What Cryptocurrency Need to Know

What Cryptocurrency Seekers Need to Know

Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Today, there are over 1,000 different cryptocurrencies available.

Another record value of the cryptocurrency sparked an avalanche of growing interest in all things related to mining a virtual currency. Right now, there is a bitcoin rally that has caught the attention of hundreds of thousands of people around the world who want to make money.

How does the cryptocurrency mining industry work, who rules in this market, and what are its financial indicators today?

Mining: I teach matches

Before talking about the current state of the crypto world, it is necessary to digress a bit and consider the key features of coin mining:

  • Unlike conventional money that is printed by central banks, new cryptocurrencies appear in the mining process. Mining is the process of solving a complex mathematical problem. The first one who receives an answer that meets the given conditions is rewarded with a certain amount of cryptocurrency units.
  • The speed of finding the correct answer depends on the computing power of the cryptocurrency mining team. The higher you are, the more likely you are to be the first to find the correct solution.
  • The mining algorithm is programmed so that with the growth of the total computing power of the cryptocurrency network, the complexity of the mathematical problem also increases proportionally. In this case, on average, the same number of new coins are added to the network during the same period of time.
  • The issuance of many digital currencies is in the form of a deflationary model, that is, over time, the number of reward decreases. This becomes the key to the future growth of the value of the coins.
  • Miners earn profit not only from the sale of coins obtained as a reward for the found solution but also from the commission for including other users in the transaction block. The miner who first found the correct solution becomes the author of the block. It is added to the chain of the same blocks previously included in the cryptocurrency network by other miners.

All this is true for this type of coin mining, such as PoW (Proof-of-Work). There are other types of mining: PoS, PoA, PoC, etc. But the most popular cryptocurrencies, Bitcoin and Ethereum, use PoW mining.

Singles Displacement: Looking for Competitors

Initially, when cryptocurrencies first appeared and the number of users was small, a central PC processor was used to mine coins. His computing power was enough to ensure that anyone had a real chance of finding the correct solution to a mathematical problem on their own.

After a while, it turned out that video cards can handle this much faster than CPUs. A graphics adapter in terms of processing power was comparable to several dozen central processors. So, the owners of powerful video cards gained a significant advantage over those who continued to mine the CPU.

In addition, there was another significant difference. Very expensive server boards could accommodate 2 processors, but less expensive mainstream motherboards allowed connecting 3-6 video cards at once. Therefore, it made economic sense to build the first farms that combined multiple graphics adapters (GPUs).

The wealthiest users could afford to purchase and include components for several farms at once in the process of mining cryptocurrencies. With the increase in the computing power of the network, the complexity of the problem to be solved also increased. Users with a video card already had little chance of finding the block alone first.

The first mining pools appeared. They were a combination of the computing power of several miners at once to solve the problem in parallel. This allowed crypto miners with a small hash rate (computing power) to stay in competition with the big players.

The advent of specialized devices, Asics, further strengthened the reliance on the uneven distribution of hash rate. After all, one ASIC, at a cost of hundreds and thousands of dollars, was able to replace dozens (and today thousands) of video cards in terms of power. The relevance of mining pools has increased many times.

What is the pool, what is the reward?

Modern mining pools unite the efforts of thousands of miners around the world. For a successful existence, they must equally distribute the received reward in cryptocurrencies among all participants. Today, the following payment schemes to miners are most often used:

  • PPS (pay per share). An action is a special identifier that is associated with and generated by a specific miner during the mining process. With the PPS payment system, all the balls that the miners generated in the process of solving the problem are added up. The reward is distributed among the participants in proportion to the number of their shares. It doesn’t matter if the miners in the pool found this block first or not. The risk insurance group charges a certain fee in the form of a commission. These funds go towards paying miners when another group mines a block.
  • PPLNS (Payment for the last N shares). With this method of reward distribution, the pool pays a reward only if the miners that are part of it found the block. To determine the share of each miner, only the last N shares are taken into account. The number N is already determined by the group itself.

There are several other variations of the above reward distribution methods, but these two are the most widely used.

