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What Is Cryptocurrency? Everything You Need to Know
Aug 14, 2020 3:10 PM EDT
Wondering if it’s the right time to break into the cryptocurrency market? That makes sense, especially since there never seems to be a clearly perfect moment.
The journey cryptocurrency owners, especially ones who have been there since the beginning, have been incredibly rocky. Look at Bitcoin. It stagnated as an almost worthless investment before skyrocketing to a price of $20,000 in December of 2020. It has fallen off significantly since, but a statement was made. Cryptocurrencies were a joke just a few years ago; now, former President Bill Clinton is set to be keynote speaker at the Swell conference created by Ripple.
The notion of cryptocurrency has intrigued some and turned others off, and the concept has likely baffled even more people. Some think it’s the wave of the future while others dismiss it as an online fad. There’s a group who believes cryptocurrency and the technology behind it can change the world for the better; there are others who see it as a dangerous trend that wastes energy.
But if you’re just looking to get into the cryptocurrency game, before you understand why all of that is, you need to know what it is at all.
Instead of a tangible piece of currency you can take with you, a cryptocurrency is a digital asset that can be exchanged. The “crypto” part stems from the use of cryptography for security and verification purposes during transactions.
In using cryptocurrency for an exchange instead of fiat currency, crypto owners don’t have to rely on banks to facilitate transactions, and can successfully avoid the fees that come with using financial institutions.
Generally, cryptocurrency transactions are processed and completed via a blockchain network. Blockchains are designed to be decentralized, and so every computer connected to the network must successfully confirm the transaction before it’s able to be processed. Ideally this creates a safer transaction for everyone involved. It can also lead to you waiting awhile; one big complaint about Bitcoin is how long it can take for a transaction to go through.
Cryptocurrency transactions are put into a “block,” and the computers in the network get to work solving a complex mathematical problem. Once a computer solves it, the solution is shown to the others on the network, and if the whole network is in agreement that this solution is correct, that block is added to the chain and the transaction is completed. Multiple transactions in one block makes it harder to edit a single transaction; the network is constantly re-confirming the blockchain on its way to the latest block and will notice should a suspicious edit be made to one transaction in a block.
Because cryptocurrencies must be mined, there is a finite amount of them that can exist. For example, there are 21 million bitcoins (BTC).
Blockchain is a big part of what has made cryptocurrency a household name, and its versatility has led to the creation of many cryptocurrencies that are meant to disrupt industries besides banks. The decentralized nature of the network is seen as safer, and businesses – especially those with valuable assets – are interested. Some companies have merely dipped their toes in the blockchain water. Other companies, like Overstock, have completely overhauled their business model to incorporate it.
Cryptocurrency vs. Banks
There are banks interested in what blockchain can do for them, but cryptocurrencies like Bitcoin were developed expressly to avoid the use of banks altogether. Fans and developers of crypto like the idea of a decentralized network that does not require the need of any other parties to process a transaction – and as a third-party with a centralized network, a bank is not where cryptocurrency owners generally want to go with their stash.
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The History of Cryptocurrency
Before Bitcoin, there were a few attempts at digital currencies with similar ambitions as Bitcoin. But they were unable to reach the same heights of popularity. Both “B-money” and “Bit Gold” were prior cryptocurrency concepts that incorporated the solution of mathematical problems into the hashing of a blockchain. Bit Gold’s proposal, written by Nick Szabo, also involved decentralization.
The first iteration of what has since become cryptocurrency, however, is Bitcoin. And that story begins in 2009, when the entity known as Satoshi Nakamoto created and released Bitcoin into the world. Nakamoto’s true identity is unknown; some believe it is one person, others believe it is a group. That same year, Bitcoin software was made public, allowing people to mine bitcoins and creating the first Bitcoin blockchain.
A cryptocurrency to be mined, Bitcoin could easily be seen as a novelty in those early days. It established itself as something that could be used as actual currency for the first time in 2020, when someone successfully used 10,000 BTC to buy two pizzas. As of this writing, 10,000 BTC are currently worth more than $68 million.
The increase in Bitcoin’s value was slow, but as the cryptocurrency gained a passionate following, others began to pop up as well in the hopes of chasing the crypto/blockchain trend, known as altcoins. Litecoin was released in 2020; Dogecoin, a joke cryptocurrency based on a meme, was released in 2020 and currently has a market cap of more than $289 million.
Bitcoin became more well-known every year, but the height of the price was limited until a surge in late 2020. It was the most volatile price year for a currency with a history of volatility; 1 BTC was worth under $1,000 dollars in mid-January but by late December had reached nearly $20,000 in value. It has, of course, fallen significantly since that height.
