Mining Mania

Overview

First and foremost, mining is not exclusive to Bitcoin, but it was with Bitcoin and its Proof of Work consensus protocol that it started as a concept, technology and maybe even a lifestyle that brought in a whole new class of people: cryptocurrency miners who advocate freedom and decentralization of finance in the future while earning a good living today. 

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What is mining at all?

Mining of cryptocurrency has nothing to do with digging for something, e.g. gold, as the term might suggest. And while some coins are not too easy to mine, it’s still not hard labor. But it does yield new coins and miners (not minors, of course) get their reward that is supposed to cover their costs and even create an attractive margine. 

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How does mining Bitcoin work?

The Proof of Work consensus does not have mining as its main purpose, it was designed to ensure all blocks in a given blockchain network are valid, untampered with. In other words, the PoW prevents creation of fake entries in the blockchain ledger (the database where transactions are recorded).

So, how does it work and what does it have to do with crypto mining? The Blockchain virtual machine (VM) generates blocks suggested by peer servers (nodes). To establish which block will be added to the chain at a given moment and to ensure its validity, the VM throws in computational challenges (“guess what number I’m thinking of” type riddle). A miner has to force a solution (a hash) to the challenge and to do it faster than its peers. If challenges are resolved too fast, the virtual machine increases the complexity level automatically and vice versa decreases it, if nodes fail to cope fast enough. 

A node that suggested the right answer is allowed to submit its block to be recorded to the ledger. And whenever a block is generated some Bitcoin is mined. It is the miner reward. 

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Is Bitcoin mining alone in the crypto universe?

No, it is definitely not by now. Yet, Bitcoin mining was the first one that blazed the trail for followers. Altcoins, e.g. Litecoin, based on the PoW consensus algorithm can be mined the same way as Bitcoin is. 

Also, more and more blockchain networks now use the Proof of Stake consensus to validate blocks; it also allows mining cryptocurrency, but uses a different principle. Instead of nodes competing to resolve a challenge faster, there is a pool of validator nodes with largest stakes in native network coins competing with each other for being allowed to generate the next block. The validator pool is set up via an election held often enough to prevent frauds and centralization. 

How much a miner earns

The bottom line is never at the bottom, so let’s start with the money. In 2021, Bitcoins mining reward (coinbase) is down to 6.25BTC. The amount used to be much larger in the beginning of the BTC era, but it is halved roughly every 4 years to slow mining down, as the total supply of BTC is limited. The original reward amount was 50BTC for a block. For Litecoin the current number is 12.5LTC; In the Ethereum network miners get 2ETH for each block.

Yet, the BTC rate rose dramatically and despite halvings, 6.25BTC still sounds like a lot. But before you quit your job and rush into mining, bear in mind that miners pay their own fees and have huge costs. So the net profit is smaller than that. Ethereum’s 2ETH is not that attractive, but stable, costs are lower, generation speed is higher and the asset price is also on the rise overall.

Bitcoin mining remains very lucrative as long as you find a place where related costs are more or less reasonable. Moreover, apart from the miner reward, there is also a miner fee users pay to accelerate transaction processing. 

If the above is too sophisticated, but you have made your mind to try, there is yet another option for you. Consider booking a reservation at a mining hotel, so to speak. Regardless of the currency you decide to mine, it is a good starter option before you learn the ropes and save enough money for running a rig on your own. Just research all offers well before investing..

Mining hotel

If you are not ready for running your own rig, maintaining it and meticulously calculating energy costs, but want to make some money from mining, you can opt for staying at a mining hotel. Basically this mysterious term stands for a type of outsourcing, Mining hotels are usually located in geographies that have appropriate legislation, low labor and electricity costs. The concept implies that customers either install their rigs within the premises of a mining hotel and get monitoring and maintenance services while paying a rent and power supply or lease a capacity from a hotel while not even bothering to visit the place. The latter option is often referred to as Cloud mining. You can lease capacity at a remote datacenter and get profits without caring too much about your local laws, hardware and software. As a side note though, we recommend you research your options most carefully before rushing into Cloud mining. It does sound very convenient, but many projects have been revealed to be scam so far. 

Is mining legal?

