Cryptocurrency mining: key facts about “digital gold”
Nowadays, it is well known that cryptocurrency purchase is not the only way to get it. More and more people acquire cryptocurrency as a result of its mining. It has become extremely popular. This is not surprising, if to consider the rapid growth of bitcoin price in 2017. Some altcoins also demonstrate an impressive growth. Etherium rate has recently slightly decreased, though a lot of people were very impressed by its immense price jump (with maximum in June), when it could have been sold almost 50 times pricier than six month ago. Cryptocurrency mining has started to be considered as an easy and fast way of income without special requested skills and deep knowledge. But is everything indeed so easy? We are sure that investments into cryptocurrency should be performed with understanding and knowledge of basic nuances that influence the result. In this article we will cover the very concept of mining as well as key types and methods of its realization.
What is mining purpose?
At the early stage of cryptocurrency (as such) concept formation a number of fundamental problems appeared. “Emission issue” is one of them. It is well known that all cryptocurrencies are based on the idea of maximum decentralization and suppose the absence of usual “сentral bank” (or a single decision-making center), that would have an overwhelming influence on emission of new currency units and full control of it. At first sight the central bank analogue is needed for emission but the whole idea of cryptocurrency existence may be deprived by its presence in the system and make it a simple copy of traditional money (with accompanied disadvantages). The solution of this problem has become an idea to distribute the emission function between miners - individual parts of the system.
An important role during mining formation has also been played by “verification issue” that is connected with the necessity to maintain functioning of the whole network and to confirm the authenticity of each separate transaction. It is commonly known that a single center which would process transactions cannot exist in the conditions of decentralization (otherwise it would gain too much power and could interfere with the system for unfair manipulations and cryptocurrency distribution in favour of certain individuals). However, there has to be someone responsible for transaction verification process. Moreover, the whole process has to be decentralized. Such necessity underlies the appearance of “verification issue” - the second conceptual problem of cryptocurrency system. Mining has become the solution once again: processing power of miners are used for each transaction verification. While the reward is a motivating factor that encourages more and more people to share their processing power (In this article you can read experts’ advices where to store mined cryptocurrencies and where to sell them).
Mining risks
Mining boom is still at the peak - more and more people, who have recently had nothing in common with cryptocurrency world, are becoming active miners today. However, there are certain risks that are not fully understood by beginning miners. It should be considered that nobody can predict in advance mining profitability or losses that depend on such variables as cryptocurrency rate and processing power of all computers, that are already involved into mining of one or another cryptocurrency.
Rate of any cryptocurrency is characterized by high volatility (variability) - it means that it can be dramatically changed without any apparent preconditions, that could be found out and responded beforehand. Beginning miner has to accept the risk of a rapid rate change as a result of which all equipment costs may not pay off due to the fact that cryptocurrency obtained during mining will cost significantly less than it was previously expected. Flash crash can be caused by one of the following reasons:
- vulnerabilities identification in the cryptocurrency software code could be detected and used by hackers, thus undermining the credibility towards certain cryptocurrency and, therefore, its demand (as it is known, the lower demand - the lower rate);
- cryptocurrency distribution in the society is characterized by high level of inequality; it may cause the significant exchange rate collapse, in case if some “crypto-monopolist” suddenly decides to place his crypto-wealth on the market and sell it; this will lead to excess offer and as it is known - the higher offer, - the lower rate;
- possible actions of government authorities and international organisations that are aimed at the prohibition or limitation of cryptocurrency anonymous usage; such actions may damage reputation of cryptocurrency and create its negative image in mass media, thereby the number of people who would like to buy cryptocurrency may decrease.
In addition, the beginning miners should take into consideration the fact that the amount of their reward (received during equal time period using the same processing power) is not fixed and depends on “mining difficulty” that is inversely proportional to total processing power used for mining of particular cryptocurrency in the whole world. The excitement around cryptocurrency mining has become so endemic that a lot of people are ready to sell their apartments, houses, cars and invest their money into mining equipment, being totally sure that high income is guaranteed. However, it’s worth to remember that the bigger number of people are involved in “gold rush” of cryptocurrency mining, the lower income each of them will get (if exchange rate remains the same).
