Cointelegraph launches a series of educational articles that will help newcomers to the world of cryptocurrency learn their way around it's more complicated parts.
If you are new to the cryptocurrency scene, or even if you have been around for a while, you might have some questions about the system that keeps it all going and how that results in free(ish) cryptocoins for the people who participate. Perhaps you have heard of people mining what is now worth thousands or even millions of dollars worth of bitcoins and figured you should get in on the action.
What is Mining?
The first thing that needs to be said, if you think you are going to get rich by mining bitcoins: I'm sorry, but you are late to the scene. Unless you already have a savings account with a lot of zeros in it, you aren't going to mine a significant number of bitcoins, at least not by yourself. There are other options and coins out there, but I should be clear on one thing: Mining is not an easy way to get rich.
But let's pull back a little bit. What is mining and how does it work? In layman's terms, mining is the engine that keeps a cryptocurrency going. There are different variations that differ drastically, bitcoin uses the most popular method: Proof-of-Work. By performing the complex mathematical equations that keep the cryptocurrency system running and secure, the owners of those computers are given a small amount of the cryptocurrency.
In slightly more complex terms: the Bitcoin blockchain uses the hashcash algorithm SHA256. Hashcash, if you study your internet history, was first used as a way to prevent spam email. In Bitcoin, it is used to confirm that a transaction is a legitimate transaction by matching it to the Bitcoin blockchain. The computer that is performing mining needs to find the corresponding code on the Bitcoin ledger in order to confirm the transaction as legitimate and send it through the rest of the system. At the same time, the transaction is compared against the rest of the blockchain, this prevents tampering.
Each “block” that is ready to be mined includes a specific amount of coins randomly placed in the data. The difficulty of each block is determined by the hashrate of the entire bitcoin network (that is, the combined processing power of every node in the bitcoin network). Bitcoin automatically adjusts the difficulty so that mining is always marginally profitable but no more than that.
If you are still thinking about mining bitcoins, the important term here is “always marginally profitable.” Marginally profitable might sound good enough for you, but regular users are unlikely to reach even marginal profitability by mining from their own homes.
In proof-of-work mining, think of marginally profitable as the holy grail. Everyone is reaching towards that, including companies that have server rooms full of dedicated mining rigs. A company can pull in extra profits for a while by using a powerful system that dwarfs other miners, but eventually the system will catch up and the profits will be minimal again. This never ending arms race has created a situation where traditional laptops, desktops and even high powered servers are near worthless for Bitcoin mining and consumer dedicated miners are only effective for a short amount of time.
Can I Still Mine?
There is still some room for the average Bitcoin connoisseur, just not much. Mining pools were popular for a long time and they can still be effective. By joining with other miners and working on the same block together, you can get through the block and access its coins at a faster rate. The downside is you have to share your rewards with the rest of the pool. It still isn't likely to be profitable for all but the most dedicated, but it is probably the best way for someone looking to mine bitcoins as a hobby. It is also arguably the best way to mine altcoins for a potential profit down the road.
There is one other option for those determined to get into the bitcoin mining game. There are a few cloud mining companies popping up. Essentially, these companies allow you to buy or rent a piece of their dedicated mining rigs. Their promise is to, over the course of a year, provide more coins than buying them outright on the market. It is an easy enough way to get access to the most powerful equipment and instantly start mining. There is no electricity to worry about, no worrying about malfunctioning or broken rigs, customers just buy a contract and start receiving bitcoins. If that is going to pay off depends on how much you are willing to invest and how much you trust the company doing the cloud mining. It also pretty much means you aren't doing any mining yourself.
If this all seems like there is no room for the little guy in bitcoin mining, it is probably because there isn't. However, various altcoins have different difficulties and far lower hash rates. If you are mining, altcoins offer a much higher upside than Bitcoin mining.
What Alternatives Are Out There?