Where Can I Find Cryptocurrency?
There are a few different methods of acquiring a cryptocurrency, if you’re still interested in getting some. A few of the different places you will be able to find cryptos include:
- Cryptocurrency software
- Cryptocurrency exchanges
- Cryptocurrency P2P (peer-to-peer exchanges)
- Cryptocurrency ATMs
Which one you use will depend on a number of factors. Are you able to buy your preferred cryptocurrency with fiat currency, or will you need to exchange other cryptos for it? How much time and money do you have, and how much energy are you willing to use?
First, though, you’ll need to decide if you want to acquire cryptocurrency by mining it or by purchasing it.
How to Mine Cryptocurrency
Cryptocurrency mining is for the most avowed crypto-enthusiast. It’s time-consuming, expensive and takes up extreme amounts of energy – some say a worryingly large amount of energy, in fact.
So if you’re looking to dive into cryptocurrency mining, keep your expectations realistic and understand that there’s a large chance it’s a losing effort. The costs of mining hardware and software, which are always updating and adapting, add up. And the aforementioned energy consumption required for mining is bound to do some real damage to your power bill.
Miners will spend a lot of their time debating between powerful options and less costly options. Mining hardware such as ASIC miners offer power, but a great graphics processing unit (GPU) for your computer can also be used to mine cryptocurrency at less of a cost.
What keeps people coming, though, is the knowledge that a lucky few days may help recoup some losses with newfound cryptocurrency. The computer will continually mine for cryptocurrency by solving the previously mentioned mathematical equations. Should your computer solve the proof-of-work system and successfully hash a block to the chain, you are rewarded with cryptocurrency.
With so many people mining out there, one computer won’t find much. So many people join mining pools to combine their computing power with others around the world. When one computer successfully mines, the reward is shared throughout the pool.
To learn more about the ins and outs of Bitcoin mining by reading our article.
How to Buy Cryptocurrency
Mining is expensive and uses an absurd amount of resources, so it’s understandable if you’d want another way to get cryptocurrency. Luckily you can now purchase it in a variety of manners.
The most popular and common way to buy cryptocurrency is via a cryptocurrency exchange. An exchange is a platform that allows you to trade for or purchase a cryptocurrency. Some allow you to use fiat currency like USD to buy, but for others you may need to already own some cryptocurrencies like BTC that you can exchange for another.
Some exchanges exist as platforms simply to trade – ironically, these exchanges are centralized. In these cases, the exchange offers the convenience of simply buying or selling cryptocurrency and simply takes a fee. Other exchanges, peer-to-peer ones, offer the ability to put you in contact directly with the trade you are buying from. Do research not just to see what exchanges offer what, but what their reputations are; a p2p exchange with a seedy reputation may be a one-way ticket to getting scammed.
To buy Bitcoin or other cryptocurrencies on an exchange is generally a fairly simple process. Exchanges like Coinbase or Coinmama allow you to purchase them with your credit or debit card.
One way of acquiring cryptocurrency that has grown? An ATM. Bitcoin ATMs have popped up around several major cities where you can, in an instant, get BTC in exchange for cash.
If you need more options for purchasing Bitcoin with a credit card, PayPal or cash, click here for our guide.
What is a Cryptocurrency Wallet?
Regardless of your method for buying cryptocurrency, you will need a wallet in order to obtain it. A cryptocurrency wallet is a public key and a private key. These digital keys confirm that it is you who is purchasing the cryptocurrency and links you to the blockchain.
There are several types of cryptocurrency wallets to consider, though, whether those wallets support your desired crypto will be a large factor. Among the safest are hardware wallets and paper wallets. Hardware wallets can connect to a computer so you can purchase cryptocurrencies, and then be stored offline. Paper wallets are literally just your public and private keys on a piece of paper, meaning they don’t connect online at all.
Hardware wallets can be expensive, though. Software wallets don’t come with the same costs, but run into more security risks, like getting hacked or a computer crash. Still, a reputable software wallet running on a computer with effective anti-virus and anti-malware protection should be able to safely store your cryptocurrency. Often, software and online wallets also have a mobile app available for iOS and Android.
Check out our list of some of the top Bitcoin wallets available.
What is Cryptocurrency Used For?
What exactly can cryptocurrency do once you have it? It’s a debate that has raged on since Bitcoin first burst onto the scene. “Currency” is in the name, and yet it took a year for anyone to make a single purchase with it. What kind of “cryptocurrency” is limited in its ability to be actually used as currency?
