Mining is the process by which Bitcoin and other cryptocurrencies are created – or ‘minted’, to use the term applied to non-digital currencies. Mining is performed by decentralized networks of individuals, working either alone or in large groups. An individual miner is known as a ‘node.’
There are two purposes of mining: to create more of the currency, but just as importantly to confirm the validity of transactions using coins already in circulation.
Let’s take Bitcoin as an example. Transactions made with Bitcoin are grouped into ‘blocks’, which are periodically verified by miners. There is a financial incentive for miners to verify transactions. They do this by solving complex equations with their computers. Verifying a block provides them with a certain amount of ‘new’ Bitcoin, in addition to earning them a transaction fee.
Can anyone mine?
Technically, yes, but with Bitcoin, the complexity of the equations has increased so much that you would spend more money on electricity to power your computer than you would make in new coins and fees. In short, you would lose money.
For this reason, miners now form large groups known as ‘pools’ to combine the mining power of their computers (called ‘hashing power’). Due to Bitcoin’s algorithm, a large number of computers working together has a significantly better chance of solving the equations quickly and earning money – while keeping costs down. These mining pools have even evolved to be consumer entities, which regular users may join for a fee.
Can I still mine other currencies privately?
Yes. Some newer currencies, and those with different algorithms to Bitcoin’s, are still mineable with just your own PC. Gains may be small, however, and can be erased due to fluctuations in the value of the currency. Remember: newly-created currencies are prone to extreme volatility. Even if you make significant profit one day, this can easily be gone the next, leaving you at a loss due to the money you spent powering your PC to perform intense work.
The hardware needed to mine depends, of course, on what you want to mine. If you are looking to mine a proof-of-stake miner, then the PC you are reading this on is probably perfectly fine. The same can be said about the various brand new altcoins, although depending on their mining algorithm, that may not always be the case. Bitcoin, as mentioned, is best left to the professionals at this point.
If you want to make larger profits, you can buy mining hardware from certain companies. This is known as a ‘rig’ and is generally quite expensive, so you should calculate the costs needed to run one, as well as its purchase price, in order to see if it will make you a profit. Factors such as the price of your electricity are important to consider.
You can also hire hardware owned by a company, which will mine on your behalf. This is known as ‘cloudmining,’ and can be a lot less complicated than purchasing equipment yourself. However, your profits will likely be smaller in the long term.
How mining will change in the future
We mentioned that people used to be able to mine Bitcoin privately, but that now only group mining is profitable. Similarly, in future years, all the available bitcoins will have been mined. This means that the only incentive miners will have to process blocks of transactions will be the transaction fee – fees will thus get higher, and transactions whose users have offered the highest fee will be processed first, as is the case now. The end of coin mining also means that Bitcoin will ultimately become a deflationary currency.