
New miners might find more luck in Vertcoin, Grin, Monero, ZCash, and Ravencoin as they do best for individual miners and have restrictions on the more expensive types of mining rigs.
There is also the option to mine one cryptocurrency and get paid in another. Minings pools and lease mining operations may pay one crypto type for mining another.
What You Need to Mine a CryptoCurrency
When crypto-mining first emerged, you could mine currencies like Bitcoin with your desktop CPU, power, and time. The current crypto mining world can get very expensive, depending on the rig you select for mining.
Anyone interested in doing anything with cryptocurrency will need a crypto wallet to store it in. Shady agencies offer inexpensive crypto wallet actions to skim or steal the currency from users, so treat your crypto wallet like you would cash and use reputable resources.
What mining software you select will depend on the desired cryptocurrency. Not all mining software mines all blocks. There are open source and proprietary software out there, all designed to process blockchains for various crypto.
A Mining Rig: CPU, GPU, or ASIC
A mining rig is a computer dedicated to mining cryptocurrencies. The parts used to create your rig will drastically affect its performance.
Some cryptocurrencies require specific types of rigs to mine, so always verify the requirements of your desired crypto.
A central processing unit (CPU) is required for all computers to work correctly. When Bitcoin launched, miners could use their spare CPU power for mining. There are some cryptocurrencies that users can still mine with CPU power. Depending on your situation, you could mine these coins to exchange for other more valuable cryptocurrencies.
Graphics processing units (GPUs) quickly do extensive calculations, making them ideal for processing cryptocurrency blocks rapidly. The exact model to select depends on the type of cryptocurrency you would like to mine.
Effective mining setups with GPUs require the use of multiple units. GPU mining also requires a Power Supply Unit (PSU), motherboard, case or frame, and some quality fans or air conditioning to make this setup work.
Application-Specific Integrated Circuits, or ASICs, are computer chips focused on one purpose. ASIC machines make up large blockchain cryptocurrency mining farms, as they are a powerful option for quickly and reliably processing the computations required to complete a blockchain.
ASIC rigs can cause controversy in some circles as they require significant financial investments not obtainable for the average person.
Having the latest and fastest machine heavily weighs the odds of blockchain rewards in favor of those with money for these robust systems. Don’t invest in an ASIC rig if your goal currency is ASIC resistant (meaning does not allow ASIC driven mining).
Computer Parts Shortages
There is a computer parts shortage that has affected the availability of many products worldwide.
High interest in cryptocurrencies like Bitcoin and an increased need for electronic devices for home use has led to increased demand for computer parts. Don’t be surprised if you find that graphics cards and application-specific integrated circuits are hard to come by going forward.
What to Do With Cryptocurrency after Mining It
You have three options for what to do with a cryptocurrency after you’ve mined it. The options are to:
- Trade your mined coins for other cryptocurrencies.
- Cash it out using a cryptocurrency exchange.
- Hold it until the value increases, and then cash out later.
The Dangers of Renting Mining Rigs
If you come across an advertisement or company that offers to lease you a mining rig in their facility for the exact amount they claim the rig costs, ask yourself how that company earns money.
When it seems like a company is helping you make money at the rate that they could achieve that money themselves, transaction fees and other charges may apply.