To understand the world of crypto mining it helps by starting with the basics that include an explanation of blockchain technology, how the mining of a cryptocurrency works, and descriptions of the various mining strategies that are possible.
All cryptocurrencies rely on blockchain technology. The original cryptocurrency is Bitcoin that launched on January 3, 2009, with block number 0. The reward for completing the complex mathematical calculations necessary to create the first Bitcoin block was 50 Bitcoins. Embedded in Block 0 was an article title from the front page of the New York Times from that same date, on January 3, 2009, locking its historical date of creation. Every blockchain of Bitcoins thereafter contains block 0.
Blocks are a fixed number of encrypted transactions that when completed and confirmed are added to the chain of blocks, therefore making a blockchain.
The software used to mine and create Bitcoins is open source so the programming code is available to anyone who wants to use it and improve it. This is why there have been many other cryptocurrencies created from the original Bitcoin source code.
There is no centralized storage of a blockchain. Identical copies circulate across the Internet freely. Every transaction added to the blockchain goes in order following the previously confirmed transactions.
Bitcoin transactions are anonymous using public/private encryption key technology. The public can see all the transactions in the Bitcoin blockchain starting from block 0 all the way up to the most recent ones. The ownership of each Bitcoin is held by the person who has the correct, private, encryption key. Only by using both the public key in combination with the correct private key can a transaction with a Bitcoin take place.
Adding blocks to the Bitcoin blockchain is a complex encryption calculation. To achieve this requires a sophisticated computer and significant computer processing power. When an operator completes the verifications and the calculations necessary to add a block to the blockchain, they receive a reward in Bitcoin payment for doing this intensive data processing work. This process is called mining.
The mining process requires robust computers with fast central processing units (CPUs) or the kind used for creating beautiful complex graphics with gaming processing units (GPUs) and top-notch graphics cards such as the ones made by Radeon or the Nvidia GeForce types.
With Bitcoin, this process continues until there are 21 million Bitcoins created. After that amount, there will be no more rewards for creating Bitcoins. Miners will only receive a transaction fee. As of June 2020, about two and one-half million Bitcoins need mining to reach 21 million. Currently, the average rate of Bitcoins created each day is 900. At that rate, it will take slightly less than eight years to complete the mining of all possible Bitcoins. Bitcoin miners are grabbing as many Bitcoins as they can during this period. The marketplace is very active.
Mining cryptocurrency, such as Bitcoin, is possible using the strategies of GPU mining, ASIC mining, pool mining, cloud mining, crypto-mining hosting services, and colocation center mining.
General Processing Unit (GPU) mining is setting up a personal computer to do the complex calculations necessary for cryptocurrency transaction verification. GPUs may mine many cryptocurrencies; however, this method is very slow.
This method was profitable in the early years when Bitcoin started gaining recognition. It is not as profitable now because the cost of electricity needed to run a computer and to keep it cool is more than the value of the Bitcoins created. Moreover, the mining computers generate significant heat and noise, which may be unwanted in a home or small office environment.
Application-Specific Integrated Circuit (ASIC) mining uses a specialized central processing unit (CPU) that has a design made specifically for the mining of a single cryptocurrency like Bitcoins. An ASIC mining computer can work anywhere that has sufficient electrical power and Internet connectivity.
Pool mining is a technique that allows individuals to join larger groups to conduct shared mining efforts and then share the profits. The rewards are small; however, this is a popular way for many newbies to participate in mining without having to make a major commitment.
Cloud mining eliminates the need to maintain any equipment. Cloud mining is a service that offers the opportunity to rent mining capacity from other miners. Cloud mining is not the most profitable method of mining cryptocurrencies because the profits are shared with other miners who sell excess computation capacity.
Crypto-Mining Hosting Services
Crypto-mining hosting services are a more extensive version of cloud mining. The hosting service handles all the hassles of maintaining the equipment and processes to mine cryptocurrencies. This includes the time required to manage the mining process, maintaining the mining locations, and getting better bandwidth with lower connectivity costs. The method provides an easy way to get started for beginners who are learning about mining.
Colocation-center mining is for professionals who want the advantages of placing their equipment in a colocation center dedicated to cryptocurrency mining. The best of these colocation centers dedicate their efforts to mining a single cryptocurrency such as Bitcoin.
This method takes advantage of economies of scale and the purchasing power of the significant capital investment required to build a dedicated data center. When the colocation center design is for Bitcoin mining exclusively, then all the focus is making that effort as potentially profitable in Bitcoins as possible.
Mining Bitcoins may be rewarding as long as the cost for the mining operations is lower than the value of the Bitcoins created. The value of Bitcoin changes minute-by-minute making this marketplace have a constantly changing cost/value dynamic. It is possible to lose money mining Bitcoins if the economic ratios go against profitability. Even the best miners face challenges to maintain profitability during difficult periods.
To be prepared with the technology and expertise that is necessary to maintain a competitive edge, it is best to work with a colocation facility with crypto-mining hosting services that offers the best economics and fully-managed services with competitive pricing.