Types of mining
From a technical point of view, there are several types of mining in the world which differ according to configuration of computers connected to the network and thus according to total process and equipment cost price. They are:
- CPU mining;
- GPU mining;
- ASIC mining.
CPU mining is performed using Central Processor of usual PC. It’s the very first type of mining from a historical perspective. Nowadays it is outdated because of its poor effectiveness in comparison with contemporary approaches. CPU mining is not profitable since 2010, when it was displaced by more effective GPU mining.
GPU (graphics processing unit) mining is based on the calculations carried out by video cards and is characterized by high processing speed due to GPU capacity to carry out parallel calculations and solve multiple tasks simultaneously (this feature is very useful for mining). Switch to GPU mining was the breakthrough that enabled to surpass CPU mining far forth. First of all, one video card is able to calculate several times more hashes than a CPU. Secondary, it was possible to integrate up to 4 video cards on one motherboard, and later - up to 6 (theoretically, up to 8). Thus, it was possible to build relatively cheap mining “farms” from video cards.
One more type of mining systems - ASIC chips (Application Specific Integrated Circuit). They were designed to complete only one task. (they are one currency mining oriented, (it is bitcoin, as a rule) and are not suitable for amateur usage). However, they are more efficient than conventional processor that could be used for multiple purposes - the gap in performance of the same price level devices can multiply differ.
ASIC systems specialization provides them not only with advantages but also significantly limits them: ASIC miners are usually restricted to mining of one cryptocurrency and can’t switch to its analogues if needed (moreover, not all cryptocurrencies are suitable for ASIC-mining). Besides, it’s more difficult to sell ASIC than GPU - in case of initial cryptocurrency rate collapse, nobody would like to buy it (while it’s still possible to sell GPU to gamers on the secondary market).
Furthermore, mining process can be distinguished according to a number of participants. There can be:
- Solo-mining;
- Pool-mining;
- Cloud-mining.
Solo-mining: it’s worth to note that this mining type is relevant only for new currencies where a great processing power is not needed for their calculation (so far). Blocks search is carried out by using the equipment of only one miner . The main advantage of such mining type is sole-possession of the reward. But there is a substantial disadvantage - the block search can take quite a long time, everything depends on the difficulty of calculations that should be processed by user’s mining-system and the luck implying that his equipment will be able to solve the task faster than the mining-competitors.
Pool-mining: the most popular mining type. This is a collaborative mining technology that unites a lot of independent miners. In this case, mining profit is distributed between all pool participants in direct relation to provided processing power. Pool mining is more reliable than solo-mining thanks to guaranteed reward for all pool participants regardless of who has generated the next block. At the same time, crypto community ambiguously reacts to large pools. There is a risk of an excessive accumulation more than 50% of the whole network processing power in one pool - in this case, the pool will gain enough power for fraudulent manipulations with transactions verification and will be able to exercise total control over the relevant cryptocurrency.
Cloud mining: the most controversial mining type. On the one hand, you do not have to spend your money for installation, setting and maintenance of your “farm”, and also for electricity (that is especially up to date in the regions with high tariffs, therefore the majority of cloud mining facilities are located in the countries with cheap electricity, for example, in Thailand). In case with solo- or pool-mining the processing equipment is entirely at miner disposal, then in case with the cloud-mining equipment could be located on the other side of the world and a miner has nothing but to believe on bare word of chosen service providers. It is also worth to remember the fact that there are no guarantees that people who offer such service will consciously fulfill their obligations and you will properly get your reward for mined blocks.
In summary, we can say that mining can still be very profitable. But you should carefully consider all risks. Choose cryptocurrency thoroughly. Think over mining strategy. Use services of reliable and proven pools with solid reputation. Do not trust your money to doubtful companies offering cloud mining if their activity is not confirmed by years of experience and positive references. Participate in thematic forums and follow the discussion of actual mining methods and industry problems that influence the rate. Be aware of all risks and be ready to rate fluctuations or mining reward drop due to an increasement of its complexity. Be realistic and you'll succeed in everything. We’ll keep on publishing useful information to develop crypto-community together.
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