The number of things one can purchase with cryptocurrency has grown, but it is also not the only way one can use it. Investing is a popular tool for cryptocurrency lovers now as well.
How to Invest in Cryptocurrency
Investing in cryptocurrency is arguably easier than spending it. What you do is buy some cryptocurrency. Then you. keep it. That’s it.
The volatility inherent in cryptocurrency, an intangible entity that still has a lot of mystery to it, has made it an intriguing investment for those who want a risk in their portfolio. And what says risk more than buying something that hit nearly $20,000 in value only to erode to below half of that the next year?
Cryptocurrency investments, if you’re truly passionate that it will work out, can be extremely long term. Think of someone who purchased bitcoins in the beginning of 2020, when their value was below a dollar, and how they must have felt if they still had them in December 2020. They weathered quite a few storms in between before it was worth it, and that sudden spike was far from certain.
Then again, think of someone who bought some bitcoins around the time it spiked, only to watch its value continually decrease throughout the next year. Cryptocurrency investments are a major risk, and those looking to do it should give the idea the full thought it requires.
Because of this, many look to try other methods of investing in cryptocurrency. Most often, that can be done via investing in companies that work on blockchain-related technology. Nvidia (NVDA) – Get Report and AMD (AMD) – Get Report each create powerful GPUs that many use to help mine cryptocurrency, and their efforts to keep up with the power necessary for mining has made Nvidia in particular a big stock in 2020. A company like Overstock (OSTK) – Get Report , which accepts Bitcoin and has developed its own blockchain, is also a popular crpyto-adjacent investment choice.
Read our guide on investment advice for Bitcoin if you want to learn more.
Can You Buy Things With Cryptocurrency?
Bitcoin as a currency has come a long way since the days of someone assuming 10,000 BTC would be sufficient for 2 pizzas, even if it’s nowhere near the mainstream currency its owners want it to be. Several different retail and online outlets have made room for those looking to use cryptocurrency for purchases – at least, the cryptocurrencies made with the intention of being used as payment.
The aforementioned Overstock, as well as electronics outlet Newegg, accepts Bitcoin payments for the various items available for purchase, and travel site Expedia allow users to use BTC for certain hotel bookings. There is also a pizza site specifically designed for buying pizza with cryptocurrency called PizzaForCoins.com. Websites are able to do this with the help of businesses like ShapeShift, a crypto-trading platform that helps PizzaForCoins accept over 50 different cryptocurrencies as payment.
Online platforms are inherently easier for accepting cryptocurrency, but some stores in the outside world have attempted crypto purchases, including some KFCs and Subways around the world. And Starbucks’ latest partnership with Intercontinental Exchange Inc., which recently launched a cryptocurrency integration system called Bakkt, has people wondering if the ability to buy Starbucks with bitcoins is right around the corner.
Learn more about where you can use Bitcoin for buying goods in our handy guide.
What Are the Most Popular Cryptocurrencies?
With all the risks mentioned about Bitcoin, it would be understandable if you perhaps did not want to get involved with it. If you’re still interested in cryptocurrency, however, what are other popular ones you may look into instead?
Here are some of the more notable altcoins on the market – both in terms of notoriety and market cap.
Ethereum. Ethereum is currently second only to Bitcoin in terms of market cap. What makes Ethereum (and its specific cryptocurrency Ether) stand out from Bitcoin is that instead of working as a currency and disruption for banking, Ethereum attempts to disrupt online data storage. The blockchain on Ethereum is popular for storing smart contracts.
Ripple. In stark contrast to Bitcoin’s intention to be separate from banking, Ripple and its XRP currency attempt to help financial institutions. XRP’s strength as a currency is its ability to be used in the middle of a transaction between two different fiat currencies, minimizing liquidity. Ripple is not mined, and the 100 billion XRP created simply exist. Ripple also promotes itself as having a significantly faster transaction speed than Bitcoin.
Litecoin. Litecoin has also frequently flaunted its transaction speed in comparison to Bitcoin, and as a result is seen by some cryptocurrency fans as another potential altcoin that can become a legitimate currency. Helen’s Pizza, a restaurant in Jersey City, NJ that accepts Bitcoin payments, also recently announced it would accept Litecoin as well.
Zcash. Zcash is also meant to be used as currency, but for private transactions. Blockchain transactions for cryptocurrency are usually visible on a public ledger, but Zcash allows businesses and other entities making transactions to selectively show their data on the ledger while hiding certain details.
Can Cryptocurrency Be Taxed?
Yes, the United States Internal Revenue Service says that virtual currency transactions are taxable.
