Introduction to Cryptocurrency Mining, How its Working, Advantages and Disadvantages

Introduction to Cryptocurrency Mining, How its Working, Advantages and Disadvantages

Cryptocurrency is ruling the digital world. Its popularity is surging day by day. Its various advantages over the traditional currency includes decentralised system, faster transaction, secure mechanism etc. Among thousands of cryptocurrencies the top crypto coins are:

1. Bitcoin (BTC) with market cap: $128bn
2. Ethereum (ETH) with market cap: $19.4bn
3. XRP (XRP) with market cap: $8.22bn
4. Tether (USDT) with market cap: $6.4bn
5. Bitcoin Cash (BCH) with market cap: $4.1bn
6. Bitcoin SV (BSV) with market cap: $3.4bn
7. Litecoin (LTC) with market cap: $2.6bn
8. EOS (EOS) with market cap: $2.4bn
9. Binance Coin (BNB) with market cap: $2.4bn
10.Tezos (XTZ) with market cap: $1.5bn

What is cryptocurrency mining?

Currency passed through many iterations, and here we are with the modern virtual currency cryptocurrency. The process of verifying the information and transaction between two parties and then adding it to a blockchain is known as cryptocurrencies mining. The method also leads to the creation of new digital coins by solving complex mathematical puzzles. It is also known as bitcoin mining or Altcoins mining. The cryptocurrency mining is gaining widespread popularity in the financial market compared to the previous years. It is emerging both as a popular activity and topic.

The process of cryptocurrency mining is responsible for injecting new digital coins in current circulating supply. It is also one of the important elements which allow cryptocurrency coins to work as a decentralised network (peer-to-peer) without the involvement of any central or third party. Bitcoin is the well-established and most popular example of mineable virtual coins, but it is also true that apart from Bitcoin there are other cryptocurrencies too which are mineable. The algorithm behind bitcoin mining is a consensus algorithm, also known as proof of work.

How does cryptocurrency mining work?

A crypto miner is a central node of the network which gathers all transactions and manages or stores them in different blocks. When the transactions proceed, all these nodes of the network get them and confirm or check their validity. After this, the miner network nodes collect these transactions from memory and start compiling them into a block.

The first or initial step of mining is hashing each transaction (taken from the memory) individually. However, before starting, the transaction is added by the miner node. It is the place where these nodes send themselves the reward of mining or block reward. The whole process is termed as coin base transaction, in which the digital coins get created. It is generally the first transaction for a new block.

After the process of coinbase transaction, all the transactions get hashed and then these hashes are managed into blocks known as the Hash tree or Merkle tree. The Hash tress is made by arranging many transaction hashes into different pairs and then hashing these pairs. The result or outcome of this step is again arranged into pairs and then hashed again. The entire mechanism is repeated many times until the top of the hash tree is reached. The top of the hash tree is known as Merkle root or root hash and it generally a single hash which reflects all the hashes which were used in creating it.

The random number (also known as a nonce), a hash of all previous blocks and root hash, are then stored into the header of the block. The next step involves the hashing of the block header, and the outcome of it depends on the root elements (nonce, previous hash blocks and root hash). The result of the previous step is a block hash which serves as an identification of the recently generated blocks. The block is regarded valid if the result (block hash) is less than a specific target value which is defined by the protocol. In short, we can say that the block hash should start with some number of zeros. This target value is also termed as hashing difficulty. It is adjusted by the protocol from time to time, thus checking that the rate at which these novice blocks are made remain proportional and constant to the total amount of hashing power given to the network.

Thus the difficulty of hashing rises each time the new miner joins or comes into the network, and the competition surges. All these factors help the average time of block from declining. In contrast to this, if in case the miner chooses to leave or go out of the network, the difficulty of hashing will come down thus keeping the average time of the block constant even in case the low computational power is delivered to the network.

The entire process of mining needs miners to constantly hash the header of the block again and again, by repeating through the random number “nonce” until any one of the network miners finally creates a valid hash block. As soon as the founder node finds the valid hash, it will transmit the block to a dedicated network. All the other nodes do the same task of checking that the hash block is valid or not and finally if all of them confirm then the block is added to the blockchain and start to mine the next block.

