And if you are technologically inclined, why not do it?
Well, before you invest the time and equipment, read this explainer to see whether mining is really for you. We will focus primarily on Bitcoin.
Why should I mine?
By mining, you can earn cryptocurrency without having to put down money for it. That said, you certainly don’t have to be a miner to own crypto.
You can also buy crypto using fiat currency (USD, EUR, JPY, etc); you can trade it on an exchange like Bitstamp using other cryptos (example: Using Ethereum or NEO to buy Bitcoin); you even can earn it by playing video games or by publishing blogposts on platforms that pay its users in crypto.
An example of the latter is Steemit, which is kind of like Medium except that users can reward bloggers by paying them in a proprietary cryptocurrency called Steem. Steem can then be traded elsewhere for Bitcoin.
In addition to lining the pockets of miners, mining serves a second and vital purpose: It is the only way to release new cryptocurrency into circulation. In other words, miners are basically “minting” currency.
For example, as of the time of writing this piece, there was about 16 million Bitcoin in circulation. Aside from the coins minted via the genesis block (the very first block created by Bitcoin founder Satoshi Nakamoto himself), every single one of those Bitcoin came into being because of miners.
In the absence of miners, Bitcoin would still exist and be usable, but there would never be any additional Bitcoin. There will come a time when Bitcoin mining ends; per the Bitcoin Protocol, the number of Bitcoin will be capped at 21 million.
A number of sites, including Blockchain.info, will give you that information in real time. At the time of writing, we are at block #490163.
What are miners doing that’s so important that they get free Bitcoin?
So after all that work of verifying transactions, I might still not get any Bitcoin for it?
That is correct.
In order to earn Bitcoin, you need to meet two conditions. One is a matter of effort, one is a matter of luck.
1) You have to verify ~1MB worth of transactions. This is the easy part.
2) You have to be the first miner to arrive at the right answer to a numeric problem. This process is also known as a proof of work.
What do you mean, “the right answer to a numeric problem”?
The good news: No advanced math or computation is involved. You may have heard that miners are solving difficult mathematical problems–that’s not true at all. What they’re actually doing is trying to be the first miner to come up with a 64-digit hexadecimal number (a “hash”) that is less than or equal to the target hash. It’s basically guess work.
The bad news: Because it’s guesswork, you need a lot of computing power in order to get there first. To mine successfully, you need to have a high “hash rate,” which is measured in terms of megahashes per second (MH/s), gigahashes per second (GH/s), and terahashes per second (TH/s).
That is a great many hashes. If you want to estimate how much Bitcoin you could mine with your mining rig’s hash rate, the site Cryptocompare offers a helpful calculator.
What equipment do I need to mine?
Either a GPU (graphics processing unit) miner or an application-specific integrated circuit (ASIC) miner.
These can run from $500 to the tens of thousands. Some miners–particularly Ethereum miners–buy individual graphics cards as a low-cost way to cobble together mining operations.
The photo below is a makeshift, home-made mining machine. The graphics cards are those rectangular blocks with whirring circles.
Note the sandwich twist-ties holding the graphics cards to the metal pole. This is probably not the most efficient way to mine, and as you can guess, many miners are in it as much for the fun and challenge as for the money.
The ELI5 (“Explain It Like I’m Five”) version of what Bitcoin miners do Example: I tell three friends that I’m thinking of a number between 1 and 100, and I write that number on a piece of paper and seal it in an envelope.
My friends don’t have to guess the exact number, they just have to be the first person to guess any number that is less than or equal to the number I am thinking of. And there is no limit to how many guesses they get.
Let’s say I’m thinking of the number 19. If Friend A guesses 21, they lose because 21>19. If Friend B guesses 16 and Friend C guesses 12, then they’ve both theoretically arrived at viable answers, because 16
Remember that ELI5 analogy, where I wrote the number 19 on a piece of paper and put it in a sealed envelope?
In Bitcoin mining terms, that metaphorical undisclosed number in the envelope is called the target hash.
All target hashes begin with zeros–at least eight zeros, and up to 63 zeros. There is no minimum target, but there is a maximum target set by the Bitcoin Protocol. No target can be greater than this number:
Here are some examples of randomized hashes and the criteria for whether they will lead to success for the miner:
(Note: These are made-up hashes) How do I maximize my chances of guessing the target hash before anyone else does? You’d have to get a fast mining rig or, more realistically, join a mining pool–a group of miners who combine their computing power and split the mined bitcoin. Mining pools are comparable to those Powerball clubs whose members buy lottery tickets en masse and agree to share any winnings.
A disproportionately large number of blocks are mined by pools rather than by individual miners. In other words, it’s literally just a numbers game. You cannot guess the pattern or make a prediction based on previous target hashes.
The difficulty level of the most recent block at the time of writing is 1,196,792,694,099, i.e. the chance of any given nonce producing a hash below the target is 1 in 1,196,792,694,099–less than 1 in a trillion.
How do I decide whether Bitcoin will be profitable for me?
The aforementioned site Cryptocompare offers a helpful calculator that allows you to plug in numbers such as your hash speed, electricity costs etc. to estimate the costs and benefits.
I’ve done the math. Forget mining. Is there a less onerous way to profit from the Crypto boom?
Sure. As discussed, the easiest way to acquire Bitcoin is to buy it on an exchange like Coinbase.com. Alternately, you can always leverage the “pickaxe strategy”.
This is based on the old saw that during the 1848 California gold rush, the smart investment was not to pan for gold, but rather to make the pickaxes used for mining. Or, to put it in modern terms, invest in the companies that manufacture those pickaxes.
In a crypto context, the pickaxe equivalent would be a company that manufactures equpiment used for Bitcoin mining. You can look into companies that make ASICs miners or GPU miners. Companies that manufacture these products include AMD and Nvidia. Disclaimer:
At the time of writing, the author held no positions in any of the companies mentioned in this piece. Investopedia does not make recommendations about particular stocks.