Cryptocurrency you are holding onto as a capital asset is treated as property; as such, buying some crypto and then merely holding it and not doing anything means it can be treated as a stock or a bond and not necessarily reported. If you sell some or exchange some to buy something, though, you will need to report that.
If you are paid via cryptocurrency, that is taxed as income and must be incorporated into your income on your W-2. Employers paying in crypto must also make sure it is in their W-2, and keep spotless records of what the cryptocurrency was worth in USD on the day the transaction was made.
If you’re a crypto miner and successfully mine coins, the IRS claims you will need to report that on your W-2 as well as part of your gross income. Like with cryptocurrency payments, you should keep records of what your coin rewards were worth when you received them.
Though cryptocurrency has found its way into mainstream discussion, major skepticism remains. Many worry that crypto, Bitcoin in particular, will turn out to be a bubble that will soon burst.
In addition, Bitcoin has seen its fair share of scams. Blockchain and cryptocurrency-related companies will often have an initial coin offering (ICO) instead of an IPO, requesting cryptocurrency in exchange for your company’s cryptocurrency in order to help the value. However, this is extremely risky, and fake ones are common.
Perhaps the most controversial element of cryptocurrency, however, is the energy. The proof-of-work process needed to mine bitcoins consumes a concerning amount of electricity, and the concern has grown as more and more people have taken up mining. This is much bigger than power bills; according to Ars Technica, the annual rate of energy consumption from Bitcoin is the same as the rate for all of Denmark. This is a major environmental issue.
Some cryptocurrencies have instead attempted to use a proof-of-stake method, where nodes are validated in deterministic fashion, to help with this energy crisis. Instead of mining a block, the creator of the block is determined by how much wealth they have within the cryptocurrency and the stake they put in. There is no reward, so they instead receive the transaction fee. Most importantly, this doesn’t require any expensive equipment taking up power. However, the overwhelming majority of cryptocurrencies still use proof-of-work.
Is Cryptocurrency Safe?
As mentioned, there are scams to be wary of. Cryptocurrency is still a relatively new thing that many frequently misunderstand, and it’s easy to rip someone off.
So can cryptocurrency be safe? If you’re careful, cautious and make the right choices, yes. Doing cold storage (keeping your wallet offline via a paper wallet or unplugged hardware wallet) can keep your cryptocurrency offline. Keep your computer updated and protected. Do as much research as you possibly can before deciding on a cryptocurrency and the exchange you purchase it from.
Can Cryptocurrency Be Hacked?
Yes. It’s something cryptocurrency owners need to be wary of, and why so many choose to store them offline as soon as they purchase any digital coins.
The most notable form of cryptocurrency hacks is hacking a cryptocurrency exchange. Once a bitcoin is gone, it’s gone forever. That exchange no longer has it, and cannot recover it. This year, South Korean exchange Coinrail was hacked and may have lost as much as $40 million worth of coins.
It’s hardly the first instance of a hacked exchange. Japanese exchange Coincheck lost
in a hack. And the Mt. Gox exchange went through multiple hacks that cost them hundreds of millions of dollars in cryptocurrency; eventually, they had to shut down.
What Is Cryptocurrency Mining and How to Mine Bitcoin?
An increasing number of people is getting acquainted with the existence of Bitcoin, but we can say with a fair degree of certainty that we are still talking about a niche market. Even among those who regularly trade Bitcoin, there are few who actually understand the underlying technology.
This arises from the fact that cryptocurrencies are, at present, largely used as a speculative tool. A lot of people are chasing profits and don’t care about anything else. Only minimal technical knowledge is required to get involved with trading, but we strongly believe that it is useful to know the basics. Education will eliminate uncertainty and doubt, which are still a large part of the broader public view on Bitcoin and cryptocurrencies in general.
In this article, we will focus specifically on Bitcoin mining . We will give a user-friendly explanation of what is Bitcoin mining and how to mine cryptocurrencies. We hope that you will gain a much better understanding of how Bitcoin mining works.
Table of Contents
What is crypto mining?
We will start with a more formal explanation, and then we will break the subject matter into smaller, more digestible pieces of information.
Mining is a distributed consensus system. This means that a large number of people around the world are involved in the maintenance of the Bitcoin network. Mining is a term used to describe the process of validating transactions that are waiting to be included in the blockchain technology.
A chronological order of transactions is achieved through the process of mining. If a transaction is to be successfully confirmed and included, it has to be packaged in a block that must comply with strict encryption rules. Those are verified and validated by the miners on the network and there is no involvement of any government authorities. This protects the neutrality of the Bitcoin network.
