What is a crypto miner and how does Bitcoin mining work?

Key points

  • The confusing world of cryptocurrency mining is all about computers, electricity and equations
  • Hash rates and mining difficulty can show whether the market is weak or strong
  • Despite the collapse of cryptocurrencies and high energy prices, there are tentative signs that the market is returning with an all-time high in mining difficulty recorded earlier this month

Have you ever wondered what are the mechanisms behind cryptocurrencies? Meet cryptocurrency mining, the complicated system that works on hash rate, a race to crack the code and math. Yes, really.

If you’re thinking about a traditional mine, stop here. While cryptocurrency mining is reminiscent of the gold rush of the 1800s, that’s where the comparison ends. Cryptocurrency mining farms look more like large areas of computer hardware in data centers.

But how does it all work? Take your cryptocurrency mining crash course. We’ll show you what it is, how it works and what’s happening in the market.

And don’t forget, if you’re looking for an easy way to invest in cryptocurrencies and want to harness the power of AI to do so, download the Q.ai app and check out our Crypto Kit.

What is Cryptocurrency Mining?

Cryptocurrency mining is what verifies and adds new cryptocurrency to the blockchain. To verify the transaction, an extremely complex mathematical equation must first be solved. Cryptocurrency miners are all fighting for a chance to be the first to solve the puzzle.

The miner who solves the equation first wins the prize: a slice of the digital currency pie. The process then starts all over again. The more miners you have, the higher the profit margin.

It’s an ingenious system because it keeps the blockchain safe and secure, while miners are rewarded with the cryptocurrency they just mined.

How does it work?

Basically, cryptocurrency mining relies on good computer hardware and lots of electricity. After that, it gets more complicated.

Many ordinary people are put off by how difficult it is to understand cryptocurrencies, and unfortunately, cryptocurrency mining is no different. We have put the most common jargon into simple terms to help you become a mining enthusiast in no time.

Hardware

Since anyone can get into cryptocurrency mining, you can use a regular computer for work. Unfortunately, with so much competition in the market, you’re unlikely to make a profit.

For Bitcoin, miners use ASIC computers which are powerful machines tailored for mining. For other cryptocurrencies like Ethereum, miners can get away with powerful gaming computers.

Electricity

Energy price fluctuations reduce or increase profit margins for cryptocurrency miners. Usually, the hardware runs on fossil fuels. Professional mining companies might have their own wind or solar farms to fuel their production.

There has been a major effort to make the cryptocurrency industry greener based on how much energy it consumes from fossil fuels. The White House recently released a report that found global electricity use for cryptocurrency mining is 120-240 billion kilowatt-hours annually, more than all of Argentina or Australia.

Cryptographic difficulty

This refers to how difficult it is to solve the mathematical problem required to add a transaction to the blockchain. The difficulty level is also calculated from the amount of power, or hash rate, used on the network.

A higher difficulty rate means more competition and less profit. The upside of high mining difficulty, however, is that it is a sign that the market is bullish.

Hash rates

Whenever a miner tries to crack the code, a hash code is generated. The higher the miner’s hash rate, the more times he can process calculations per second and get the reward. The better hardware you have, the higher your hash rate will be.

The overall hash rate of all miners is used as another measure for overall network performance.

How is it profitable?

For cryptocurrency mining to be worthwhile, the profits must exceed the costs of electricity and hardware. This has pushed miners’ margins to the limit lately, with the inflated cost of gas contributing to high electricity prices around the world.

Some cryptocurrency miners join forces to create mining pools, where computing power and profits are shared. Having ASIC hardware also makes life easier for professional miners.

What’s happening lately?

Like the rest of the cryptocurrency market, cryptocurrency mining is all over the place and shows no clear direction for what might happen next. Then we’ll look at what’s happened in the last few months and you can make up your own mind.

Ethereum merger

In September of last year, Ethereum completed its long-awaited merger and moved the system to a Proof of Stake mechanism. With the move, miners were swapped for validators. By placing their stake, similar to a security deposit, they are reliable to verify transactions.

The merge, while long planned, caused concerns among crypto enthusiasts that the network would become less secure as new transactions were verified.

Bright side? A 99% reduction in power consumption for the entire Ethereum network. Given cryptocurrencies rocky image for environmental credentials, this was a huge move for the industry and the planet.

Crypto winter

Unless you’ve been living under a rock, you’ll know about the cryptocurrency price crash. Bitcoin, the world’s most popular cryptocurrency, has gone from $68,000 in November 2021 to around $16,000 in early January this year.

This is the tip of the iceberg. The aftermath of the FTX crash is still ongoing as the SEC charged Genesis and Gemini with unregistered securities. As of December of last year, Bitcoin mining profits had dropped a whopping 70%. All seemed lost.

There was much more carnage to come.

Mining at all-time high

Incidentally, Bitcoin has rallied over the past two weeks and the price of Bitcoin is now trading at around $23,000.

Rising prices caused miners to return to the networks in droves. This caused mining difficulty to hit an all-time high on Jan. 15, up 10.26% to 37.73 trillion hashes.

Are we ready for a bull run? It’s hard to say, especially given the recent lows in the cryptocurrency market. With two new records already set, 2023 is certainly shaping up to be an interesting year for Bitcoin miners.

The bottom line

Cryptocurrencies may not be down right now, but many strongly believe that it is absolutely not available. If you fit into that field, learning how it works is super important. You want to make sure you have the knowledge and understanding to make the right financial decision, especially considering how volatile cryptocurrency can be.

That said, all the research in the world won’t let you analyze the level of information that AI can do.

That’s why we created the perfect match, with our AI-powered Crypto Kit. This invests in a range of different crypto assets via public funds, which can include coins and tokens such as Bitcoin, Ethereum, Chainlink and Litecoin.

Every week our AI analyzes a huge amount of data and predicts how these trusts are likely to behave in the coming week, on a risk-adjusted basis. It then automatically rebalances the Kit for you, in line with these projections.

So if you want to invest in cryptocurrencies with AI on your side, download the Q.ai app today.

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