How does cryptocurrency mining work
How to mine cryptocurrency?
There are many ways to mine crypto, but which cryptocurrencies are the most profitable? Should you buy a mining rig yourself or do cloud mining? How to calculate the profits? We will discuss all that and compare the three main ways to see which one is the most profitable.
So what is cryptocurrency mining? Mining is the process of validating other user’s transactions (e.g. bitcoin transaction) with a computer and then adding them to the blockchain. As a reward, miners receive cryptocurrency.
3 Main Ways to Mine Cryptocurrency
- 1. GPU mining (mining on video cards)
- 2. ASIC mining
- 3. Cloud mining
1. GPU Mining
GPU Mining is using video graphics cards to mine cryptocurrencies. Some of the most popular GPUs are NVIDIA GTX1060, GTX1070 and GTX1080Ti as well as RADEON models RX470/RX480 RX570/RX580. Should be noted that RADEON GPUs consumes more electricity but are generally cheaper than NVIDIA GPUs. In terms of performance, NVIDIA GPUs are generally better. However, any GPU performance highly depends on the price of electricity. Thus, all aspects should be taken into account.
Most crucial factors of the cryptocurrency mining
- cost of electricity
- cryptocurrency prices
- level of mining difficulty
- GPU performance (hash rate per watt)
Break-even point of the cryptocurrency investment
Another significant issue that smart investors would consider is the cost of mining equipment (mining hardware). The cheaper you manage to buy the mining rig, the faster your investment will be paid off. Don’t forget that the price must not be your only factor when making a final decision on mining hardware. Having a warranty in case the GPU or any other part will fail is essential. Otherwise, there will be a need for extra investment.
How to mine ethereum?
Ethereum is one of the most popular altcoins for mining, we will briefly describe how the process looks.
First, you need to get a mining rig, see list of all components required to build your first one below. Second, you must configure BIOS correctly, install OS and required software. Third, specify details of the mining pool and your personal cryptocurrency wallet (the one you will get proceeds to).
Note, currently Ethereum is running proof of work system which makes it possible to mine, but it was announced that the proof of stake system to be introduced in the future. The plan still officially remains, so Ethereum miners should be aware that it will impossible to mine once the new protocol is updated.
That’s it, you are good to go. Further, we cover some specific aspects you should be aware of while getting your mining rig ready.
How to build a mining rig?
In order to build your first mining rig, you will need a case/chassis (it can be bought online or you can make it yourself) and mining hardware, which includes:
- Motherboard (number of active PCI slots must not be less than the number of GPU you plan to employ)
- Storage: SSD disk (16gb is enough for LINUX)
- RAM (4GB)
- PSU (power supply depends on the mining rig, see next section for details)
- Processor (any that is suitable for chosen motherboard)
- Risers (PCIe risers are used to provide additional space for GPUs. It is often the basic component of the multi-GPU mining rig, as the PCIe riser actually provides the additional space to place multiple GPUs in the GPU mining rig.)
- Video cards (cards with higher computing power will ensure the higher hash rate and thus higher rewards)
- Wattmeter (to monitor actual power consumption on the power socket)
As you can see it is generally the same list as if you were building a PC.
How to calculate the required Power Supply for mining with the video card?
It is important to calculate how much power you need to supply your GPUs. So here is an example of how you can calculate it.
EXAMPLE RIG: 6 Video cards NVIDIA GTX1070
- general system will require 150w
- GPUs: 120w x 6 = 720w
- Risers 60w x 6 = 360w
- Total: 150w + 720w + 360w = 1230w
Thus, you need either 1 power supply with at least 1200w or 2 power supplies connected together, where each is at least 600w.
Having that in mind, you can check what are the best pricing options you can get, as the cheaper, you can get the mining rig, the faster you can get it paid off reaching the break-even point on your investment.
Ethereum mining software
Most popular options of OS for miner are:
- Windows 10
- HIVE OS (Linux modification for mining)
- ETH OS (Linux modification for mining)
We will not go deep examining the advantages and disadvantages of each OS, instead, we will only share our experience. Having Windows for mining sounds attractive, but in reality, this is probably the most unstable and complicated option if we dive into details. However, it is probably the least scary option if you want to try mining with your existing PC to see how it generally works and get a concrete understanding.
HiveOS is a relatively new option which is free to connect first 3 mining rigs and is quite straightforward to set up and to run. After you run the mining rig with pre-installed HiveOS Linux build the process will ask you to connect the mining rig you’ve created in your online cabinet. Then, all configuration and management happen online.
Once you set up the OS you will need to install mining software, choosing the most popular is a safe and stable option:
Choosing more exotic altcoins for mining may require less popular mining software.
What to mine in 2020?
Most profitable altcoins for your GPUs can change any day, any time as it involves a number of factors, but most importantly it will depend on the price of the altcoin. You can check https://whattomine.com to see most profitable altcoin for your mining rig.
Still, apart from using available mining profitability calculators, we suggest thinking long term. Ethereum is altcoin No1 of cryptocurrency industry with a strong team behind and relatively long record. We’ve seen the price of Ethereum reaching 1300 USD in January 2018. Mining Ethereum may not be the most profitable option today, but if you hold your mining rewards and sell later at highs, what would be with your mining rig’s profitability? Yes, it will be higher.