We can make a quick comparison with using credit cards in the traditional electronic money system. Every payment must be verified and recorded by the credit card company (for example, MasterCard or Visa).
We could say that the entire cash flow of the contemporary banking system is recorded in centralized systems, and they are very susceptible to manipulation.
Bitcoin, on the other hand, doesn’t have a centralized organization that confirms transactions. This work is done by Bitcoin miners, and they also create new Bitcoins in the process!
But why is the process called crypto mining ? Where does this term come from?
The process of creating new Bitcoins is called mining due to its many parallels with gold mining. Both scenarios involve investing a large amount of work and energy to produce a highly valuable asset.
Bitcoin mining: the basics
Everyone is probably familiar with the process of gold mining. We have to put in a certain amount of work to retrieve the raw material that has value in the eyes of the people. Bitcoin is not much different in that regard, except that it is an entirely digital resource, so the mining process takes place in the virtual world.
The basic economics of obtaining gold is simple, but the process can be volatile and unpredictable.
There is an economic incentive for gold mining when the costs associated with the mining of one ounce of gold (labor, paychecks, equipment) are less than the value of one ounce of gold.
Bitcoin is similar in this respect, but there are slight differences in comparison to gold mining. The miners are discovering new Bitcoins at pre-determined, rising levels of difficulty and increased energy consumption.
There is an economic incentive to mine Bitcoin when costs associated with the mining of Bitcoin (electricity, computing power) are lower than the value of the mining reward.
What kind of reward are we talking about?
Bitcoin mining: rewards
The most successful miners are rewarded with new Bitcoins if they successfully add a new block to the blockchain.
Nowadays the prize is never received by one single person because no one in the world has enough computing power at their disposal to solve the complex mathematical operations needed for a successful block.
Miners, therefore, merge into so-called “mining pools” and collaborate on with joint forces. The award is then distributed in proportion to the work involved. Those with a larger input of computing power receive a higher prize.
The reward is halved every 210,000 blocks. At the time of writing this article, the so-called Bitcoin block height is 567,000. This means that the entire Bitcoin blockchain contains 567 thousand blocks.
Each block is chronologically linked to the previous (older) one in the chain all the way back to the original Genesis block.
Miners were initially rewarded with 50 Bitcoins, and in 2020 the reward was halved to 25 Bitcoins. The most recent halving was in 2020, down to the current reward of 12.5 Bitcoins. The next halving is projected for May 2020, and it will happen on block number 630,000. You can monitor the countdown here .
The reward is halved approximately every four years. We can easily calculate this time frame by simple multiplication of ten minutes (average time for a new block) with 210,000 (the exact number of new blocks required for a halving event). As an interesting fact, the halving events coincide with the Summer Olympics.
Bitcoin mining: security and difficulty
More miners guarantee a more secure network because this practically eliminates the possibility of anyone manipulating the network and its assets.
The downside is that an increase in the number of miners also increases the mining difficulty (and decreases profitability). That is what we call a relative measure of how difficult it is to find a new block. Roughly speaking, the difficulty is adjusted according to how much computing power is distributed throughout the miners’ network.
This adjustment ensures that a block is always added to the blockchain roughly every 10 minutes (and not sooner or later due to a varying number of miners).
A higher difficulty, in theory, means a lower profit for the miners. This is because the reward is distributed to a larger number of miners, so each one of them receives a smaller share. That’s not a big issue if the Bitcoin price is high — or if miners have access to cheap or free electricity. Check out the price of cryptocurrencies.
It can happen that the mining reward doesn’t cover the costs of mining. In that case, many people continue with their mining operations, mostly because of their belief that Bitcoin will be worth much more in the future.
In conclusion, Bitcoin mining is the process of verifying transactions and creating new Bitcoins.
How to mine cryptocurrencies?
Now that you have a better idea of what crypto mining is, you may have itchy fingers to try it out yourself. In this chapter, we will take a look at the hardware equipment and the necessary procedures to establish a home mining operation. So get your pickaxe ready!
Hardware equipment for crypto mining
The first step to start mining Bitcoin is to invest in appropriate hardware because it represents the most important factor for success.
In principle, anyone can mine cryptocurrencies. You have to run a dedicated mining software on your computer, but you’re unlikely to have any worthwhile profits without some research.
In the first few years of Bitcoin’s existence, it was enough to use ordinary home computers and consumer GPUs, but in recent years this has become largely ineffective. A large contributing factor was the rise of the so-called ASIC (Application-specific integrated circuit) devices as they are much more efficient and competitive BTC miners. They perform only specific types of computational operations that are required for crypto mining. But we are talking about extremely loud and hot devices that are hardly suitable for domestic environments.
