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What is cryptocurrency mining and how does it work?


Crypto-mining is a way to create new units of digital currency. It’s tricky, and the process itself can affect investors.

As the crypto continues to evolve and more and more daily Australians start investing, the question arises; where do cryptocurrencies like bitcoin actually come from?

Although it is easy to think that it is simply downloaded from the computer of each creator of cryptocurrency, the truth is that it is much more complicated.

One of the most famous and reliable processes, Proof-of-work mining.was key in securing the network as well as in issuing new coins to the market for circulation.

For those new to the crypthere’s a breakdown of crypto mining and how the process can affect investors.

Definition of crypto mining

When cryptocurrencies such as bitcoin were first introduced, there were basically only three ways investors could get their hands on them (at the time there were no major exchanges like CoinSpot).

They could either:

  1. Peer trading
  2. Give it away from another owner
  3. Have it yourself

The mining process generates rewards for processing transactions by miners who provide the computing power of the network. Rewards from mining can sometimes include freshly “expected” coins, as well as a commission for transactions accumulated in the block.

Mining itself requires technical know-how as well as the enormous computing power needed to solve the algorithmic puzzles that make blockchain networks so secure. The mining process involves checking blocks of data and adding transactions to a public record – also known as a distributed register.

In order to confirm and add new transactions to the blockchain, miners must compete with each other using specialized computing equipment to solve mathematical equations. They generate fixed-length codes known as “hashes”.

A hash is a complex mathematical function that converts any message or input into code of fixed length. Simply put, it is essentially a very secure encryption method when messages are transposed into a set of numbers and letters.

To detect the next block and earn cryptocurrencies such as bitcoin, miners must first generate a hash that has an equal or greater number of zeros in front of it than the “target hash”. This process is known as Proof of Work (PoW), and this is how blockchains reach consensus on transactions without a central regulator.

3 steps to start investing in cryptocurrency

Growing pools for mining

In the early stages of the market, cryptocurrencies were mined by individuals on desktops with conventional CPUs, but now this has been streamlined through large “mining pools”. Pools are spreading in many regions – especially in China, before a number of regulatory measures were implemented.

If you are wondering whether to do mining hobby for pocket moneykeep in mind that you will most likely need millions of dollars of high-end computers and a huge electricity budget to generate any tangible profits.

Alternatively, if you have some suitable equipment, you may want to consider joining a mining pool: a joint group of cryptocurrency miners who pool their computing resources in a network to increase the likelihood of finding a block.

Considering four types of mining

There are currently four types of PoW mining:

  1. GPU mining
  2. CPU mining
  3. Mining ASIC
  4. Cloud mining
GPU mining

Mining on the GPU is the most common and popular type of crypto mining. It is relatively cheap and efficient. GPU mining requires the installation of graphics processors (GPUs) to use video cards to extract cryptocurrencies. One standard setup consists of a CPU, motherboard, cooling, frame mount and about 2-8 graphics cards – a type you can find in high-end gaming computers.

CPU mining

CPU mining involves the use of a central processing unit (CPU) to mine cryptocurrency. Processors can be found in everyday hardware such as laptops and desktops. Nowadays, processors are largely obsolete as they are quite slow and time consuming compared to other competing installations on the market.

Mining ASIC

ASIC mining is when certain devices, known as application integrated circuits (ASICs), are used to extract a crypt and are designed to perform a single task. Many miners choose this method because ASICs tend to produce a large amount of cryptocurrency compared to a GPU or CPU.

Cloud mining

Finally, cloud mining is a process in which you pay someone, often a large corporation, a certain amount of money to rent out your installation. They conduct the mining process on your behalf. The lease is valid for an agreed period of time, through which all profits generated by the rift are transferred to your cryptocurrency wallet.

Destruction of crypto mining algorithms

Over the years there have been many problems for the PoW consensus mechanism, one of the alternatives to the PoW mechanism is Proof-of-Stake (PoS).

The concept of PoS states that a person can extract or verify the blocking of transactions simply by owning a “share” in the network.

For example; on Etherium blockchain, which is currently in the process transition from PoW to PoS, requires owners to put 32 ETH to become a validator in the network. At current market value it is about 185,000 Australian dollars.

If a validator tries to intentionally compromise network security, he loses his share. This ensures that network security will not be compromised as all participants have a skin in the game and they may lose something valuable if they become fraudsters.

For successfully verifying transactions in the PoS network, users are rewarded with a native asset (so in the case of Ethereum the reward will be in ETH), similar to mining in the PoW network. Rewards can range from 4 to 10 percent per annum depending on the number of entrants and online activity.

PoS is often considered a cleaner way to generate cryptocurrencies because it does not require the use of processors that absorb energy and generate heat that is harmful to the environment.

PoW vs. PoS: pros and cons

Although PoW and PoS provide network security and allow you to control the inflation of the underlying asset, each consensus mechanism has its pros and cons.

PoW is the closest thing to being a digital asset.

What is the fundamental value of bitcoin? That’s a good question

The amount of electricity and computing power needed to create one bitcoin is huge. This provides a significant level of security, given that creating a fake bitcoin will be harder than creating a real one, which is already extremely difficult and expensive. In addition to this is the fact that it will require one entity to control 51 percent of the entire network. Given the liquidity of bitcoin, the number of holders and its market capitalization, this is virtually impossible.

PoS, on the other hand, improves PoW in a variety of ways. First, the amount of electricity needed to operate the blockchain is drastically reduced, and more people can participate in grid verification because they are not prohibited by the cost of electricity or equipment. Security is also enhanced as participants who test the network are encouraged to act in the interest of their own investments.

In reality, for most Australians the entry barrier for both of these token generation methods is too high. There are probably better ways to invest your hard earned money. Investing in cryptocurrencies and keeping them up to increase value is one way to make a profit without limiting your ability to quickly liquidate your assets.

To create a strong portfolio and risk insurance, it is reasonable to combine several different approaches. Diversify the types of currencies or assets in which you invest (i.e. you can also include assets such as NFT in your portfolio) and invest only what you can afford to lose.


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