“How much money can you make mining Bitcoins?”, is one question, not being jailed or fined for it, is another. Laws regulating the cryptocurrency domain are sometimes as cryptic as the technology itself. Laws keep being adopted, amended, abolished for various reasons. Governments tend to be cautious about cryptocurrencies as digital assets threaten monetary monopolies of states. Some authorities try to beat crypto, some prefer to join the trend by hopping on the train with national digital currency (so-called CBDC) projects. Yet, whatever the attitude, legal frameworks are chaotic, and a prudent, savvy miner has to monitor changes closely to avoid troubles.

China used to be a miners haven for a fairly long period of time, yet out of the blue they were outlawed. Does it mean the government wants to make money by mining itself after launching the digital yuan? Maybe yes, maybe no, but the known fact is miners have to flee the country for more welcoming locations. The good news is such locations do appear in most unexpected regions of the world. Thus the Baltic states are known for liberal regulations of crypto and so is Belarus. 

The United States, known for its liberal laws, is surprisingly hard on crypto and is not the best place for miners and crypto enthusiasts in general. Even buying crypto is complicated for US residents. 

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What do I need to mine Bitcoins?

Hardware

If you are serious about becoming a full-time miner, you will need to learn the ropes of mounting a proper mining PC. A rig is basically a server station capable of crypto mining. Two main types of mining rigs are ASIC and GPU. Without going into too many technical details you can get elsewhere, let’s say that GPU is a powerful processor that can handle modern games, graphics and mining, while ASIC is a newer type of GPU initially tailor-made for efficient hash generation required for Bitcoin mining. ASIC is more expensive, fast outdated by newer models and less reusable, as miners can resell outdated GPUs to gamers and designers, whereas ASIC is only good for mining, in particular for Bitcoin, Litecoin, Dash and other altcoins that are based on similar algorithms. 

While by now ASIC is almost mandatory for Bitcoin mining, it admittedly does better, and leading mining operators like Bitmain rely on it for a reason. Yet, if you are not obsessed about mining Bitcoin alone, GPU is still a good starting point and prudent investment. It is cheaper, allows mining all types of crypto currencies and is particularly good for Ethereum, Monero, Dogecoin. 

As a side note, a good old CPUs can also work for low-complexity coins, if your is powerful enough. But to be honest, usually CPUs are only good to Google, “how does mining work?” stuff, but fail when it comes to some serious business. Mind the tech properties well.

Software

As mentioned above, a mining “station” is a server that is added to the peer-to-peer blockchain, a so-called blockchain node. And the main purpose of a node is not mining, it is block validation through a computational process. Also, “all miners are nodes, but not all nodes are miners” (an expression borrowed from some other source which we happen to like). New coins are mined as a byproduct and miners get their share as a reward. Of course, a node is not just a piece of adequate hardware, it is the software that makes it work. 

Node software is usually distributed and maintained by the relevant open-source community. All you need to get it is to go to a repository or website and follow guidelines there. By all means, starting a node is far more complicated than getting a wallet app to your mobile device, but it doesn’t require programming skills. Moreover, despite an obvious competition and scarcity of some coins, community members are usually ready to help as more nodes means more decentralization which is seen as the ultimate goal of blockchain movement. 

Power Supply

This one is an issue. It has become so big recently that environmentalists protest against Bitcoin and other crypto currencies based on the Proof of Work consensus, while governments are sometimes only too ready to use it as a pretext to crack down on the whole crypto mining industry. 

Yet, while a lot of power is required for Bitcoin mining, it is less of an issue with coins based on the Proof of Stake. And even if you are partisan to Bitcoin and altcoins based on the same principle (e.g. Litecoin), you can still find geographies where power is less expensive (cooler climate also helps). 

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The takeaway: is it simple?

Mining Bitcoin is definitely not rocket science. All the required software has long been open-sourced and the community is likely to welcome any new peer ready to join the network. 

So, cryptocurrencies are easy to mine in general. It doesn’t take being a software engineer or geek if simply mining is all you want. 

Yet, before you start mining, analyze all the caveats, because some options are easier, some are quite hard due to higher costs. 

Remember the gist:

• GPU is cheaper, but ASIC is best for Bitcoin
• Mining hotels are a good option for newbies
• In PoW networks miner rewards are regularly halved
• PoW costs are considerably higher
• Mind the laws of Bitcoin mining. Illegal activity can be punished

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