Ethereum gained a lot of popularity in 2020 and 2020 because it enabled large profits of coins using home computers, combined with a growing market, as well as large profits.
An approximate estimate of the total amount of computing power in the Bitcoin network. We can see an enormous increase in 2020 and 2020. The efficiency of mining hardware is usually displayed in units called “Tera Hashes per second” or TH/s. It shows how many Trillions (10^12) of computing operations (or attempted mining solutions) are performed every second. In theory, this is the main number you should be interested in when buying Bitcoin mining hardware. Graph source: https://www.blockchain.com
Miners soon realized that they can easily increase their profits by combining more GPU units. As a result, entire mining farms were built in regions where there is cheap access to electricity and mining equipment. These farms made many millionaires. Some mining companies even outsourced their computing power by renting it to consumers.
In light of the increasing popularity of Bitcoin mining, some people also started to merge into so-called mining pools, which increased the chance of receiving the reward.
A typical farm of ASIC miners – devices that are made for one specific form of computation. In this case, they are used for crypto mining. Farms like this are most often found in Asian countries due to a large supply of cheap electronics, and in the northern countries due to colder weather and consequential cheaper cooling.
How to start mining cryptocurrencies
Now we know that crypto mining demands equipment which uses as little electricity as possible. We are always searching for the best combination of price and performance.
If you decide to start mining cryptocurrencies, you must realize that you will probably have a hard time due to the price of electricity. We call this solo mining, but it is recommended that you join a mining pool or a community that uses their combined computing power in order to mine cryptocurrencies.
But where does the term “pool” come from? Let me explain with an example. Think of computing power as water, and the entire Bitcoin network as one large body of the sea. People with the largest amount of water will have the greatest chance of receiving the reward. Most people only have a small bucket of water. As a result, they group together and pour their water into a pool. If their pool receives a prize, then it will be distributed proportionally according to the amount of water poured by each individual.
Beginners are therefore advised to join a mining pool. But be careful and choose only well-known mining pools.
You will need specialized software without which it will not work, even if you have the best hardware for mining cryptocurrencies. A good deal of technical know-how is required to set up the software, so this process is intended for those with a bit more experience.
We don’t intend to write tutorials on installing and using these programs, so follow this link if you are interested in mining software.
A typical rig of someone who is a bit more serious about crypto mining. We can see eight graphics cards, two power supplies, and a motherboard. These are all regular consumer components that you have in your computer.
Rewards payout for mining cryptocurrencies
After you set up the Bitcoin mining hardware and software, you can immediately start mining! But you may be wondering where you will receive your potential earnings.
Payouts are mostly carried out with Bitcoin because it is by far the most popular cryptocurrency in the mining community.
You probably already know that Bitcoin cannot be saved to your bank account, so you will need a Bitcoin wallet. Let me remind you that the latter is also supported by Kriptomat.
You need to be very careful when choosing a wallet. Bitcoin transactions are irreversible, so nobody should ever access your private keys.
A Bitcoin wallet is always made of two parts. The first part is the public key of the wallet (also called a public address), which can be shared with others. The second part is a private key, which must never be revealed publicly.
The crypto wallets are divided into two basic categories:
- Hot wallets – constantly connected to the Internet,
- Cold wallets – not connected to the Internet,
and four basic subcategories:
- Hardware wallets
- Paper wallets
- Online wallets
- Software wallets
We recommend wallets like Ledger or Trezor devices, but you can read more about crypto wallets in our blog post.
Cryptocurrency mining: energy consumption
Like any other payment system, the mining of cryptocurrencies comes with a price. In this case, we are talking about power consumption. The mining equipment is constantly working at maximum load and huge amounts of energy are wasted in the form of extra heat. As a result, many major mining operations are housed in northern countries, where it is easier to reduce the cost of electricity associated with cooling.
It is difficult to accurately assess the impact that the Bitcoin mining has on our environment. Older studies estimate that it is more wasteful than gold mining, but these estimates appear to have been exaggerated.
A new report, published by CoinShares at the end of 2020, suggests that crypto mining is much more environmentally friendly than we originally expected. According to their report, the vast majority of mining is being powered by renewable energy sources. They estimate that Bitcoin mining is greener than almost any other large-scale industry.
Cryptocurrency mining: conclusion
We certainly live in interesting times. People are investing a lot of time, effort and energy into mining virtual assets that are recorded with digital ones and zeros. In our opinion, this is just a natural societal and technological development. What was strange yesterday, will be normal tomorrow.
