Cryptocurrency Mining Explained

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Since cryptocurrency isn’t a physical commodity like gold or oil, it might be hard to understand how people mine it. It’s a currency, so the fact that people "mine it" could boggle your mind. It’s also entirely digital -- you can’t just dig up some bitcoins with a pickaxe -- so how and why do people mine cryptocurrency? Let’s read on to find out.

Cryptocurrency Mining Explained

To truly understand how cryptocurrency mining works, you first need to know the basics of Blockchain, which is the underlying technology for cryptocurrencies like Bitcoin, Litecoin, and Ethereum.

Blockchain is like a digital ledger that records each transaction of a cryptocurrency, copies itself, and sends the copies to every computer, or node, in its network.

To make sure the ledger’s true state is verified and updated, each node in the network references and communicates with each other to see if all the copies are the same. This decentralizes, secures, and publicizes every single transaction of the cryptocurrency.

If one of the copies isn’t the same, due to a manipulation of a transaction’s record after the fact, the network rejects the transaction. This security protocol halts people from altering the ledger to spend the cryptocurrency more than once or send someone else’s digital funds to themselves.

To update a blockchain with new transactions, a new block, which is a bundle of these transactions, needs to be created and added to it. But to create and add the block, its transactions needs to be validated by the answer to an incredibly intricate math problem. So individuals, groups, or businesses use mining rigs, which consists of mining hardware and software, to try and solve it. These validators are called miners, and the first miners to solve the problem will be rewarded with a payout of the cryptocurrency.

Once a miner figures out the correct answer to the math problem, which is verified by each node in the network, the new block is created and added to the blockchain and the winners earn a block reward. For Bitcoin miners, the block reward for validating one megabyte worth of Bitcoin transactions is 12.5 tokens. And since the value of one token currently hovers at around $6,450, a successful miner could rake in approximately $80,625 today.

Validation methods like cryptocurrency mining are called proof-of-work or PoW, and it's one of the reasons why cryptocurrency and blockchain are considered so innovative.

Incentivizing miners with payouts of a certain cryptocurrency to validate its transactions makes the cryptocurrency safe, secure, and trustworthy to use. Mining also mints and releases the cryptocurrency into circulation, which increases the odds that consumers and merchants will be more willing to adopt and accept it, boosting the currency’s value.

But even though cryptocurrency mining is economically beneficial to miners, consumers, merchants, and the cryptocurrency itself, digging for crypto can actually harm the environment.

As more people mine more cryptocurrency, it gets extremely difficult to solve the math problems that validate the cryptocurrency’s transactions. You need massive amounts of electricity to power your mining rigs and solve these complex problems, especially for cryptocurrencies with a limited supply, like Bitcoin. In fact, by the end of this year, Bitcoin miners are predicted to consume more electricity than all of Argentina.

But whether or not you’re willing to contribute to the massive energy use of cryptocurrency mining, you can definitely earn a profit mining, if you live in low-cost power regions.

If you want to mine cryptocurrency in a more environmentally-friendly way, you can mine lesser-known cryptocurrency that require less energy and effort to dig up. There’s even some cryptocurrency that you can mine with your own personal computer.

To find the best fit cryptocurrency for your specific situation, check out CoinMarketCap, a website that lists all the active cryptocurrencies today.

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