If the network completes the process with the two competing blocks which can sometimes happen when the two miners transmit a valid block too at the same time. In such a case, the miners begin to mine the following block depending on the block which they received first. This competition between blocks lasts until the minder mines the next block as based on either one of the two competing blocks. The block which is abandoned by the miner is known as a stale block or orphan block. The miners of the stale block will then come back to mining the chain of the block which won in the entire process.

The initial investment required for cryptocurrency mining

Various negative and positive points exist when miners mine the digital currency or pursue cryptocurrency mining. But all the positives outweigh the negative ones. There is the requirement of some supplies before actually starting mining. It will require an initial investment to purchase them. The thing which miner will need are:

1) A high-end Graphics processing unit or in short GPU (FPGA, ATI and ASIO only)
2) You require to find out the speed of hashing of the graphic processing unit
3) You require the proper equipment and budget to fulfil the massive power needs of the computer.
4) You also require a budget for paying the huge electricity bill. Because when the high processing computer runs for an extended period, they consume good power.

Many people ask this question: is it possible to create money from cryptocurrency mining. The answer to this question is yes one can fetch a good amount out of it, but this requires little patience, equipment (to start it on your level) along with the money for the initial investment. Once these conditions are fulfilled, they will pay you back.

Advantages of cryptocurrency mining

Cryptocurrency mining has several advantages over the traditional currency or banking institution. You can assess these digital coins anytime, unlike the trading currency where banks can freeze transactions anytime. But the main point is that you need to keep your private key safe. If you misplaced your private key, then it would be difficult for you to fetch the amount. Some important highlights of cryptocurrency mining are:

1) Lower fees
2) Can be assessed anytime
3) Inability to counterfeit
4) It also puts an end to identity theft (credit make use of the pull method to obtain funds whereas the digital currency pushes it through)
5) No requirement of the third party for settlement and settlement are processed instantly.

The risk associated with cryptocurrency mining

Risk is an inevitable factor, and every industry faces it. The main risks involved with cryptocurrency mining are sufficient preparation for items, tactics, and strategies, prediction of the market and efficient tools or plan for hedging the risk. Further, the system of cryptocurrency is heading towards a centralised system as compared to previous years. All these arguments are not hypothetical; many CEOs of famous companies put them forward.

The future of cryptocurrency mining

Cryptocurrency mining is still a fresh concept in the financial market, and people will need some time to adopt it fully. The reason for this is the society is still following the conventional form of payment, and breaking their ideology will surely need time.

However, when we ponder on it, most individuals do not carry cash along with them, they pay their bill through a plastic credit card. So we can easily see that the initial step toward the digital and cashless society has been taken already.

So, the time is near when the cryptocurrency will capture the whole world rather than affecting a small part of society. So, if you are pondering to invest in crypto coins then go on but with the authentic brokerage firm and with strong fundamental knowledge.

The best platform to trade cryptocurrency

One of the best ways or platforms to trade cryptocurrency is T1markets. It is a leading name in the arena of financial service providers. It provides trading on more than 300 financial assets, including cryptocurrency. The three essential steps to open an account with the broker are:

1) Visit the site of broker and get yourself register (provide name, email id, profession and mobile number)
2) Upload the document for verification of details provided in step 1
3) Depositing the fee for trade.

Key Takeaways

Bitcoin mining or Altcoins mining or cryptocurrency mining is a process in which all the transactions between various clients are verified. Then they are securely added to the blockchain virtual ledger.
By the process of cryptocurrency mining, one can easily earn top crypto coins without putting money for it.
Miners get the bitcoin as a premium for completing the blocks of valid and verified transactions that are put in the blockchain.
The certain advantages of cryptocurrency mining are low fees, easy access, inability to counterfeit and elimination of identity theft.
One requires a high-end Graphics processing unit or in short GPU (FPGA, ATI and ASIO only)

The Bottom Line

It is irrelevant to talk about the fact: how fast the change will happen. Cryptocurrency mining has now turned into an accepted component of society. People are slowly learning how to make actual capital and get physical goods in return from using them.

FAQs

Leave a Reply

Your email address will not be published. Required fields are marked *