When people started to mine gold centuries ago, it probably seemed ridiculous to some because gold won’t help when there are hungry mouths to feed. Give a chimpanzee an option to choose between a banana and a gold bar, and it will surely choose the former. They have no awareness that gold would provide almost a lifetime of food supplies.
We have simply created a valuation/belief system that enables an exchange of goods. Who says that this system doesn’t have room for entirely digital currency? As it is, the entire financial system is migrating into a digital domain anyway. For example, what do you use for payments? Credit cards or physical cash? If you mostly use the latter, then you are an exception to the rule.
The world is increasingly digital and Bitcoin plays a very interesting role in this. Is it the first real-world currency? Is it a digital version of gold? In any case, miners are a critical part of this system.
We also advise you to read the following articles for a more complete understanding of Bitcoin:
If you have any questions, we will be happy to respond in the comments below. We also invite you to join the debate on our social networks.
Cryptocurrency mining: key facts about “digital gold”
Cryptocurrency mining: key facts about “digital gold”
Nowadays, it is well known that cryptocurrency purchase is not the only way to get it. More and more people acquire cryptocurrency as a result of its mining. It has become extremely popular. This is not surprising, if to consider the rapid growth of bitcoin price in 2020. Some altcoins also demonstrate an impressive growth. Etherium rate has recently slightly decreased, though a lot of people were very impressed by its immense price jump (with maximum in June), when it could have been sold almost 50 times pricier than six month ago. Cryptocurrency mining has started to be considered as an easy and fast way of income without special requested skills and deep knowledge. But is everything indeed so easy? We are sure that investments into cryptocurrency should be performed with understanding and knowledge of basic nuances that influence the result. In this article we will cover the very concept of mining as well as key types and methods of its realization.
What is mining purpose?
At the early stage of cryptocurrency (as such) concept formation a number of fundamental problems appeared. “Emission issue” is one of them. It is well known that all cryptocurrencies are based on the idea of maximum decentralization and suppose the absence of usual “сentral bank” (or a single decision-making center), that would have an overwhelming influence on emission of new currency units and full control of it. At first sight the central bank analogue is needed for emission but the whole idea of cryptocurrency existence may be deprived by its presence in the system and make it a simple copy of traditional money (with accompanied disadvantages). The solution of this problem has become an idea to distribute the emission function between miners – individual parts of the system.
An important role during mining formation has also been played by “verification issue” that is connected with the necessity to maintain functioning of the whole network and to confirm the authenticity of each separate transaction. It is commonly known that a single center which would process transactions cannot exist in the conditions of decentralization (otherwise it would gain too much power and could interfere with the system for unfair manipulations and cryptocurrency distribution in favour of certain individuals). However, there has to be someone responsible for transaction verification process. Moreover, the whole process has to be decentralized. Such necessity underlies the appearance of “verification issue” – the second conceptual problem of cryptocurrency system. Mining has become the solution once again: processing power of miners are used for each transaction verification. While the reward is a motivating factor that encourages more and more people to share their processing power (In this article you can read experts’ advices where to store mined cryptocurrencies and where to sell them).
Mining boom is still at the peak – more and more people, who have recently had nothing in common with cryptocurrency world, are becoming active miners today. However, there are certain risks that are not fully understood by beginning miners. It should be considered that nobody can predict in advance mining profitability or losses that depend on such variables as cryptocurrency rate and processing power of all computers, that are already involved into mining of one or another cryptocurrency.
Rate of any cryptocurrency is characterized by high volatility (variability) – it means that it can be dramatically changed without any apparent preconditions, that could be found out and responded beforehand. Beginning miner has to accept the risk of a rapid rate change as a result of which all equipment costs may not pay off due to the fact that cryptocurrency obtained during mining will cost significantly less than it was previously expected. Flash crash can be caused by one of the following reasons:
– vulnerabilities identification in the cryptocurrency software code could be detected and used by hackers, thus undermining the credibility towards certain cryptocurrency and, therefore, its demand (as it is known, the lower demand – the lower rate);
– cryptocurrency distribution in the society is characterized by high level of inequality; it may cause the significant exchange rate collapse, in case if some “crypto-monopolist” suddenly decides to place his crypto-wealth on the market and sell it; this will lead to excess offer and as it is known – the higher offer, – the lower rate;
– possible actions of government authorities and international organisations that are aimed at the prohibition or limitation of cryptocurrency anonymous usage; such actions may damage reputation of cryptocurrency and create its negative image in mass media, thereby the number of people who would like to buy cryptocurrency may decrease.
