Analyses
24
Mar
crypto mining

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What is cryptocurrency mining?

Cryptocurrency mining means blockchain maintenance work. Mining for each cryptocurrency is slightly different, although the basic principles are the same. There are hundreds of different cryptocurrency mining devices.

Crypto mining is a profitable business in many countries worldwide. The most popular currencies to mine are Bitcoin, Dogecoin, Bitcoin Cash, and Litecoin. Cryptocurrency mining is not a good idea on a smartphone. Cloud mining means that the investor buys computing power from a mining farm.

What does cryptocurrency mining mean?

Cryptocurrency mining is blockchain maintenance work. This principle applies to all mineable cryptocurrencies, such as Bitcoin, Litecoin, and Monero. Miners are, therefore, vital players in the crypto world.

Blockchain is a decentralized database. It is a data warehouse where all network transactions are stored. Other types of information (images, videos) can also be stored in a blockchain. However, for efficiency reasons, blockchains contain primarily transaction data. This is because the size of each block is limited.

Crypto mining is often performed using specially made ASIC computers. Below is a picture of a Bitmain Litecoin ASIC miner.

dogecoin litecoin asic

Whether mining is also profitable with graphics cards (GPU) or computer processors (CPU) depends on the cryptocurrency.

What does blockchain maintenance work mean in practice? Miners form new blocks of the blockchain. They collect transactions sent to the network and add them to new blocks. Cryptocurrency mining is practically a competition between miners for who gets the right to create the next block.

This competition could be compared to a lottery draw. Almost every week, someone lucky hits the correct number, even though the probability is small. You could also say that miners try to guess the correct lottery number, and some get it right every few minutes.

Miners receive block rewards for their work. They often also receive fees for each transaction included in the block. The size of the rewards varies depending on the cryptocurrency.

Crypto mining: Differences between cryptocurrencies

Mining for each cryptocurrency is slightly different, although the basic principles are the same. Differences arise mainly from the hardware used, which in turn is determined by the mining algorithm of each cryptocurrency.

Let’s start with some technical differences. For example, Bitcoin’s block time is 10 minutes, Dogecoin’s block time is about a minute, and Litecoin blocks are generated once every 2.5 minutes. This shows how blocks are created at different intervals depending on the cryptocurrency.

litecoin

Each cryptocurrency also adjusts the mining difficulty level so that new miners joining the network (increased mining power) do not change the block time. If the mining difficulty weren’t adjusted, the block time would decrease all the time towards zero.

The most significant difference in mining between cryptos is the mining algorithm. Proof of Work is a consensus algorithm. It tells, on a general level, how the network consensus is formed. PoW means that physical miners are needed. The opposite of PoW is Proof of Stake, where no miners are used.

The mining algorithm, on the other hand, tells what kind of mining device each crypto is optimized for. Ethereum Classic’s mining algorithm is etcash and Litecoin’s script. Bitcoin uses the famous SHA-256. Monero has changed its mining algorithm over the years, making it challenging to mine with ASIC devices. The goal is to keep mining as decentralized as possible.

You should remember that only a fraction of cryptocurrencies require mining. More than 99 percent of cryptos on the market use Proof of Stake instead of Proof of Work. Many beginners may have the opposite image. This is because the biggest and best-known crypto on the market, Bitcoin, needs to be mined.

Cryptocurrency mining rigs

There are hundreds of different cryptocurrency mining devices. It depends on the cryptocurrency and your budget, what kind of mining machine you want to get. Mining equipment can be divided into two categories:

  1. GPU
  2. ASIC

GPU stands for a graphic processing unit. Pre-built rigs are available, but most miners build their own GPU rigs. Typically, 5-10 graphics cards are connected to one motherboard. Specially made motherboards are also available for this purpose. They are optimized for power consumption.

The picture below is a cryptocurrency mining GPU rig.

crypto mining gpu rig

ASIC devices are specially made-computers designed only for a specific task. As the name suggests, a GPU rig can be harnessed to mine any cryptocurrency, while the ASIC, on the other hand, is optimized for a specific mining algorithm.

Ten years ago, ASIC devices were only available for Bitcoin. Nowadays, the most popular mineable cryptos can be mined with ASIC machines. An ASIC is much more expensive than a GPU but also more efficient.

Is crypto mining worth it in Estonia?

