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Cryptocurrency Mining 101
What is What is Cryptocurrency mining? In this article, we aim to show you!
The world of cryptcurrency mining has come a long way from its nascent days nearly a decade ago.
When pseudonymous Bitcoin inventor, Satoshi Nakamoto, announced his invention in 2009, his libertarian dream was essentially a decentralized currency that anyone could mine at home.
Indeed, early mining activity was mostly on a small scale by individuals trying to make money from their home computers.
Back then, the average CPU packed enough computing power to allow almost anybody to comfortably mine some Bitcoins.
After all, blockchain wallet users only increased slowly at first–from two at Bitcoin’s debut to about 45k a year later. Consequently, the mathematical puzzles to be solved were fairly easy.
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But those go-go days did not last very long. As the value of Bitcoin increased, more people flocked in and the difficulty of mining new Bitcoin increased, too.
Soon, miners started aggregating into mining pools to combine their computing power and share the rewards. Mining pools such as AntPool, BTC.com and Slush were born, and remain the biggest in the business to-date.
Nakamoto designed Bitcoins only as digital entries that are entered in a giant ledger called the blockchain.
Blockchain contains a history of all Bitcoin transactions with copies held in numerous computers around the globe.
How does Bitcoin Mining Work?
1.) Every 10 minutes, a group of machines takes a block of pending transactions and use it to create a mathematical puzzle.
2.) The machines then solve these puzzles and process transactions in the currency. The first machine to solve the puzzle announces it to the rest which go ahead to check its accuracy and then approve it.
3.) A new block is subsequently added to the blockchain ledger. Successful miners have to wait for another 99 blocks to be processed before they are rewarded in Bitcoin.
The time rate at which Bitcoin can be minted is immutable (set at every 10 minutes).
This system was designed to keep Bitcoin inflation in check. The system adjusts the difficulty of solving these puzzles every two weeks depending on the number of nodes on the network.
In practice, the time required to mine a specific number of Bitcoins doubles every four years.
Currently, each block mined successfully is rewarded with 12.5 Bitcoin, having halved from 25 initially.
That number is set to halve again in 2020. This trend has introduced considerable hardware challenges.
By the end of 2009, Bitcoin miners were hashing at a snail speed of just 8 million times per second–two years later that had swollen to 116,000 million times a second.
Hash rate refers to the number of compute functions that miners complete in cryptocurrency code. The rapid increase in the hash rate led to a dramatic increase in mining difficulty.
CPUs were rapidly replaced by faster GPUs, which then were themselves replaced by even faster FPGAs. GPUs and FPGAs are commonly used to accelerate data-intensive workloads in deep neural networks, advanced networking, 4K live streaming video workloads and complex data analytics.
As the Bitcoin momentum continued building up, the puzzles got increasingly more fiendish thus necessitating the use of high-end chips specifically designed to solve Bitcoin algorithms.
ASICs (Application Specific Integrated Circuits), chips specifically designed to run the SHA-256 algorithm were introduced in 2013 to handle the heavy mining workloads.
Industrial scale Bitcoin mining
The expensive equipment required to profitably mine Bitcoin today spurred Industrial scale Bitcoin mining that saw several Bitcoin mining startups spring up.
These invested heavily in mining infrastructure, including massive data centers dedicated to Bitcoin mining.
Several mining companies now sell mining capacity in the cloud. One such company is Genesis Mining, which has data centers located in Iceland, China, and Bosnia. This cloud hosting model appears quite attractive from both the mining companies and the miners’ perspective.
For instance, Genesis Mining has provided estimates that it spent $200 to mine one Bitcoin in 2016, which was worth $690 back then.
Since electricity costs, a major cost component, have remained fairly constant, it’s fair to surmise that Genesis’ mining operation is profitable.
On the other hand, the company charges $350 for a 2,500 GH/s Bitcoin mining contract plus a small fee for electricity, thus making Bitcoin mining feasible for retail miners.
The photo below shows one of Genesis’ mining operations. More than 10k mining GPUs are packed in this single room.
Other notable mining companies include BitFury, KnCMiner, SkyCoinLabs, and CloudHashing among others.
Many of these companies have diversified into mining other popular cryptocurrencies including Ethereum, Dash, Litecoin, Monero and Zcash.
Bitcoin mining companies prefer locating their data centers in regions where there’s ready access to cheap electricity and low ambient temperatures in order to minimize cooling costs.
For instance, KnCMiner has a large data center near the Arctic circle right next to a hyrdoelectric dam while Genesis Mining’s Enigma Mine, the largest Ethereum mine in the world, relies on the frigid airs of Iceland for cooling.
The number of blockchain wallet users currently stands at 18.4 million.
Aggregate hashrate is approaching 20 Tera hashes/second (20,000,000 million hashes per second).
Cloud Mining vs. Traditional Mining
Despite the recent increase in companies offering cloud mining services, mining pools still dominate the scene.
For example, all of the 10 largest market players in the crypto world in terms of hashrate are mining pools, with a combined market share of 86.5%.
AntPool, the world’s largest mining pool, owns 17.4% of the market while BitFury, the largest cloud mining service, is 11th on the list with just 2.8% of the pie.
As a retail investor, the question that begs for an answer is: why has cloud mining not become popular despite its clear advantages?
There are two reasons why this could the case:
- High commissions charged by cloud miners.
- Lack of trust in cloud miners.
Unlike mining pools where miners use their own equipment, buying mine hosting services from a cloud miner means that you are essentially renting mining infrastructure.
Throw in other costs such as maintenance and administrative expenses plus owner’s markup and overall costs are likely to be higher for mining companies compared to mining pools.
The second problem is even more insidious, since there’s a possibility that Ponzi schemes can masquerade as mining companies.
Unlike mainstream cloud services such as AWS, Azure and Google Cloud, crypto clouds are still relatively unknown. It might, therefore, take some time before public trust in these outfits develops adequately.
In the final analysis, it appears as if it’s only a matter of time before genuine cloud mining companies start rapidly scaling.
Many offered tiered contracts that start from as little as $30; in comparison, a low-end Bitmain Antminer S9 + Power Supply will set you back at least $300.
Cloud mining platforms, therefore, offer a good entry point for people trying to get their feet wet in cryptocurrency mining.
Want more? Check out our post on the Best Altcoins to Trade