Mining pools exist in almost all cryptocurrencies that use PoW mining. The biggest ones for bitcoin are:

  • Group F2. Founded in 2013, the pool is multi-currency (in addition to Bitcoin, it supports mining of Ethereum, Zcash, Litecoin). Currently, it represents around 16% of the total hash rate of the Bitcoin network. The minimum payout threshold for a 2.5% commission is 0.005 BTC.
  • pool Founded in 2017, but already controls 14% of the total hash rate of the bitcoin network. It is also multi-currency. The commission is 2.5%.
  • Anthill. This group was created and maintained by the largest ASIC manufacturer in the world: Bitmain. It controls 11% of the bitcoin hash rate. You can choose between 2 types of reward distribution: PPLNS without commission and PPS with 6% commission.

For Ethereum, the most popular pools are:

  • determinate. It is multi-currency. The reward is paid by the PPLNS system with a payment threshold of 0.05 ETH. The commission is 1%.
  • Sparkpool. It also works with the payment of remuneration according to the PPLNS type. The minimum payment threshold is 0.1 ETH and the commission is 1%.
  • Nano pool. Multi-currency pool. By analogy with the previous ones, PPLNS and a commission of 1% are used. The minimum withdrawal threshold is 0.2 ETH.

In addition to heavy pools, there are many small pools that can offer miners better conditions or a lower threshold for computing power. However, the choice must be approached carefully, having studied, among other things, the reviews of other crypto miners on how often and how consistently the stakeholder pays remuneration, what are the commissions and the minimum withdrawal threshold, etc.

There is a pillow, you can plan

The financial side of mining, like any business, consists of two components: profit and cost. Earnings include revenue from the sale of cryptocurrencies and transaction fees. But the costs can be divided into one-time and current. One-time costs include the cost of purchasing mining equipment and its placement. And to permanent ones – payment for electricity.

It is clear that the amount of net profit of any miner directly depends on:

  • prices of cryptocurrencies at the time of their sale;
  • the cost of buying devices for mining;
  • the current costs of electricity, the payment of which is the main item of expenditure.

The miner cannot influence the cost of the cryptocurrency and the price of the equipment; it is dictated by the balance of supply and demand in the market. But the cost of electricity already depends on where the mining farm is physically located. There are territories with cheap electricity, such as China, the countries of the former USSR, Iceland, etc. There are also those where the price of electricity is high: Europe, USA.

It stands to reason that mining is more profitable where electricity is cheap. For this reason, most of the miners spawn in those places. For example, in China, in some regions, electricity is cheap (and for industrial consumers, as long as they are located near power plants, the price is even lower). Therefore, today in China there are the largest mining farms, which in total control the largest part of the bitcoin hash rate. Cheap electricity helps Chinese mining to remain profitable even when the price of cryptocurrency drops several times when miners from other countries are forced to turn off their devices so as not to work in the red.

In situations where, due to natural disasters and government restrictions, mining in some provinces of the country becomes impossible, the owners of the largest farms simply relocate them to provinces with more loyal conditions. In the near future, it is unlikely that any of the countries will be able to catch up with China in terms of mining power.

Well, during the cryptocurrency rally, which we can see with our own eyes right now, mining profits are so high that miners are willing to overpay several times for the purchase of equipment. That is why the largest manufacturers of ASICs sold their future devices six months in advance, and on store shelves, you will not find video cards of current models, even at a price 2-3 times higher than the recommended price.

As of early March 2021, Bitcoin miners earn around $60 million per day. Ethereum miner revenue exceeded $1 billion in February this year. Interestingly, more than half of the profits were payments for transactions on the Ethereum network. At the current price of these cryptocurrencies, even buying ASICs or video cards at a price 3 times more expensive than in the fall of 2020 will allow you to recover your investments in just 4-6 months. The only problem is that they are not for sale.

Thus, mining today is a very profitable activity. But it is also necessary to understand that the price of a cryptocurrency can collapse at any time, as it happened in January-February 2018. Therefore, one can afford to make some plans in long-term mining only if there is a cushion. of financial security in the event of a drop in profitability, as well as the ability to remain in the industry even with little or no profit.

In no case should you take a loan for mining or spend all your money on the purchase of equipment. Today, it is still a high-risk business that is difficult to predict in a period of even a few months.