Today we talk about another way to acquire cryptocurrency. Mining bitcoin or other cryptocurrencies can be a highly profitable endeavor, but it is even more risky as buying cryptocurrency because as a miner you are not only subject to fluctuations in price, but also in the hashrate, which directly correlates with the number and power of other miners on any given coin.
Mining Bitcoin or other high cap coins is usually not feasible for the hobbyist as normal PCs cannot be used in an economical way anymore. Instead expensive hardware, either special hardware called ASCIs or many top end GPUs have to be purchased. Also setting up everything needed is usually not worth it for one unit, so many units have to be purchased to be economically. Most importantly is how much you pay for electricity, if you cannot compete with other miners around the world that might pay much less, you won't last very long in the mining game.
Even digital payments using the U.S. dollar are backed by a central authority. When you make an online purchase using your debit or credit card, for example, that transaction is processed by a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, those companies verify that transactions are not fraudulent, which is one reason your debit or credit card may be suspended while traveling.Bitcoin, on the other hand, is not regulated by a central authority. Instead, bitcoin is backed by millions of computers across the world called “miners.” Like the Federal Reserve, Visa, and Mastercard, bitcoin miners record transactions and check their accuracy. Unlike those central authorities, however, bitcoin miners are spread out across the world and record transaction data in a public list that can be accessed by anyone, even you.
When someone makes a purchase or sale using bitcoin, we call that a “transaction.” Transactions made in-store and online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the same effect without these institutions by clumping transactions together in “blocks” and adding them to a public record called the “blockchain.”When bitcoin miners add a new block of transactions to the blockchain, part of their job is to make sure that those transactions are accurate. (More on the magic of how this happens in a second.) In particular, bitcoin miners make sure that bitcoin are not being duplicated, a unique quirk of digital currencies called “double-spending.” With printed currencies, duplicating money isn't an issue. Once you spend $20 at the store, that bill is in the clerk’s hands. With digital currency, however, it's a different story.
Digital information can be reproduced relatively easily, so with bitcoin and other digital currencies, there is a risk that a spender can make copy of their bitcoin and send it to another party while still holding onto the original. Let's return to printed currency for a moment and say someone tried to duplicate their $20 bill in order to spend both the original and the counterfeit at a grocery store. If a clerk knew that customers were duplicating money, all they would have to do is look at the bills’ serial numbers. If the numbers were identical, the clerk would know the money had been duplicated. This analogy is similar to what a bitcoin miner does when they verify new transactions.
With as many as 600,000 purchases and sales occurring in a single day, however, verifying each of those transactions can be a lot of work for miners, which gets at one other key difference between bitcoin miners and the Federal Reserve, Mastercard, or Visa. As compensation for their efforts, miners are awarded bitcoin whenever they add a new block of transactions to the blockchain. The amount of new bitcoin released with each mined block is called the "block reward." The block reward is halved every 210,000 blocks, or roughly every 4 years. In 2009, it was 50. In 2013, it was 25, at the time of writing it is 12.5, and sometime in the middle of 2020 it will halve to 6.25.
At this rate of halving, the total number of bitcoin in circulation will approach a limit of 21 million, making the currency more scarce and valuable over time but also more costly for miners to produce.
Which coins to mine?
The question remains on what hobbyist can do. Basically like in big business, hobbyists and small teams are best when it comes to try out different things and quickly change strategy. There are many websites to quickly check which coin is most profitable today and change your strategy quickly, often pools even allow this automatically to quickly cycle your hardware through different coins, which result in the most profits (usually measured in bitcoin). A good example is https://whattomine.com/
Is it worth to mine cryptocurrencies?
As a hobby venture and to learn more about how this technology works, yes, it makes sense to get in the game and support coins you like. Mining can generate a small income of a few dollars per day and provide another way to accumulate coins. However keep in mind that mining difficulty and needed hardware is changing all the time, what made sense a year ago, might be completely unprofitable. This is also a hobby that takes a lot of time and most people don't get the amount of coins or dollars they expected when they started mining as they vastly underestimate how fast things can drop (both in lower prices and higher hashrates).
Set Reasonable Expectations
If your objective is to earn substantial money as a second income, then you are almost always better off purchasing the coins you want with fiat. When they increase in price you have made a good investment. While this is easier than mining, it is still very hard and most investors lose money, buy high and sell low. Just look at 2018 and you can quickly see almost no one that bought anywhere in the year did make a good investment as the market was dropping more and more unexpectedly. Now that prices are much lower than a year ago, people are afraid to buy, even if you get 6 times as many bitcoins for the same dollar or even 10 to 20 times more altcoins depending on how much they dropped.
Smart miners need to keep electricity costs to under $0.1 per kilowatt-hour, if your local power costs are higher it is hard to compete. Some miners might have far cheaper electricity (e.g. in china or near big power plants), might use solar or have other incentives to mine while it makes no sense for you to continue.
How does mining work?
Mining is the process of adding transaction records to the public ledger. This ledger of past transactions is called the blockchain as it is a chain of blocks. The blockchain serves to confirm transactions to the rest of the network as having taken place. Through hard math problems that keep the cryptocurrency safe and increasing difficulty, no one can reverse a block once it is written (except for a 51% attack on a parallel chain) and all prior transactions are getting more and more safe the more blocks are confirmed on top of it.
We hope this quick overview helps.