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Cryptocurrency mining in 2018: the simple explanation

In essence, mining is the process where many computers, which are not interconnected, are simultaneously solving various complicated computation tasks using a special program (miner). Computations result in the emission of bitcoins and other types of cryptocurrencies which are credited to special wallets (accounts) that belong to miners as the reward for completing these tasks. The given account can exist in the form of a “cold” cryptocurrency wallet that is stored on your computer or in the form of a virtual wallet that can be created on one of many exchanges.

Anonymity and decentralization are the distinguishing features of distributed databases, the technology which serves as a basis for the creation of the new generation of digital money. Bitcoin’s open source code facilitates the emergence of its analogs which have the similar principle of operation. All forks of crypto coins have different exchange rates which depend on the level of demand for certain cryptocurrency as well as the complexity of the mining process.

Cloud mining is the most palatable option for cryptocurrency mining in 2018, because it provides means of consolidation of equipment within large data centers, which decreases the prime cost of equipment as well as its maintenance, and makes the mining capacities less expensive for the end-user (contract holder).

Article navigation:

  1. What is Bitcoin mining?
  2. Solo mining.
  3. Cloud mining
  4. How to start mining independently?
  5. Why Bitcoin needs miners: technical details
  6. Cryptocurrency obtainment without mining and investments, using faucets
  7. Should you make large investments in mining in 2018?

What is Bitcoin mining?

Mining is the process of creation of crypto coins using the specific algorithm. The computer generates the unique set of data (or block) the purpose of which is to confirm the authenticity of payment transactions. Each block consists of a header hash of the previous block, the transaction hash, and a random number. The chain which contains all transactions is called a blockchain.

There is also a reward for each successfully created block. The amount of reward differs from currency to currency. For instance, the mining reward of the oldest and the most expensive cryptocurrency (Bitcoin, BTC) decreases two-fold every four years. In 2016, the reward for one block was 12.5 BTC (approximately $32 thousand); the next decrease is expected to happen in 2020.

The reward for mining Ethereum (ETH) amounts to 5 ETH (around $1.540) but eventually, it will switch to POS (Proof-of-Stake) and the mining will no longer be required. The profitability of mining depends on the computation capacity of your computer or your mining farm. The more capacity you have, the higher is the probability of acquiring the reward; however, when mining in pools, the reward is divided proportionally among all participants, depending on the amount of contributed computing power. This type of mining is more stable and allows participation in pools even using ordinary PCs.

Mining is defined as the efforts to maintain a distributed platform and create new blocks which are rewarded with newly issued coins and fees in different cryptocurrencies, particularly in Bitcoin. These calculations are necessary for ensuring the protection from double-spending of same coins, while the rewards serve as an incentive for people to use their computing capacities and maintain the networks intact.

Mining is not the only technology for creating blocks. Forging (minting) and ICO are another alternatives to conventional mining. People usually employ only one type of technology, but some coins require the combination of these mining methods.

The definition was taken from Wikipedia.

Characteristic features of mining and blockchain:

  • The system for cryptocurrency mining has no means for centralized regulation. Therefore, it is virtually impossible to block or bring it under the umbrella.
  • The system is anonymous. The users are not obliged to disclose their real names or any other personal data. It makes the traction of any transaction virtually impossible.
  • Graphics card mining works on the original algorithms; therefore, it is not possible to create more bitcoins or altcoins than necessary.
  • Transactions can’t be canceled and all data, related to these transactions, is stored in the public database. In doing so, the system employs blocks that are formed in the process of mining bitcoins.
  • The profits are generated by the exploitation of resources of the given personal computer. It is possible not only to exchange the mined bitcoins for various commodities and items within the network but also to convert them to fiat currency (real money).

The creation of new coins is carried out by solving a given mathematical problem which implies searching for the combination of symbols that have to comply with certain requirements. After the computer solves the problem, the user gets the reward which comes in the form of a certain amount of cryptocurrency. Making income via mining is associated with the consumption of large computing resources.

There two ways to organize the mining process:

Solo mining. You participate in solving cryptographic problems using only your own equipment. We will describe this method later.

