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At its peak, cryptocurrency mining was like an arms race that led to a sharp rise in demand for graphics processing units (GPUs). During the heyday of mining, Advanced Micro Devices, a GPU manufacturer, recorded impressive financial results, as demand for the company’s shares skyrocketed and its shares traded at their highest level in ten years.
Despite the growing demand for GPUs, the “gold rush” in crypto mining has ended quickly, as the difficulty of mining top cryptocurrencies like Bitcoin has grown as fast.
However, cryptocurrency mining can be profitable. So what is crypto mining? Is it legal? If so, how can you start mining cryptocurrencies? This article aims to provide the answer to such questions.
Most people think of cryptocurrency mining simply as a way to create new coins. Crypto mining (cryptocurrency mining), however, also involves validating cryptocurrency transactions in a blockchain network and adding them to a distributed registry. An extremely important aspect is that cryptocurrency mining prevents the double spending of digital currency on a distributed network.
Like physical currencies, when a member spends cryptocurrency, the digital register must be updated by debiting one account and crediting the other. However, the challenge of a virtual currency is that digital platforms are easy to manipulate. Therefore, the Bitcoin distributed registry only allows verified miners to update transactions on the digital registry. This gives miners the added responsibility of securing the network against double spending.
Meanwhile, new coins are being generated to reward miners for their work in securing the network. Because distributed registries do not have a centralized authority, the mining process is crucial for the validation of transactions. Therefore, miners are encouraged to secure the network by participating in the transaction validation process, which increases their chances of winning newly minted coins.
To ensure that only verified cryptocurrencies can undermine and validate transactions, a Proof-of-Work (PoW) consensus protocol has been implemented. PoW secures the network from any external attacks.
Cryptographic mining is somewhat similar to the extraction of precious metals. While precious metal miners will unearth gold, silver or diamonds, cryptocurrencies will trigger the release of new coins in circulation. For miners to be rewarded with new coins, they have to implement machines that solve complex mathematical equations in the form of cryptographic hashes.
A hash is a truncated digital signature of a piece of data. Hash is generated to secure data transferred over a public network. Miners compete with their colleagues to concentrate the hash value generated by a cryptocurrency transaction, and the first miner to break the code ends up adding the block to the registry and receiving the reward.
Each block uses a hash function to refer to the previous block, forming an unbroken chain of blocks that leads back to the first block. For this reason, network colleagues can easily check if certain blocks are valid and if the miners who validated each block correctly solved the hash to receive the reward.
Over time, as miners implement more advanced machines to solve PoW, the difficulty of network equations increases. At the same time, competition between miners is increasing, increasing the cryptocurrency deficit.
Cryptocurrency mining requires computers with software specially designed to solve complicated mathematical, cryptographic equations. In the early days of this technology, cryptocurrencies such as Bitcoin could be mined with a simple CPU chip on a home computer. However, over the years, CPU chips have become impractical for mining most cryptocurrencies due to increasing levels of difficulty.
Today, cryptocurrency mining requires a specialized GPU or application-specific integrated circuit miner (ASIC). In addition, GPUs in the mining platform must be connected to a reliable internet connection at all times. Each crypto miner must also be a member of an online crypto mining pool.
Different methods of mining cryptocurrencies require different periods of time. For example, in the beginning, CPU mining was the preferred option of most miners. However, CPU mining is considered to be too slow and unprofitable at the moment, as it takes months to accumulate even a small amount of money, given the high costs of electricity and cooling, as well as the increased difficulty of the whole process, in general.
GPU mining is another method of mining cryptocurrencies. It maximizes computing power by combining a set of GPUs under a single mining platform. GPU mining requires a motherboard and a platform cooling system.
Similarly, ASIC mining is another method of mining cryptocurrencies. Unlike GPU miners, ASIC miners are specifically designed to mine cryptocurrencies, so they produce more units of cryptocurrencies than GPUs. However, ASIC equipment is very expensive and cannot be used indefinitely, which means that as the mining difficulty increases, it quickly becomes obsolete.
Due to the increasing costs of GPU and ASIC mining, cloud mining is becoming increasingly popular. Cloud mining allows individual miners to take advantage of the power of large corporations and dedicated crypto mining facilities.
Individual cryptocurrencies can identify both free and paid cloud mining hosts, and can rent a mining platform for a period of time. This method is the most “handy” way to mine cryptocurrencies.
Mining pools allow miners to combine computing resources to increase their chances of finding and extracting blocks on a blockchain. When a mining pool succeeds, the reward is distributed to that mining pool in proportion to the amount of resources each miner contributed to the pool.
Most crypto mining applications come with a mining pool; however, cryptography enthusiasts are now grouping online to create their own mining pools. Because some pools earn more rewards than others, miners are free to change pools whenever they need to.
Miners consider official crypto mining pools more reliable because they receive frequent upgrades from their host companies, as well as regular technical support. The best place to find mining pools is CryptoCompare, where miners can compare different mining pools based on their reliability, profitability, and the currency they want to mine.
Answer to the question Is crypto mining profitable? it depends on several factors. Whether a prospective miner chooses a processor, a GPU, an ASIC miner, or a cloud miner, the most important factors to consider are the hash rate of the mining platform, power consumption, and overhead costs. In general, crypto mining machines consume a considerable amount of electricity and emit significant heat.
For example, an average ASIC miner will use about 72 terawatts of power to create a Bitcoin in about ten minutes. These figures continue to change as technology advances and mining difficulty increases.
Even if the price of the car weighs heavily, it is equally important to consider the power consumption, electricity costs in the area, and cooling costs, especially when using GPUs and ASIC mining platforms.
It is also important to consider the level of difficulty of the cryptocurrency that a person wants to mine in order to determine whether or not the transaction itself is profitable.
Most jurisdictions and authorities have not yet enacted laws governing cryptocurrencies, which means that for most countries the legality of cryptocurrency mining remains unclear.
Within the Financial Crimes Enforcement Network (FinCEN), cryptocurrencies are considered “transmitters” of money, so they can be subject to the laws governing that activity. In Israel, for example, crypto mining is treated as a business and is subject to corporate tax. In India and elsewhere, regulatory uncertainty persists, although Canada and the United States appear to be friendly to crypto mining.
However, apart from jurisdictions that have specifically banned cryptocurrency-related activities, very few countries ban cryptocurrency mining. Based on the principle that everything that is not forbidden is allowed, in Romania there is no law (at least not at the time of writing) that prohibits the mining of cryptocurrencies.
For aspiring cryptocurrencies, curiosity and a strong desire to learn are simply a must. Cryptocurrency mining is an ever-changing field as new technologies emerge. And professional miners, who receive the best rewards, are constantly studying the crypto space and optimizing their mining strategies to improve their performance.
On the other hand, climate change advocates have become increasingly concerned that more and more fossil fuels are being burned to fuel the mining process.
Such concerns have led crypto communities such as Ethereum to consider moving from a Proof-of-Work (PoW) consensus protocol to a more sustainable one, such as Proof-of-Stake (PoS).
(i) Check the list of cryptocurrencies updated according to market capitalization.