Mining Cryptocurrencies Explained Simple
In the world of cryptocurrencies, "mining a currency" means extracting it digitally with the use of sophisticated computer equipment.
Bitcoin is like Gold
In 2009, Bitcoin, the quintessential cryptocurrency, was first mined by its inventor Sathoshi Nakamoto, laying the foundation for the entire history of mining.
Over time, Bitcoin mining has been repeatedly associated with gold mining, as they are similar activities in some ways:
- one is material mining
- the other is digital mining
While maintaining these abstract connotations, Bitcoin, thanks to this parallelism has been, and still is, considered as a kind of digital gold.
Bitcoin Mining and Exchange
Bitcoin miners use machines capable of validating transactions and allowing the entire ecosystem to exist.
Thanks to their efforts, they are paid back by the network with a small fraction of Bitcoin.
If you can send your bitcoins to your friend, it is thanks to all the miners who approve this operation. The validation of this operation depends precisely on the work of specific machines.
All existing bitcoins in circulation have been previously mined. What does it mean?
It means that in the past it was not possible to buy bitcoins in modern exchanges.
Then, when bitcoins were gradually mined, exchanges were born that allowed buying and selling even to non-expert miners.
If you own bitcoins, unless you are already a miner, they were definitely mined in the past by someone, then resold in some exchange.
Can I Mine Bitcoins Indefinitely?
Bitcoins have been designed following several parameters that guarantee a deflationary policy.
I'll try to explain myself better: the amount of Bitcoins that can be mined is well definite.
21 Million Bitcoins
This is because there is a finite amount of bitcoins that can ever be created.
The maximum amount of bitcoins that can be in circulation is 21 Million.
Every 4 years, the daily amount of Bitcoin that is generated by the network is halved.
Each day, 900 Bitcoins are currently generated, which are to be distributed to all miners on the network.
In early 2023, this amount will be halved. After that date, miners will receive a maximum of 450 Bitcoins daily.
In the early months of 2027, the figure will drop to around 225 Bitcoins and so on.
This protocol inevitably leads to a decreasing supply over time. Due to this characteristic, bitcoin is labeled as digitally scarce, due precisely to its deflation.
After 12 years, the Mining Industry has innovated, so much so that today it is possible to mine many coins besides bitcoin, such as:
- and many more
Each cryptocurrency has its own protocol with its own rule and monetary policy.
How to Mine a Cryptocurrency
Extracting a cryptocurrency is not a simple activity.
First of all, it is necessary to have special machines, called GPUs or ASICs.
Usually GPUs are used for Ethereum mining while ASICs are used for Bitcoin mining.
These machines, are able to solve complex mathematical problems at a very high speed. The unit of measure used to calculate this computational power is the hash per second (H/s).
Total Hash Rate
Given the high computational power present in the network, called Total Hash Rate, it is advisable to associate a prefix number to the hash per second.
Regarding Bitcoin, the computational power is calculated in Tera hash per second: 10^12 hashes per second.
As for ethereum, the computational power is calculated in Mega hash per second: 10^9 hashes per second.
In addition to the machine, it is essential to have other resources, besides of course the technical ones related to the assembly of the machine and the addressing to the right algorithm:
- first of all, a stable Internet connection
- in secundis a significant energy power, able to support a constant use of the machines
It is important to understand that, in most cases, the machines will have to remain on 24 hours a day, in order to maximize the production of cryptocurrency.
This constant usage inevitably leads to a higher than expected bill.
While Paying a High Energy Bill, can you Profit from Mining?
This is a rather generic question.
The profitability of mining depends on many factors, and it is impossible to make a single estimate for all miners in the world.
In Italy, mining is highly dangerous, as energy costs, most of the time, barely cover the gain from digital mining.
There is then to add the cost of the machines themselves, which can vary over time depending on market demand.
If you are a neophyte, I do not advise you to improvise!
Those who do mining, do it because, hopefully, they know all the risks involved in starting this activity, and because they most likely live in a favorable environment (low cost of energy and low cost of machines).
What is the Entity that Rewards Miners with Cryptocurrencies?
There is actually no person, company or entity responsible for this mechanism.
The reward in bitcoin rather than ethereum or litecoin is done through a protocol, i.e. the mechanism is automatic and embedded in the network.
This is a very important aspect.
Almost all mineable cryptocurrencies (there are also non-mineable cryptocurrencies), have open source protocols that are open to everyone.
This means that anyone can potentially become a miner, without asking anyone's permission and without signing any contract.
By having a machine, a low energy cost and an Internet connection, everyone can participate in increasing the total computational power of the network and participate in receiving the cryptocurrency prize.