Mining in pools. There are certain groups where users unite their computing powers into a single powerful pool. The mined cryptocurrency is divided among all participants. We give a detailed review of mining in pools here.

Solo mining

The name of this method of making money online fully reflects its essence. Solo mining of bitcoins involves solving various cryptographic problems on your own (solo).

The process of cryptocurrency mining is conducted by unification into mining pools, where dozens or even hundreds of people, who pursue the same objective, are building the functioning hash. Those who have their own mining farms can work independently.

Each method has its pros and cons. It should be noted that solo mining allows you to save on organization since mining pools charge the commission for each transaction. However, solo mining requires rather powerful computing equipment that is affordable only to people with high income.

Pros and cons of solo mining

Before engaging in such a popular activity, you should carefully weight up all pros and cons.

This method has the following pros:

  • It does not require personal interference. It will be sufficient to download the mining agent and get on with your errands, while the computer is earning you money. The faster is the speed of mining, the more money you make.
  • The output of mining depends only on the capacity of the equipment you use.
  • All mining agents and rigorously checked for viruses, so they won’t cause any harm to your computer.
  • Each pool has its own partnering program which allows earning a commission by inviting your friends to join the pool.
  • Withdrawals can be carried out using different payment systems. Moreover, you can withdraw any, even the smallest, amount.

The given method also has several cons:

  • The difficulty of mining increases on a yearly basis and requires even more powerful equipment.
  • Cryptocurrency prices can be influenced by the external financial markets.
  • Some of them have internal problems, like the lack of transparent regulation of Bitcoin-to-Litecoin conversion.

Cloud mining

Cloud mining is an actual investment or a purchase of mining equipment that is not physically located at your house. A special service called cloud mining provider takes upon itself the task of configuring, connecting, and maintaining the equipment.

You can find detailed information about cloud mining, reliable services, as well as the blacklist of fake websites. In this article, we will only mention HashFlare since it is the most trustworthy cloud mining service in 2017-2018.

The profit from cloud mining is proportional to the capacity of rented equipment or a hash rate, to be precise. You can purchase any amount of hash rate (and buy additional hashes at any time); the payments are carried out on a daily basis.

Pros:

  1. It is highly unlikely that you will be able to install a mining farm at your own house, because of the heat and noise it produces. However, you could remotely operate any number of farms or invest a small amount of money (the minimal contract on some services are worth less than a dollar) in the cloud mining service.
  2. This method is recommended for those who are not very technology-savvy since it would be really hard for them to assemble and configure the equipment on their own or those who do not want to spend their time or be bound to the house or some other space where the farm is located.
  3. Higher capacity, compared to the home-equipment.
  4. The option of mining Bitcoin and other cryptocurrencies at the same time.

Cons:

  1. The risk of getting into the scammers’ trap.
  2. Commission that is charged on every reward (it usually includes all expenditures, including the probable equipment break-down etc.)
  3. The risk of DDoS attacks which may wipe out your crypto wallet on the server.
  4. Strong similarity to Ponzi schemes. Logically, it is more profitable for services that have high hashing capacity to mine cryptocurrencies on their own than to give it away, even if they charge the commission for each transaction. This presumption is confirmed by the availability of referral programs that offer the reward for attracting new users to the cloud mining service.

How to mine independently?

We cover Bitcoin mining in the separate article because this process requires special devices – ASIC miners. In this article, we will provide information about the things you need to start mining other cryptocurrencies independently on your devices.

Assembling the equipment

  • Graphics card (GPU) – don’t opt for a budget one, always use the high-end cards. It would be better if you buy several cards, not a single card.
  • Computer (farm) with the efficient cooling system and the motherboard with the maximum number of slots for graphics card installation. You can choose any processor that works stably. The recommended RAM is no less than 4 GB.
  • Microsoft Windows 10 Pro 64-bit is the most popular software for mining farms. You can also use the software that was specifically designed for mining certain cryptocurrency, for example, ethOS to mine Ethereum.
  • Internet with good PING (the cable is the best, but Wi-Fi will also do fine).