In addition, the beginning miners should take into consideration the fact that the amount of their reward (received during equal time period using the same processing power) is not fixed and depends on “mining difficulty” that is inversely proportional to total processing power used for mining of particular cryptocurrency in the whole world. The excitement around cryptocurrency mining has become so endemic that a lot of people are ready to sell their apartments, houses, cars and invest their money into mining equipment, being totally sure that high income is guaranteed. However, it’s worth to remember that the bigger number of people are involved in “gold rush” of cryptocurrency mining, the lower income each of them will get (if exchange rate remains the same).
Types of mining
From a technical point of view, there are several types of mining in the world which differ according to configuration of computers connected to the network and thus according to total process and equipment cost price. They are:
– CPU mining;
– GPU mining;
– ASIC mining.
CPU mining is performed using Central Processor of usual PC. It’s the very first type of mining from a historical perspective. Nowadays it is outdated because of its poor effectiveness in comparison with contemporary approaches. CPU mining is not profitable since 2020, when it was displaced by more effective GPU mining.
GPU (graphics processing unit) mining is based on the calculations carried out by video cards and is characterized by high processing speed due to GPU capacity to carry out parallel calculations and solve multiple tasks simultaneously (this feature is very useful for mining). Switch to GPU mining was the breakthrough that enabled to surpass CPU mining far forth. First of all, one video card is able to calculate several times more hashes than a CPU. Secondary, it was possible to integrate up to 4 video cards on one motherboard, and later – up to 6 (theoretically, up to 8). Thus, it was possible to build relatively cheap mining “farms” from video cards.
One more type of mining systems – ASIC chips (Application Specific Integrated Circuit). They were designed to complete only one task. (they are one currency mining oriented, (it is bitcoin, as a rule) and are not suitable for amateur usage). However, they are more efficient than conventional processor that could be used for multiple purposes – the gap in performance of the same price level devices can multiply differ.
ASIC systems specialization provides them not only with advantages but also significantly limits them: ASIC miners are usually restricted to mining of one cryptocurrency and can’t switch to its analogues if needed (moreover, not all cryptocurrencies are suitable for ASIC-mining). Besides, it’s more difficult to sell ASIC than GPU – in case of initial cryptocurrency rate collapse, nobody would like to buy it (while it’s still possible to sell GPU to gamers on the secondary market).
Furthermore, mining process can be distinguished according to a number of participants. There can be:
Solo-mining: it’s worth to note that this mining type is relevant only for new currencies where a great processing power is not needed for their calculation (so far). Blocks search is carried out by using the equipment of only one miner . The main advantage of such mining type is sole-possession of the reward. But there is a substantial disadvantage – the block search can take quite a long time, everything depends on the difficulty of calculations that should be processed by user’s mining-system and the luck implying that his equipment will be able to solve the task faster than the mining-competitors.
Pool-mining: the most popular mining type. This is a collaborative mining technology that unites a lot of independent miners. In this case, mining profit is distributed between all pool participants in direct relation to provided processing power. Pool mining is more reliable than solo-mining thanks to guaranteed reward for all pool participants regardless of who has generated the next block. At the same time, crypto community ambiguously reacts to large pools. There is a risk of an excessive accumulation more than 50% of the whole network processing power in one pool – in this case, the pool will gain enough power for fraudulent manipulations with transactions verification and will be able to exercise total control over the relevant cryptocurrency.
Cloud mining: the most controversial mining type. On the one hand, you do not have to spend your money for installation, setting and maintenance of your “farm”, and also for electricity (that is especially up to date in the regions with high tariffs, therefore the majority of cloud mining facilities are located in the countries with cheap electricity, for example, in Thailand). In case with solo- or pool-mining the processing equipment is entirely at miner disposal, then in case with the cloud-mining equipment could be located on the other side of the world and a miner has nothing but to believe on bare word of chosen service providers. It is also worth to remember the fact that there are no guarantees that people who offer such service will consciously fulfill their obligations and you will properly get your reward for mined blocks.
In summary, we can say that mining can still be very profitable. But you should carefully consider all risks. Choose cryptocurrency thoroughly. Think over mining strategy. Use services of reliable and proven pools with solid reputation. Do not trust your money to doubtful companies offering cloud mining if their activity is not confirmed by years of experience and positive references. Participate in thematic forums and follow the discussion of actual mining methods and industry problems that influence the rate. Be aware of all risks and be ready to rate fluctuations or mining reward drop due to an increasement of its complexity. Be realistic and you’ll succeed in everything. We’ll keep on publishing useful information to develop crypto-community together.
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