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Why is mining the safest entry into the crypto world?

Have you ever wondered what cryptocurrency mining is and how anyone earns profit from it? Wonder no more, as here is our basic explanation on mining.

There are three primary ways people obtain cryptocurrencies. They can be bought on centralized or decentralized exchanges, received as a payment for a service or a product, and mined. While most people encountering cryptocurrencies try to invest or trade them, only a handful know about mining. 

Related: How to mine cryptocurrencies in a bear market

Mining has been around ever since Bitcoin was created, and it is the fundamental way Bitcoin (BTC) will get to its finite number of 21 million. Recently, 91% of all Bitcoins have been mined, meaning there is only 9% left. But BTC is not the only cryptocurrency that people can mine. So before you understand why mining is the safest entry into the crypto space, let’s understand the basics first. 

What is crypto mining?

Cryptocurrency mining is simply a method of producing new virtual coins, but that is where the simplicity starts and ends. Your hardware will need to work out challenging mathematical puzzles, verify cryptocurrency transactions on a blockchain network, and add the transactions to a distributed ledger in order to find those coins. Additional security precautions are implemented since digital platforms are easy to manipulate. 

For instance, only verified miners are permitted to update transactions on the cryptocurrency ledger, helping to avoid double-spending. Since distributed ledgers are decentralized, mining is essential for verifying transactions. By participating in the validation process and receiving freshly created coins as compensation, miners are encouraged to safeguard the network.

You may also read: Crypto adoption increases – investors need to stay vigilant

It is an endless loop of positive feedback because the miners protect and maintain the blockchain, the blockchain distributes the coins, and the coins provide the miners with motivation to protect and maintain the blockchain. The whole operation is possible thanks to a Proof of Work (PoW) mechanism

Why are miners needed?

Blockchain “mining” is simply a metaphor for the computational work that nodes in the network carry out to obtain brand new tokens. Miners essentially receive compensation for acting as auditors, although they are called miners. They are doing the necessary checks to ensure that crypto transactions are legitimate. Satoshi Nakamoto, the creator of Bitcoin, came up with this practice in order to keep users honest. Now it is a common practice in many other cryptocurrencies with a PoW mechanism.

Miners aid in avoiding the already mentioned double-spending issue by confirming transactions. Double spending is when people potentially use the same token twice. This is not a problem with physical money because if you pay someone $50, you no longer have that $50. Therefore, there is no chance you could use it to buy something else. So, despite the possibility of counterfeit money, it is not the same as really spending the same money again.

What is Proof of Work?

Cryptocurrencies lack centralized gatekeepers that would check the veracity of newly uploaded transactions and data to the blockchain. They instead rely on a distributed network of participants to validate incoming transactions and put them as new blocks on the chain. To ensure that blocks are only viewed as valid if they cost a particular amount of processing effort to produce, cryptocurrencies and their blockchains utilize a software method called Proof of Work.

The work in this term is essential as the system thrives on the competition of miners. They need to race on who will be the first to solve mathematical equations and receive rewards as a result. The winning miners are only rewarded after other network users verify that the data are valid. 

In reality, miners compete to be the first to generate a 64-digit hash that is either lower than or equal to the target hash. Essentially, it is based on randomness, but it is tremendously difficult work given that there are trillions of different answers for each of these issues. 

Read more: Cryptocurrency exchanges are fighting a crucial legal battle

With each new miner entering the mining network, the number of potential solutions (also known as the mining difficulty level) only grows. Miners need a lot of processing power to tackle a problem initially. A high hash rate, which is expressed in terms of gigahashes per second (GH/s) and terahashes per second (TH/s), is necessary to mine successfully.

The complexity of equations on the network rises with time as miners use increasingly sophisticated equipment to solve PoW. As a result, the competition among miners also intensifies at the same time, which raises the cryptocurrency’s scarcity.

How much do miners earn?

While miners mined most of the bitcoins in the first years of its existence, the reward is getting smaller over time because of halving. Every four years, the Bitcoin mining earnings are cut in half, which is the halving event. For example, you could earn 50 BTC for mining one block when Bitcoin was originally created in 2009. This was cut in half to 25 BTC in 2012 and cut in half again to 12.5 BTC by 2016. The payout was once more cut in half on May 2020, to 6.25 BTC. 