The math behind altcoins run the gamut: from radically different and new technologies to line for line Bitcoin clones. Most coins simply work off of a variation of Bitcoin's algorithm, either easier or more difficult and a different number of total coins, others differ dramatically. Litecoin, for an example, uses the Scrypt algorithm rather than the SHA-256 algorithm favored by Bitcoin and a few other digital currencies.
But, there are some coins that abandon Bitcoin's proof-of-work basis entirely. Proof-of-stake has gained popularity lately and it can be used on its own or in combination with proof-of-work. The idea of proof-of-stake is to give coins to those who have an interest and stake in the coin itself, rather than who can gather the most computational power. While there are individual variations on Proof-of-stake, generally it works by rewarding those who already have coins in their possession. Rather than giving miners a complex mathematical equation that ultimately serves no purpose other than securing the network, proof-of-stake currencies require a computationally simple verification process and rewards those that hold the most coins.
Peercoin is the most popular proof-of-stake coin (although it is technically a hybrid coin) so I will go with that. Instead of mining, Peercoin has used the word minting to describe its process. Peercoin distributes new coins based off of how many coins each member holds and their coin's “coin age.”
Coin age is determined by how long each coin is held in a wallet. Coins start aging the moment they are put into a wallet and are refreshed every time they are spent or sent to another wallet. Starting on the 31st day a peercoin (or a denomination there of) is held in a wallet, it begins accumulating coin age. Any time after that the owner can use their accumulated coin age to “mint” new peercoins. The longer the coins are held in a wallet, the more coin age is accumulated and with it, a higher chance of obtaining newly minted Peercoins. The coins stop accumulating coin age on the 90th day of being held in a wallet. If the owner keeps up with his or her minting schedule (they mint coins every 90 days) the owner should see a 1 % interest rate on their Peercoins.
While computations are needed to verify transactions, they only have to be complex enough to ensure security, not to create a scarcity of coins like Bitcoin. This means that any user can theoretically mint Peercoins at the same rate as any other big company, and the amount of Peercoins earned is limited only by the amount of Peercoins invested. It also means that any regular CPU can handle the task without taking up a terrible amount of resources, making proof-of-stake far more environmentally friendly than proof of work. That may not seem like a big deal now, but as cryptocurrencies increase in popularity and value, the electricity wasted could conceivably become an issue.
What Coins Should I Mine?
What coin you should mine depends largely on what you want to accomplish. Cloud mining is pretty much the only option left for end users to mine Bitcoin, and even then the margins are small. If you are looking for something more akin to the early days of Bitcoin, jumping in the early stages of an altcoin can provide a similar experience.
More popular proof of work altcoins will already have a fairly full market. That being said, the markets are far less competitive than Bitcoin's. The four major altcoins: Litecoin, Peercoin, Darkcoin and Dogecoin (Ripple can't be mined and NxtCoin uses a Proof-of-Stake algorithm) all have more opportunity than Bitcoin for the average miner.
Dogecoin, despite being fourth on the above list in pure market size, is perhaps the second most popular cryptocoin that comes to the mind of mainstream America. This undoubtedly has to do with its recent NASCAR promotion and memorable Mascot/Joke, but that doesn't change the reality that Dogecoin is, and will probably remain in the immediate future, the second most recognizable name in cryptocurrencies.
Dogecoin has a relatively low difficulty (under 1000 again at the time of this writing) and can still be mined profitably. You won't get rich from doing it but it can net you a little more than your power bill will jump by. A dedicated miner isn't strictly necessary, but a powerful videocard is. Dogecoins remains one of the easiest established coins to mine out there. That makes each coin less valuable, but if you want to mine and get a lot of numbers in your account, Doge is the way to go.
As mentioned, Litecoin is named such because of its lighter difficulty level than Bitcoin. However, Litecoin mining is still difficult, sitting at over 8,500 at the time of this writing. A dedicated mining rig is necessary to even think about mining Litecoin and even then the competition is fierce. Unless you are willing to pay for some serious hardware, Litecoin mining is probably best left to the pros at this point, but it is still easier than Bitcoin.
