Cryptocurrency mining entails introducing new coins into the current supply. It is also the process through which the network in which the coins operate is secured. This security is provided in the form of cryptocurrency transaction verification and issuing coins as a reward for verifying the blockchain.
Sometimes cryptocurrency mining is also called Bitcoin mining mainly because this is the most popular crypto out there. Other names such as Altcoin mining and crypto coin mining are also used.
Cryptocurrency mining is an alternative way of acquiring cryptocurrency. But it is also a more demanding way compared to Bitcoin trading when it comes to the investment of both financial and physical capital.
Cryptocurrency Mining Explained
For you to better understand what cryptocurrency is all about, let us begin with something that you are pretty conversant with – regulation of fiat currency. Printed currencies are most trusted by consumers mainly because they are under the regulation of a central bank. The United States dollar is regulated by the Federal Reserve.
The Federal Reserve is in charge of how much money would be produced and released to the banks for circulation in the economy. It also punished counterfeits in addition to many other responsibilities.
The scope of a central bank does not just cover offline transactions. It also covers any financial transactions made on the Internet. For instance, when you buy your 40-inch smart TV on Amazon and pay using a credit card or PayPal, the source of funds is from your bank account and processed by a company like Visa or MasterCard.
Whenever the transaction is completed, its history is recorded in a private ledger that can only be made public to specific people upon producing a court order. Take note of this ‘private ledger’ bit because there is the idea of ‘public ledger’ in cryptocurrency which essentially refers to the blockchain.
The transaction’s history is primarily one of the reasons why your credit card could be suspended when traveling abroad. That’s because the bank is used to you transacting within a given scope but you are now doing it from a different geographic location.
The working of cryptocurrency is completely different from fiat currency. It is based solely on the idea of anonymous transactions. There is nothing like a central authority to regulate what happens. Rather, there are millions of independent and interconnected computers spread throughout the world that back it up.
The network of computers does exactly what the Federal Reserve does. The miners are involved in recording transactions and verifying its authenticity. The only difference from the central banks is that the miners are all over the world and the data is in public on the blockchain.
Every time a cryptocurrency transaction is executed, it is the miner’s duty to ensure that this transaction is authentic after which they add the block to the chain. This is actually where the name blockchain comes from – a chain of blocks.
Mining is a highly competitive process. Explaining it may make it sound simple; you just verify a transaction and you are awarded coins. In reality, you will be in stiff competition with other cryptominers to solve complicated mathematical problems that are linked to the block that has a transaction.
If a miner successfully cracks this problem, they get a code for authorizing that specific transaction. Because you delivered a service, you will receive a small amount of coins as your own. For you to be successful at this, you need a computer with powerful specifications.
Cryptocurrency Mining Profitability Issues
The name mining is used because it is individuals who volunteer to be part of the transaction verification process. It goes without saying that the miners will need something to motivate them to do so. To them, this is a profit.
As more transactions are added, the difficulty of the mathematical computations also increases. This is what makes miners get concerned. They are increasingly demanded to invest in power computer resources to stand a chance of solving the computations.
It is not just individuals that do the mining. Many businesses have been involved in the process. Some of these businesses have even gone ahead and set up their mining centers in rural areas and closer to dams where the cost of electricity is less expensive.
Others have installed Application Specific Integrated Circuits. These have been built to do mainly one thing, mine cryptocurrencies. Back in 2009 when Bitcoin had just emerged, you could simply use the home CPU to do the mining. The problem with the CPU is that it could be running many other applications while at the same time mining, hence will not be that effective.
There are several disadvantages of cryptocurrency mining:
- Requires huge investment which is determined by the size of your operation
- A lot of time is involved in the process including determining rigs, location to set up and source of electricity among other factors
- Equations are increasingly becoming more complex hence the need for powerful resources
- Effective mining needs one to join a mining pool which has fees
You are probably wondering if there is an alternative to mining the crypto. Yes, there is.
Why Choose to Trade Instead?
Mining is not the only way that you can get cryptocurrencies. If having to set up ASICs and rigs is not something you are a fan of and you know how to play around with numbers, then trading is the most viable option.
You have every reason why you might want to get involved in cryptocurrency trading:
- Does not need technical skills and equipment: You can start trading as soon as today. There are no specific skills that are needed for this and you could do it for as little as $10. Once you have a better grasp of everything, you can increase your investment.
- A variety of coins: The hardware used in mining tends to limit the miner to specific coins. When it comes to trading, you are not limited by a specific algorithm or coin, hence you can trade in any coin of your choice. As of now, there are a total of 1600 cryptos. Of course, not all coins are equal. You are better off choosing ones that give you higher earnings.
- Ability to earn more: In a circumstance where you have invested an equal amount of resources and money in mining and trading, crypto trading could potentially make you more money. Whereas mining may start generating revenue after about 5 to 6 months, you could double your investment in mining within a month. However, do not look at trading as a get-rich-quick plan.
In most cases, cryptocurrency trading is the most viable choice. It does not need you to make a great investment for it to pay off. Neither do you need complex skills and resources. The same cannot be said for mining.
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