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If crypto is digital, how are cryptocurrencies “mined”?
You may have heard of mining cryptocurrencies such as bitcoins as a way to generate income. What does this mean, what is the process, and can you get started mining cryptocurrencies?
As of January 2022, 18.9 million Bitcoins have been mined so far, with 2.1 million Bitcoins yet to be introduced. But why is the process of creating cryptocurrencies termed ‘mining’? It's because the process resembles the mining of metals: it takes time, energy, and resources. It takes a while to make more units available to everyone who wants to participate.
How does a crypto transaction work?
If you want to buy a cool pair of shoes and pay for them in bitcoin, you start the transaction by sending a message with instructions to the network. The instructions will have information like the buyer’s and seller’s electronic addresses, the amount of bitcoin that has to be traded, and a timestamp. All this information sits in a block.
Once your transaction queues up, the information from your block gets converted into cryptographic code, and miners compete with each other on the network to solve this code. The other users on the network check the solution to the code and then give their sign off on the transaction. This is called proof-of-work. Once the users approve the solution, they approve your transaction for that cool pair of shoes, and it gets added to the blockchain as a record. It can take up to 60 minutes to be sure that the transaction has gone through and is successful.
How do you mine cryptocurrencies?
All transactions on a network are verified by ‘cryptomining’, which is the process of solving complex mathematical problems by using the processing power of computers. So, how do you mine cryptocurrencies?
There are multiple websites and videos that guide you on how to mine bitcoin using your computer. You will have to use specific hardware, graphics cards, a Graphic Processing Unit (GPU) or a Central Processing Unit (CPU). If you want to mine a specific cryptocurrency such as bitcoin, you will have to download a particular software. Once that’s done, you will have to key in details like the mining pool that you would like to be a part of, your e-wallet address and the name of your computer.
Once the miner solves the code mentioned above, the transaction is approved, and bitcoins are generated. Simultaneously, the mining pool pays the miner their fee. This money sits in the miner’s e-wallet or an online cryptocurrency exchange that can hold different cryptocurrencies together.
It's technically possible for a solo miner to mine a bitcoin every 10 minutes, provided you have access to a top-quality crypto mining computer. However, the average time it takes to mine one bitcoin is understood to be closer to 30 days.
Is bitcoin mining profitable?
Miners are given a share of the spoils once they solve the code with a small amount of cryptocurrency. This share is essentially a mix of reward and transaction fees.
It's important to rememember that mining bitcoin often requires you to invest in specialised computer hardware, which can be expensive and cut into an at-home ctypto miner's potential profits. Additionally, with more and more competition from other miners, often with high-end mining rigs, it's becoming more challenging for smaller miners to compete.
The environmental impact of mining bitcoin
Miners have a better chance of mining a block if they have computer systems with very high processing power. However, mining may also affect the environment as powering the proof-of-work consensus process is an energy guzzler. In fact, bitcoin mining may soon be consuming over 200 terawatt hours of electricity a year, which is more than all Australians consumed in 2020.
There is also a 2019 report that claims 73% of Bitcoin mining is powered by renewable energy. Companies are now considering channelling renewable energy to mitigate the environmental impact of cryptomining.
Disclaimer
This article is over two years old, last updated on March 22, 2022. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent cryptocurrency articles.
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