The bigger problem, when it comes to mining proof-of-work coins, even ones that are currently easy to mine, like Dogecoin, is that it is impossible to know how long mining will keep its marginal profitability. ASIC miners are just now hitting the market, and as they grow, so will the difficulty of all coins with a proof-of-work algorithm. The question isn't if your mining hardware will give you coins, it is will it give you enough coins to turn a profit before the hardware turns obsolete.
Darkcoin is famous for its technology that essentially fulfills the anonymity that Bitcoin promised when it first launched. It is also significant, however, because its algorithm greatly reduces the effectiveness of ASIC miners and levels the playing field between CPU and GPU based miners. This makes it a better bet for long term mining investments. It is also rapidly increasing in price and popularity, which makes it a decent altcoin bandwagon to jump on.
We already talked about Peercoin's proof-of-work algorithm, which means if you have a decent amount of Peercoins, it is worth leaving your computer on to collect the 1 % interest but getting rich through “mining” alone is out of the question.
How Do I Get Rich Quick By Mining?
I don't know how to get rich quick, by mining or any other method. If I did, I would be doing that instead of writing this article. It is important to keep that in mind: is someone tells you that they will make you rich, what they really mean is that you will make them rich.
There are a lot of people trying to get rich quick by mining. Some of them might even do it. The key, if you are determined to try your luck, is to research your subject and get in early.
There is a sea of altcoins out there, the vast majority of them are easy to mine and even more of them will fall flat on their faces. Many of them are pump and dump schemes run by their creators and many of them were significantly premined before their public release. That being said, another altcoin is sure to make a big splash eventually, just like Darkcoin did when it was released this year.
If I was determined to mine my way to riches, I would be researching the multitude of new altcoins that hit the market on a regular basis. I would then look for coins that have a unique hook and a useful technology that Bitcoin and the major altcoins do not have. It is not enough to simply be a Bitcoin clone with an easier difficulty or cute mascot (Dogecoin) because those positions are already filled. The next altcoin will do something Bitcoin can't, like Darkcoin and Peercoin before it. If I was trying to get rich quick, I would be hitting up every new altcoin with a unique technology. Then it isn't a matter of how long your machine will be effective, but if one of those currently near worthless coins suddenly become valuable.
What Do I Need In Order To Mine?
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 mine an established altcoin or mine new altcoins rapidly, investing in dedicated hardware is the way to go. One can be built easy enough if you know what you are doing. Your best bet is to go cheap on everything but the video cards. RAM and CPU speed don't affect mining. So, buying a motherboard with three or more slots for video cards and getting just enough specs elsewhere to run the computer's OS is the most cost effective strategy to follow while building a mining rig. A custom case that fits the video cards while giving enough ventilation for the system is also crucial. It is also important to make sure the video cards can draw power from places other than the motherboard, or else their constant running while mining can cause the motherboard to burn out.
If building your own miner doesn't seem like a good use of your time, several companies sell rigs designed specifically to mine and their prices are continually dropping. Butterfly Labs and KnCMining are two of the more well known companies out there that sell dedicated mining rigs.
Of course, the mining world is constantly evolving and the tips found in this guide may be obsolete depending on when you find it. With that in mind, here is a general rule of thumb that will likely hold true whenever you read this: The more popular and valuable a coin is, the more it will be mined and the harder it will be for regular users to mine the coins effectively. The key is to get in before the dedicated mining companies do.
Mining makes the Cryptocurrency world go-round, but once a coin gets value it becomes impossible to make money using regular hardware. The core tenant of limiting inflation by creating scarcity, limits how much money can be made. Mining pools and dedicated mining rigs can expand end-user viability in a coin for a while, but eventually mining can only be done by those with the bankroll to compete, at least in proof-of-work coins. That being said, there are still some opportunities for miners of all budgets, one simply has to get creative.