What exactly is mining of cryptocurrency? It is the process of creating new bitcoins. Mining is also the way transactions are being validated. It’s a decentralized clearinghouse. It protects the system and helps with creating a consensus throughout the whole network without actually having a central authority. It is a truly revolutionary technology.
Bitcoin mechanics and economics
You can think of mining as a contest for solving an algorithm as fast as possible. Special hardware is used in order to do this task efficiently and quickly and the person who finishes first gets a reward known as coinbase transaction.
N0des, used in mining, are monitoring for new ones. When a new block appears, the node selects the winner which stops the old competition and gives start to the new one. The completed block is validated and added to the ledger, and the mining node combines the transactions in a candidate block and begins to solve the algorithm.
To put it simply, mining includes repeated hashing of the block header. In this way the parameter (nonce) is altered and the goal is to, in the end, match a particular target. This is done by randomly changing it, until there is a match. There is no way to guess the needed result, you have to go through the whole process every time.
The already mentioned “target” is very difficult to achieve on purpose. The system adjusts it in such a way as to take about 10 minutes for all the miners (and their combined power) to reach the correct answer. The first individual who succeeds is automatically validated as having the correct answer since there is no way of guessing it. This whole process required a huge amount of electricity.
Every 10 minutes a new block is created. The system automatically changes the parameter so that it could fill in this time period. The difficulty depends mostly on the whole computing power of the network. If the miners are being faster than 10 minutes, then the difficulty will increase and vice versa. The more people are joining and the competition becomes bigger, the more the difficulty has to increase.
Is there a way to cheat the system?
No. There are a lot of criteria that the system checks when a new block is created before it validades it. Each node makes an individual evaluation and only after that it transfers it to the next one. In this way there is no way for another block to sneak in. This way also ensures that the real miners will receive their reward and the mined block will be added to the global ledger.
Starting to mine
Before doing anything else, you have to analyze some factors that are crucial for a successful mining career. They are:
- Initial investment – it is obvious that you will have to have good hardware as well as pay for cables, software, cooling, electricity, rent and so on. All of those things are important.
- How difficult is it to mine – when difficulty increases, you can expect that your profit will also go down. It can be observed that mining is becoming tougher and tougher every day as the participants increase in number.
- What is the value of Bitcoin on the free market? – This is a crucial point when calculating the potential profits. All investments in this crypto are very risky, but could also bring you a lot of money. You should never forget that it’s a volatile market.
- Electricity cost – this is one of the most serious expenses you will face as a miner. Hardware is also very expensive, but electricity will have to be paid every month. You will also find a way to cool off since mining generates a lot of heat. If you are located somewhere where electricity is cheap, you have an upper hand.
- Block and fee rewards – the block reward is reduced by ½ with every 210,000 blocks (or 4 years). If you are pressed for time, you will have to pay a higher miner fee to be confirmed quickly. If time is no issue, you can save money by waiting longer. This means that the rewards are unpredictable.
- Downtime – this is the worst thing. The time you are not mining, you are losing profit. You might come across overheating issues, software bugs, power outage, and many more.