The world of cryptocurrencies can seem confusing at times. There’s a lot to learn about how cryptocurrencies work, how to buy and store them and where to spend them – but sometimes the terminology can make things seem more confusing than they really are.
At Free Money, we’re keen to help break down any barriers of understanding so you can earn, save and spend with confidence.
With that in mind, we’ve put together a guide to cryptocurrency mining to give you a primer on what you really need to know and explain key phrases. Unlike other sites, we won’t baffle you with science, we want you to be able to know enough to make an informed choice – and then you can be on your way.
What is crypto mining?
Cryptocurrency mining is the process of auditing and verifying cryptocurrency transactions so that payments can be made and sent safely and securely. It’s the process that’s needed to keep the whole system running.
The more you get into cryptocurrencies, the more you’ll see that people have used terminology more commonly associated with physical assets in order to explain and illustrate the similarities. Bitcoin was often referred to as ‘digital gold’ and so ‘mining’ is perhaps an apt way to describe the process that helps to uncover more of the asset.
However, terminology such as this can be a little misleading too. People aren’t actually ‘mining’ through digital digging and finding and unearthing coins. The mining process involves verifying transactions, checking they are safe and legitimate and adding a new ‘block’ to the ‘blockchain’, a public ledger of transactions that cannot be altered.
In effect, this is like a cross between two other examples involving physical currency. By checking and verifying the transaction, miners are acting in the same way as retailers who test that a note isn’t counterfeit or Chip and PIN machines that verify the identity of the payee. Their work ensures that a transaction is legitimate. On top of that, by adding new ‘blocks’, miners are also the people who allow new cryptocurrencies to enter the system – similar to the way a central bank would mint new coins and notes to spread the availability of physical currencies.
How to mine cryptocurrency
So, how does cryptocurrency mining work in practice?
Miners compete to ‘solve’ a block by using cryptographic hashes – solving a mathematical puzzle in order to add these blocks on to the chain. They can be rewarded for their efforts – receiving payment in cryptocurrency to reflect the work they’ve done. However, in order to receive this, they need to verify about 1MB worth of transactions (this can be thousands of individual transactions) and have to be the first miner to solve their puzzle – so it’s fair to say that it isn’t easy to get this reward.
It’s worth considering the scale involved with this too. The number of Bitcoins, the first and most popular cryptocurrency, has been capped at 21 million – but it’s estimated that it’ll take more than 100 years to mine that total amount. When Bitcoin began, miners could earn 50BTC for each block they added to the ledger. By 2020, that reward has reduced to 6.25BTC – although it’s worth noting that the price of a Bitcoin is so high that this is still a significant amount in traditional – or fiat – currency.
When Bitcoin first launched and cryptocurrencies were in their infancy, enthusiastic amateurs were able to turn their hand to mining, using their own home computer equipment. Since then, however, the competition has intensified – especially given the value of a single Bitcoin. As a result, the process now needs some serious hardware – namely a graphics processing unit (GPU) or an application-specific integrated circuit (ASIC) – and professional, large-scale operations have been set up to carry out the mining function needed to verify cryptocurrency transactions.
It’s important to stress that this is a complex and specialist operation. The kit is expensive and you’re likely to need to spend more on hardware and energy than you will make back in coins, especially if you’re a beginner and you’re just starting to look into the cryptocurrency market. Our guide to free Bitcoin sites looks at easier and cheaper ways to make free money if you’re interested in this. Other people, however, choose to do this because they like the idea of doing their bit to further the use of this still-new technology. Cryptocurrencies attract many people who are advocates of the technology and who passionately believe in a payment platform that is free from central control and offers privacy and security.
Many people who do still choose to engage in cryptocurrency mining opt to join mining pools. These, as the name suggests, bring together the mining power of a host of different individuals in order to co-ordinate the mining process and provide the sort of power needed to carry out mining activity. Some pools charge a fee and each has its own way to operate – with software, hardware and payment structures to suit the way they wish to work.
Cryptocurrency mining: Glossary
Hopefully that helps to give you an understanding of the basics of cryptocurrency mining. Here’s our quick guide to some of the key terminology – some of which we’ve covered above – in order to help you understand what people are talking about when it comes to cryptocurrency mining:
- ASIC: An application-specific integrated circuit. This is a microchip designed for one specific purpose – in this case mining cryptocurrencies.
- Blockchain: A public ledger of all cryptocurrency transactions. Each block stores all of the digital information required for these transactions to be made and these are added to the blockchain once verified and audited by the mining process.
- GPU: A graphics processing unit. These can be combined to create a mining rig. They can be expensive, though, and do require a lot of energy and cooling to keep them working effectively.
- Hash: A unique code of numbers and letter used to identify the transactions made in a block.
- Hash Rate: The processing speed of a network – this shows how quickly the mining process is operating.
- Mining rig: A combination of computer components, put together for the purposes of mining cryptocurrencies.
- Mining pool: A group of people who combine their computing power to carry out a collective mining effort.
- Private key: An individual’s private cryptographic code. This is confidential and allows them to make cryptocurrency transactions from their wallet.