How to overclock GPU for cryptocurrency mining
Your overclocking strategy may change if you have cheap electricity or willing to get as much crypto as fast as you can (in that case you may want to consider simply buying Bitcoin or Ethereum on the market). A general idea to keep in mind, the higher you set the overclocking the more power your mining rig will consume. Thus, make sure that the extra hash rate will still make sense because your electricity costs will increase.
Search for optimal settings online carefully, as it may allow you to both increase hash rate and reduce power consumption.
How to Join an Ethereum Mining Pool?
Your main concern with regards to mining pool should be its size and capacity to operate stably. We recommend to start with:
Is it too late to start mining Ethereum?
It may be late for some people and still fine for others. Other things being equal, the cost of electricity should be your first concern. If you are lucky to be living in a country with cheap electricity (less than 0.1 USD kWh), then it may be a good idea to consider mining as an investment.
Is crypto mining profitable?
Let’s take an example, imagine you’ve built a mining rig with NVIDIA GTX 1070 video cards. Now let’s take a look at a fair result of the miner:
Price of mining rig hardware: 3000 EUR
Target altcoin for mining: Ethereum
Altcoin price on the market: 280 Euro per 1 ETH
Hash Rate: 180MH/s
Reward per 24h: 0.0144 ETH
Reward, 30 days: 0.432 ETH
Electricity expenses (kWh): 518
Cost of electricity: 77 EUR (at a cost of 0.15 EUR per kWh)
Revenue per month: 121 (current price of Ethereum is 280 EUR)
Profit per month: 44 EUR
Calculated at Ethereum mining calculator WhatToMine
If the price of Ethereum is unchanged then it will take 68 months to reach a break-even point on your investment. However, if you accumulate all proceeds and in case Ethereum costs 600 EUR in 6 months, then your electricity expenses would be 462 EUR, while rewards would be equal to 1555 EUR, which leaves you with 1093 EUR of profit for a period of 6 months.
In case the price of Ethereum will reach 1000 EUR in 6 months and you sell your accumulated Ethereum, then your profits would be 2130 euro, which makes it a lot more attractive, right?
You can see that any scenario highly depends on your price expectations and strategy you follow while mining.
Mining is obviously a risky thing, but in some cases, it can be highly profitable.
- GPU can be sold easier than ASIC
- Easy to switch Cryptocurrency (having a huge choice of altcoins to mine)
- High Power Consumption for typical households
- Easily Affected by Disruptions (not too stable)
- Needs a PC
- Requires hardware knowledge if you are going to maintain it yourself
- Require less Mining Power than ASICs
2. ASIC miner
ASIC miner is using Application-Specific chips to mine. That alone tells you, that you will not be able to switch between the high number of cryptocurrencies when using this mining method. Each ASIC is capable of mining only on a specific algorithm. For example, Bitcoin is based on SHA256 algorithm and apart from mining Bitcoin, it is also possible to use it for mining Bitcoin Cash or mining Litecoin for example.
It should be noted, that ASIC mining was created as a result of increasing difficulty. CPU mining and GPU mining became less efficient for bitcoin mining specifically, which forced innovators to focus on ASIC development.
Largest ASIC miner producers:
ASIC miner profitability example
To see if ASIC mining can still be profitable let’s look at the latest miner – Bitmain’s Antiminer S17, a powerful bitcoin mining hardware.
Price of the miner: 2410 euro for pre-order in 6 months (at the moment of review)
Hash rate: 53TH/s
Bitcoin reward per 24h: 0.00172 BTC
Bitcoin reward, 30 days: 0.0516 BTC
Electricity expenses (kWh): 1512
Cost of electricity: 227 EUR (at a cost of 0.15 EUR per kWh)
Revenue per month: 557 EUR (current price of bitcoin is 10800 EUR)
Profit per month: 330 EUR
Calculated at bitcoin mining calculator – WhatToMine
In this example, we get a break-event period at 7.3 months in case the Bitcoin price stays the same. This is the latest mining ASIC which is quite difficult to get right now, currently, you have to wait for 4-6 month depending on reseller.
To conclude, mining most popular cryptocurrency Bitcoin looks pretty attractive, especially if the Bitcoin price will grow even further.
- ASIC mining is easier to start than GPU mining
- Highest power consumption
- Latest ASIC can become outdated faster than the latest GPUs
- No PC needed
- Less chance of disruptions compared to GPU mining
- Plug and play
- List of cryptocurrencies to switch to is short
- Needs proper Cooling. Generally, ASICs produce a lot more heat than GPUs.
- Can be hard to sell, if it’s not the latest model of ASIC
- Profitability highly depend on Bitcoin price
- Difficulty can be increased at any time if large players come (unlike GPU mining, ASIC mining can easily be scaled and controlled, thus it happened to be highly attractive for large investors, which eventually shows a significant impact on the bitcoin network mining difficulty)
3. Cloud Mining
Cloud mining is when you rent hashing power from a mining company and they do it all for you. You don't have to worry about electricity or finding a place for the equipment. It is very easy and cheap to start. But we do it for profits, so which is more profitable?