Crypto mining is a profitable business in many countries worldwide. Is that also the case in Estonia? This is a question that many beginners often ask. The answer to the question depends on three things:

  1. Cryptocurrency price
  2. The cost of electricity
  3. The efficiency of your miners

The first point is essential. The hash rate (mining power) of cryptos constantly increases as new miners join the network. Mining equipment has also become more and more effective over time.

Many cryptos also have a built-in algorithm that decreases the block rewards over time. In Bitcoin, this is called halving. If cryptocurrency prices do not increase in the same proportion, mining is profitable only for the most efficient operators.

The price of electricity is also a critical element. Many think 10 cents/KWh is a good rule of thumb; it is not worth mining if you can’t get cheaper electricity than this. The image below shows the calculation of mining profitability on the cryptocompare.com website.

cryptocurrency mining

Bitmain’s S19 ASIC mainer has been used in this example, with a power consumption of 3250W and a hash rate of 95 TH/s. If the price of electricity were 10 cents/KWh, the profit would be about $32 per month, which is 1/100 of the device’s purchase price. So, the price would have to be multiplied from this example for mining to make any sense.

If the price of electricity fell to five cents, the profit would increase almost fivefold. If the price of Bitcoin doubled, the hardware costs could be amortized in less than a year.

The price of the cryptocurrency, the cost of electricity, and the efficiency of your miners decide the profitability of mining any cryptocurrency. At cryptocompare.com, you can test how profitable it would be to mine Litecoin, Ethereum Classic, or Monero. Reaching the shortest possible amortization period for your mining devices is essential.

Mining hardware develops fast every year. Today’s expensive and powerful GPU can already be far behind next-generation devices a few years from now. Due to this, the yield of the devices starts to drop promptly over time.

The most popular cryptos to mine

The most popular currencies to mine are Bitcoin, Dogecoin, Bitcoin Cash, and Litecoin. This list is not complete, as new cryptos are constantly created. The situation in the market can also change from a technological point of view. For example, Ethereum changed to Proof of Stake in September 2022 which ended Ethereum mining.

The biggest mineable cryptos in terms of market cap:

  1. Bitcoin
  2. Dogecoin
  3. Bitcoin Cash
  4. Litecoin
  5. Stacks
  6. Filecoin
  7. Ethereum Classic
  8. Kaspa

In addition, popular coins such as Monero, Dash, Ravencoin, and Digibyte are mineable cryptocurrencies. This means there are still dozens of mining cryptocurrencies on the market—plenty of options! If you are interested in mining cryptocurrencies, use online calculators to determine each cryptocurrency’s profitability.

Is it possible to mine cryptocurrency on a smartphone?

Cryptocurrency mining is not a good idea on a smartphone. Using a mobile device for mining purposes 24/7 is not wise because you quickly destroy the battery. Second, the phone’s processor is not designed for such use, and third, electricity consumption would also be a problem.

There are various mining apps on the internet for smartphones. In practice, these are games or tasks similar to mining. Some mining-like apps can be profitable at the peak of a bull market when prices skyrocket.

If you want to make money from mining long-term, invest in good equipment, get a cheap electricity contract, and stop using your smartphone.

What is cloud mining?

Cloud mining means that the investor buys computing power from a mining farm. Cloud mining is an easy option for anyone who wants to participate in mining but doesn’t want to buy the hardware. The reason may be, e.g., lack of technical know-how or high electricity prices.

Investments in cloud mining are also smaller in order of magnitude. You can usually join with investments of around 1000 euros. Cloud mining sounds like quite a pleasant and risk-free way to make money. However, the reality is different.

There have been many scams in the cloud mining industry. It is impossible to know whether the service you invest in has acquired any miners. Even if there is a mining farm, it might sell more mining power than equipment.

In addition, the rapid drop in crypto prices can trigger unpleasant contract terms. If prices fall too low and mining becomes unprofitable, the service provider may terminate all contracts. Generally, you must buy a mining contract for 12-24 months.

We recommend participating in cloud mining only to experienced investors. Also, read the terms of the contract carefully.

Antti Hyppänen

Antti Hyppänen is the founder and editor-in-chief of AboutBitcoin.io. Antti has written articles about cryptos since 2017. He follows the crypto market every day of the year and is responsible for the daily operations of AboutBitcoin. Antti is not a maximalist regarding any cryptocurrency but looks at the industry objectively. Antti’s investment profile is “buy & hold,” i.e., he does not trade or use leverage. His crypto portfolio consists of mainly Bitcoin and Ethereum. Antti also follows macroeconomic events. In addition to cryptos, his interests include gold, silver, and the US stock market.