Picking the cryptocurrency

The choice largely depends on the available graphics card. Ethereum, Zcash, Bitcoin, and Litecoin are the most popular cryptocurrencies among miners; however, they are no longer mined with graphics cards, instead, miners use specific devices called ASIC (Application-specific Integrated Circuit).

The types of graphics cards used for mining:

  • Nvidia GeForce GTX 1050 Ti/1050 as well as 1060, 1070, 1080 Ti/1080
  • AMD Radeon RX 470/480 and 570/580

The average cost of the mining set that contains five to six graphics cards (considering the rapid rise of their prices due to the extremely high demand) is around $2,500 – $3,500. You should also calculate the electricity cost (which will be consumed non-stop), the air conditioning of the space where the farm will be located, and the Internet rates.

Choosing the mining pool (server)

There is a plethora of mining pools. The following characteristics should be taken into special consideration when choosing the pool: ping, capacity, security, simplicity of configuration of the miner-agent, the availability of server in Russia, the means for monitoring the mining process, the amount of pool commission (usually no more than 1%) and fees for transactions to your crypto wallet.

Most recommended pool by the visitors of mining blogs:

  • NiceHash;
  • dwarfpool.com;
  • www2.coinmine.pl;
  • nanopool.org.

Choosing the exchange or the wallet for storing cryptocurrency

We can suggest only one thing: use only verified services that have positive feedback. You can read the reviews about the largest and the most reliable crypto exchanges on our website:

Review of Poloniex.com

Review of Bittrex.com

Review of EXMO.com

Review of YoBit.com

Review of LiveCoin.net

Review of Cryptopia.co.nz

Why Bitcoin needs miners: technical details

Mining is essential for the integrity and security of the Bitcoin as well as any other cryptocurrency system. The miners ensure that all functions of the network are carried out properly:

  • Confirmation of deals (transactions);
  • Protection of the network from entering false information (fake transactions and blocks);
  • Protection of the Bitcoin network from various types of attacks;
  • Sustention of the decentralization of the Bitcoin network.

The transaction between two participants of the Bitcoin network has to be confirmed by their participation in the block formation. If the miner, who had created the block, has approved it and entered it into the block, the coins that were involved in the transaction become available for further use. If the perpetrator tries to feed the fake transaction to the system, it will be rejected at the stage of block formation.

What if he tries to enter an entire fake block into the system? Well, in order to do that, he would have to possess an electronic signature that was created on the basis of the previous block. If the perpetrator doesn’t have the signature, he would have to repeat a certain amount of calculations which were used for the creation of the previous block, and then more, up till the very first block that was created on January 3, 2009. In other words, if someone tries to brutally hack the network and establish his own rules, he would have to re-calculate the entire blockchain.

It is an absurdly large amount of work, so it would be easier for the perpetrator to contribute his computation capacities to the honest work process rather than trying to re-calculate the entire Bitcoin network for the sake of hacking a single block.

What about forking the blockchain? It is possible, though such forking is deemed to remain orphaned if it’s not backed by the ever-increasing computing capacity which is greater than the total capacity of all “honest” miners. It also requires a lot of effort and literally has no practical meaning.

By investing only a few hundred million dollars in the mining equipment, you can get a capacity of 51% or more of the computing capabilities of the Bitcoin network. That’s why this hack is called the “51% attack”.

However, even if the perpetrator manages to do that, he will only get the Pyrrhic victory because he will be able only to “freeze” transactions within the network or arbitrarily change the details about payments from his own crypto wallet which will not make him any significant fortune.

Decentralization or non-dependence on a single regulatory center is one of Bitcoin’s major advantages over conventional currencies. Such decentralization becomes possible thanks to the miners who are dispersed around the world. Deactivation of a part of computing capacities won’t result in the stoppage of transactions in the network. It would be possible only when every single miner gets disconnected from the network.

The concentration of hashing power within large mining pools or data centers actually pose a certain threat to decentralization, but the mining is getting more popular, so it leaves a very little change for a single pool to accumulate more than 50% of network capacity. Moreover, the data centers are dispersed across several continents, from Norway and Greenland to Australia.