Main profit factors:
- Cost of electricity (the cheaper the electricity the more profit you get)
- Mining rewards (the higher mining block reward the more profit you get)
- Price of cryptocurrency (higher price makes more profit)
- Cloud mining fee (for cloud mining only, higher fee means lower profit)
- Mining difficulty (higher is the mining difficulty, the lower will be the mining reward, hence lower profit)
If you do some research, the public opinions about cloud mining are not too great. The cloud mining Giants:
- Hashing 24
- Genesis Mining
These are the biggest players in the cloud mining game, which can offer you the best deals. The thing about mining is that the profits are not stable, so it's hard to tell how much exactly will you earn. The value of a cryptocurrency being mined is constantly changing. It also depends on how much mining power you are renting.
Note, with the most stable mining companies the entry investment barrier is significantly higher. Most of the companies who targeted retail and offered to start with investments of 500 USD are gone now.
Profit formula of crypto mining
Calculate how much of a specific currency will you mine and follow the value of it. WhatToMine is a great tool to calculate mining profits. It may look complicated at first. Once you know your mining power, find out your electricity costs and how much power your mining hardware power consumes. Then, subtract the bills from the mining yields and what's left is your profit.
Where will I get royalties from mining?
It may be very obvious for those who have already tried mining or is deep into crypto but if you are new, it might not be that clear – “how, where and when do I get my rewards for mining”.
First, as you set up your mining rig, you will define to which address you will receive the mining reward. Second, as you will successfully do mining your balance on the mining pool will be increasing. Once you reach the minimum level, the pay-out will be made to your account. Thus, depending on the results of your mining rig you will be receiving accumulated rewards every time threshold is reached.
With cloud mining, it works in a similar way but terms can differ from company to company.
Crypto mining taxes
Depending on a place you live you may need to pay tax on rewards you get from mining. In most countries, you would need to pay tax on income. However, in most countries, cryptocurrencies are still not legalized, thus unless you sell your mining rewards and receive fiat money (USD, EUR, GBP, etc.) to your bank account, you may be exempt of taxes (this is not financial advice, please confirm with your State Tax Office for details).
How to invest cryptocurrency?
Simple but important aspect: as soon as you sell your cryptocurrency you fix your gains or losses. In case you decided to follow a holding strategy, you always have to keep in mind that you would be holding your crypto assets up to the point at which you would like to spend them. Therefore, your potential gains or losses would depend on the point of entry and exit of your investment. In case you believe in short term growth, you should probably exit once you believe crypto has reached its peak and re-enter in your investment positions at better/lower price.
Apart from the typical question of whether you should hold or sell, there are alternatives. First, you can learn to trade and try to make more crypto. What’s great about the cryptocurrency market is that you have tonnes of cryptocurrency pairs, so you can trade ETH against other cryptocurrencies with the aim of the increasing amount of Ethereum. This is an especially positive thing as cryptocurrency trading against fiat on both bullish and bearish market sentiments is a very risky thing.
Second, you can go for social trading, which essentially employs the idea of copy-trading behind it. On a typical social trading platform, there are two groups of users, crypto traders on the one side and beginner traders (also know as copy-traders or investors) on the other. Traders simply trade through the automated trading platform (like Wunderbit Trading) and try to show as best statistics as they can, while Investors are screening through the Traders’ list and try to select the best performer.
Once the best match to the risk and reward appetite is found, Investor can then start to follow and copy trade the Trader. Copy-trading (also known as mirror trading or shadow trading) allow Investor to automatically execute the same trades as the Trader.
There are differences across platforms, almost each has its own interpretation of social trading and technical functionality. It’s yet great to have such a variety of options, thus allowing to invest your crypto and make it work.
Note, some platforms allow to make the whole simulation but every trade is made against a broker. In such cases, it’s always a bet, where you can make more of fiat money or less. Still, there are platforms that are built on top of exchanges (e.g. Binance and Kraken), which means that behind each trade there will be your crypto.
Wunderbit Trading is an automated trading platform that is built on top of the largest crypto exchanges, where copy-traders don’t send their holding to anyone, they simply connect API to allow Wunderbit Trading platform to copy trades.
To summarise, mining can still be a great way to profit from cryptocurrencies. Mining is not dead.
In countries, where the cost of electricity is higher or equal to 0.24 USD mining, mining profit is zero, if the cost is lower, you are in profit.
Countries with the cheapest electricity include Ukraine, where 1 kWh costs only 4.1 cents USD meaning that running a six-card mining rig of NVIDIA GTX1070 would profit you a 3.46 USD daily (per month 103.8 USD), thus if the mining rig was bought for 2000 USD (the price of pre-owned mining rig), then it would take you 19 month to break-even your investment.
Another great way to profit from cryptocurrencies is to start trading. Although trading crypto is not easy, some say that crypto trading is the best strategy you can follow right now, since mining difficulty has increased significantly and the cryptocurrency value is not that high.
Thank You for Reading!
We hope this article was helpful. Read our comprehensive guide on how to buy bitcoin and sell bitcoin at Wunderbit Exchange.