- The confusing world of crypto mining is all about computers, electricity and equations
- Hash rates and mining difficulty can show if the market is weak or strong
- Despite the crypto crash and high energy prices, there are tentative signs the market is returning with an all-time mining difficulty high recorded earlier this month
Ever wondered about the mechanics behind crypto? Meet crypto mining, the complicated system that runs on hash rates, a race to crack the code and math. Yes, really.
If you’re thinking of a traditional mine, stop right there. While crypto mining does feel reminiscent of the 1800s gold rush, that’s where the comparison ends. Crypto mining farms look more like vast swathes of computing hardware in data centers.
But how does it all work? Strap in for your crash course on crypto mining. We’ll take you through what it is, how it works and what’s been going on in the market.
And don’t forget, if you’re looking for a simple way to invest in crypto and you want to harness the power of AI to do it, download the Q.ai app and check out our Crypto Kit.
What is crypto mining?
Crypto mining is what verifies and adds new cryptocurrency to the blockchain. To verify the transaction, a hugely complex mathematical equation needs to be solved first. The crypto miners are all fighting for the chance to be the first ones to crack the puzzle.
Whichever miner 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 larger the profit margin.
It’s a nifty system because it keeps the blockchain safe and secure, while miners are rewarded with the cryptocurrency they just mined.
How does it work?
At its core, crypto mining relies on good computer hardware and a lot of electricity. After that, it gets more complicated.
A lot of ordinary people are put off by how difficult crypto is to understand – and crypto mining is, unfortunately, no different. We’ve put the most common lingo in simple terms to help you become a mining buff in no time.
As anyone can get into crypto mining, you can use a normal computer for the job. Unfortunately, with so much competition in the market, it’s unlikely you’ll turn a profit.
Fluctuating energy prices cut or increase profit margins for crypto miners. Usually, the hardware runs on fossil fuels. Professional mining companies might have their own wind or solar farms to power their production.
There’s been a big drive to make the crypto industry greener based on the amount of energy it consumes from fossil fuels. The White House recently published a report which found global electricity use for crypto mining is 120-240 billion kilowatt-hours per year – more than all of Argentina or Australia.
This refers to how hard it is to solve the mathematical problem needed to add a transaction to the blockchain. The difficulty level is also worked out by how much power, or hash rate, is being used on the network.
A higher difficulty rate means more competition and less profit. The upside of high mining difficulty, however, is that it’s a sign the market is on the up.
Every time a miner tries to solve the code, a hash code is generated. The higher the hash rate of the miner, the more times it can work out calculations per second and get the reward. The better hardware you have, the higher your hash rate will be.
The overall hash rate across all miners is used as another measure for the overall performance of the network.
How is it profitable?
In order for crypto mining to be worth it, the profits need to outweigh the costs of electricity and hardware. That’s been pushing miners’ margins to the limit lately, with the inflated cost of gas contributing to high electricity prices across the globe.
Some crypto miners join forces to create mining pools, where the computing power – and profits – are shared. Having ASIC hardware also makes life easier for professional miners.
What’s been happening lately?
Like the rest of the crypto market, crypto mining is all over the place and doesn’t show any clear direction for what might come next. So we’ll look at what’s been going on in the last few months, and you can make your own mind up.
Back in September last year, Ethereum completed its long-awaited merge and moved the system over to a Proof-of-Stake mechanism. With the move, miners were swapped out for validators. By putting in their stake, similar to a security deposit, they’re trusted to verify transactions.
The merge, though planned for a while, has caused concerns among crypto enthusiasts that the network would become less secure when verifying new transactions.
The upside? A 99% reduction in energy use for the entire Ethereum network. Given crypto’s rocky image for environmental credentials, this was a huge move for the industry and the planet.
Unless you’ve been living under a rock, then you’ll know about the crypto price crash. Bitcoin, the world’s most popular cryptocurrency, went from $68,000 in November 2021 to around $16,000 by the start of January this year.
That’s the tip of the iceberg. The fallout of the FTX collapse is still unfolding, while the SEC has charged Genesis and Gemini for dodgy unregistered securities. By December last year, Bitcoin mining profits were down a whopping 70%. All looked lost.
There was plenty more carnage to come.
Mining all-time high
Incidentally, Bitcoin has been rallying in the last two weeks and the Bitcoin price is now trading at roughly $23,000.
The price increase has had miners flocking back to the networks in their droves. This has caused mining difficulty to hit an all-time high on January 15, rising 10.26% to 37.73 trillion hashes.
Are we in for a bull run? It’s hard to say, especially given the recent lows of the crypto market. With two new records set already, 2023 is certainly shaping up to be an interesting year for Bitcoin miners.
The bottom line
Crypto might not be down right now, but many believe very strongly that it’s definitely not out. If you fit into that camp, then learning how it all works is super important. You want to make sure you’ve got the knowledge and understanding to make the right financial decision, especially given how volatile crypto can be.
With that said, all the research in the world isn’t going to allow you to analyze the level of information that AI can.
That’s why we’ve created the perfect match, with our AI-powered Crypto Kit. This invests in a range of different crypto assets via public trusts, which can include coins and tokens like Bitcoin, Ethereum, Chainlink and Litecoin.
Every week our AI analyzes a huge amount of data, and predicts how these trusts are likely to perform in the coming week, on a risk adjusted basis. It then automatically rebalances the Kit for you, in line with these projections.
Download Q.ai today for access to AI-powered investment strategies.