Cryptocurrency obtainment without mining and investments, using faucets

Nowadays, it is quite complicated to generate cryptocurrency on your own. Frankly speaking, it is the thing of the past, though it depends on how the price of Bitcoin will behave in the future. There are certain means for obtaining bitcoins without making personal investments. Using faucets is the most popular method of gathering satoshis. Faucets are the websites where you can earn small amounts of Bitcoin by carrying out simple actions.

There are five types of faucets:

5-minute

10-minute

Half-hourly

Hourly

Cumulative

There are also the so-called rotators where you can collect satoshis from several faucets at the same time, which is obviously more convenient. It possible to do this automatically if you have special software installed. Otherwise, you will have to collect the coins manually: enter the website, complete the given task and get the reward.

The users usually withdraw the accumulated satoshis to their crypto wallet or other electronic payment systems, but the experienced miners try to re-invest them into crypto mining. There are services where it is possible to purchase the share of other users’ hashing power. For example, once you earn $50 on a faucet, you have two options: withdraw them to the electronic wallet or multiply them by re-investing into mining services. Anyone, who has the required amount of money, can exploit his opportunity.

Here is a list of the most popular and profitable Bitcoin faucets:

Freebitcoin. You can collect coins once every hour and take seven shots per day at winning a free lottery which offers more sizable rewards. In order to start collecting, you have to register by providing your e-mail address as well as the address of your Bitcoin wallet. The withdrawal limit is 10 thousand satoshis;

FreeBitcoinGame. This faucet operates since 2016. You can boost your earning by inviting referrals and participating in the lottery that can double the amount of cryptocurrency on your account. The bonuses are provided once every hour. The withdrawal limit is 10,400 satoshis.

BonusBitcoin. It is a relatively new faucet which is quickly gaining large traction. You can collect the rewards once every 15 minutes. If by the end of the day, you have some coins left on your account, you will be given a 5% bonus. The withdrawal limit is 10 thousand satoshis.

WheelOfCoin. This faucet works in the automatic mode. 500 satoshis are credited to your account four times a day. Those who love gambling can try their luck at the variety of game which offers even bigger rewards. You can register only by providing your e-mail and the address of your Bitcoin wallet. The withdrawal limit is 20 thousand satoshis.

ClaimBTC. Gives away 320 satoshis every 20 minutes. You will also be given a little bonus for each visit. It considered one of the best faucets.

Should you make large investments in mining in 2018?

Critics think that investments in cryptocurrencies are highly risky. However, experienced investors still choose this platform for their long-term investments.

It is important to understand how the system works and be able to assess all possible risks. Let’s specify all pros of Bitcoin mining from the standpoint of investment of large amounts of money.

Bitcoin does not have any resource, like gold, nor is it depended on any government. The technical software, as well as miners, are working only because of the high price of Bitcoin. The price itself is directly related to the number of system users (miners) which is constantly growing. The value of Bitcoin will remain stable for a foreseeable future; therefore, it is possible to say that cryptocurrency investments are risk-free;

Over the course of the last 8 years, the price of Bitcoin has increased more than 1000 times. It is obvious that people who invested heavily in this particular area of business became very rich. The forecasters claim that the price of BTC is not final and it will continue to rise.

The security of this system is well-known. The third-parties can’t get access to the information about transactions, addresses, and personal data unless the user provides that information. Certainly, there were cases of system hacks, but they only destabilized the system from a short period of time, on the lapse of which everything went back to normal while the perpetrators were left with nothing. If you consider making a large investment in a cryptocurrency, try to pick the platforms that fully comply with all requirements of technical and personal security;

The technological fundamentals of the Bitcoin system look reliable and they surely have a lot of potential. The financial institutions from different countries are considering the possibility of implementation of blockchain structures in their economies. Besides, the newest software for the usage of Bitcoin and its forks is already at the stage of development. But do the investors, who trusted this cryptocurrency with their money, stand to gain from it? In case Bitcoin obtains the status of the official currency, the investors will get an immense profit, and it may happen in the near future.