Moreover, another halving is coming in 2024, resulting in a 3.125 BTC reward after mining a block. However, while 50 BTC in 2011 could be worth just $500 because one Bitcoin had a $10 value, mining just 1 BTC now results in more than $20,000. So even though the rewards were higher in the quantity of Bitcoin, the price now is much higher. 

According to historical data, the price of Bitcoin is always worth more after a halving event than it was in the previous one. However, new technologies bring new possibilities for mining other cryptos such as Raven Coin, Ethereum Classic, Litecoin, Monero, Kadena, and several others.

Why is mining the safest entry point?

Many users enter the crypto market as traders or investors. Only a handful of people decide to mine cryptocurrencies or receive payments in crypto. While trading and investing might be fruitful, it involves many risks in picking the right strategy and tokens to trade. Several cryptocurrencies rise in the long run, but most of them never make a new all-time high or even die off. So why is mining the safest entry into the crypto space?

Miners do not rely on timing the market as heavily as traders do. Their role resides in validating transactions and mining cryptocurrencies as a result. They do this regularly, which also helps them to dollar cost average (DCA) the mined tokens. If miners are consistent for several years, there is a high probability they will make a profit as cryptocurrencies rise in the long term, like stocks, for example. 

Although miners could be at a loss while mining in a bear market, they still have the hardware with an actual physical value, be it a GPU or ASIC. This technology and those chips have value, so if miners decide to close down their operations, selling this hardware at a reasonable price is still possible. 

How to start mining?

For cryptocurrency mining, computers with specialized software created to solve challenging cryptographic mathematical equations are needed. Early in the development of the technology, cryptos like Bitcoin could be mined on a home computer using just a basic CPU chip. However, due to the rising degrees of difficulty, it is now unfeasible to mine the majority of coins using CPU chips.

Today, a dedicated GPU or an application-specific integrated circuit (ASIC) miner is needed for cryptocurrency mining. The mining rig’s GPUs must also be constantly connected to a strong internet connection. Each cryptocurrency miner must also be a part of an online cryptocurrency mining pool.

What are the main mining methods?

  1. CPU (central processing unit) – The CPU is basically your computer or a laptop. Using your personal computer to mine cryptocurrency is the slowest and least productive method. The majority of CPUs lack the processing power necessary to mine cryptocurrencies quickly. Since mining consumes so much power, there is a genuine risk of your computer overheating, especially if it is a laptop.
  2. GPU (graphics processing unit) – This technique combines several GPUs into a single mining rig to increase processing power. The rig needs a motherboard, a cooling system, and constant access to a reliable internet connection for the GPUs. Every crypto miner must also join an online crypto mining pool in order to operate.
  3. ASIC (application-specific integrated circuit) – ASIC chips have a specific function, such as managing a phone call or processing audio. This particular ASIC is made to mine a specific cryptocurrency. This approach can produce more cryptocurrency units than GPUs, but it is also more expensive. ASIC chips are controversial in the crypto mining community since they are more pricey and faster than GPUs, making it difficult for miners with lower beginning budgets to keep up. 

The best mining method

As mentioned, CPUs are a thing of the past, and ASICs are considered controversial. That is why GPUs are the most popular and reliable method to mine cryptocurrencies. Future Mining company also recommends that its clients use GPU, which is dedicated to professional mining operations. These GPUs are optimized for the highest efficiency and allow investors to recoup their investments faster. Get more information here

The most profitable cryptos to mine

Bitcoin and Ethereum used to be the most profitable cryptocurrencies to mine or hold, but times have changed. Bitcoin has grown into a large size, and Ethereum switched to the Proof of Stake mechanism. Other players have entered the game in the last couple of years, offering high returns. Find the answers here.

The bottom line

The process of mining cryptocurrencies is essential for validating and confirming new transactions on the blockchain and preventing fraudulent users from making multiple payments. Additionally, it is how new cryptocurrencies are added to the system. The task requires PoW, which is inherently energy-intensive and is based on a challenging puzzle. 

However, this energy is embodied in the value of cryptos and the system, which maintains this decentralized system’s stability, security, and reliability. Bitcoin is the king of the whole crypto market, so it is crucial to keep it going as its price and development influence altcoins and the future of cryptocurrencies. While BTC mining might be the surest way to profit, altcoin mining offers higher returns. 

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I got into financial markets by accident in 2012 and started with Forex trading. Later in 2017, I started investing in stocks in cryptocurrencies and began writing articles profess...

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