Finances

4 Things Investors Should Know About Mining Crypto

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Written by Quentin Hack

The fame of cryptocurrency has kept on surging these past few years. If you had been acquainted with digital currency before, then you must know that mining cryptocurrency was the former trend before trading became the absolute game-changer.

Crypto mining involves validating every transaction using crypto on a network of blockchain and adding them into a distributed ledger. Mining these digital currencies helps secure a blockchain from any attack. It also leads to incentivizing the miners financially upon them assisting in securing every blockchain. Now, if you are thinking of mining your cryptocurrency or investing in one, there are things that you need to know before you get started.

1. Mining Equipment

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Crypto miners generally think about two factors when they are using mining rigs, and these are the following: hash rate and energy usage. Hash rate or hash power is the total computational power used to mine and process transactions utilizing PoW/Proof of Work. This PoW is then used in securing, verifying, and confirming crypto transactions while preventing any double-spending and other blockchain attacks. The amount of energy consumed while mining is also being observed by miners, especially when it comes to hashes per kilowatt-hour. A miner can only profit if there is enough hashing rate which equates to the efficient energy that is consumed.

Back in the day, Bitcoin aficionados took part in mining and securing the digital currency’s network by helping create nodes. Ten years ago, a PC with an i7 processor could be used to mine around 50 bitcoin a day but this has been counterproductive for miners. That’s because at that time, they are paying more for the electricity than the worth of what they are mining, which values at $0.80 per coin. When these Bitcoin enthusiasts realized that the high-end Graphics Processing Unit (GPU) has the potential to process cryptographic hashes at higher speeds than the Central Processing Unit (CPU), they began building mining rigs to mine bitcoin using GPUs. The more computing power a mining rig has, the more solutions it is likely to find, and this will all lead to more block rewards for miners.

Later on, miners using ASIC (application-specific integrated circuit) took over the mining game from GPU miners because ASIC’s sole purpose is to mine cryptocurrency at a much faster rate compared to GPU. ASIC is purpose-built which is used to mine a specific coin, whereas GPUs are general-purpose, but they can mine every crypto.

We also consulted the crypto experts at Cryptoner, a site that publishes crypto guides and news, regarding this topic. They added that ever since the introduction of ASIC in 2013, its power has to be improved every six months. After three years of use, the ASIC equipment that you own becomes unprofitable. So it is best that you, as an investor, would know which hardware would be more profitable to use.

2. Energy consumption and environmental impact

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As the algorithm of blockchain to be solved gets harder and harder as time passes, the standard mining rig can no longer keep up. To address this, special computer equipment is needed to handle the intensity of processing power that is needed to mine a coin. With the use of a special computer also comes the need to run a lot of electrical power. We are not talking about kilowatts, but terawatts. Dozens and dozens of terawatts are used for mining.

Proponents of mining say that they are already using electricity from renewable sources which will make it cheaper. Although, there are a lot of environmentalists who rebuke the use of renewable sources. The reason is that mining rigs can be moved from place to place depending on where energy is cheapest. These sources can be in the form of using fossil fuels or coal.

3. Indirect investment

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Direct investment in cryptocurrency is not advisable. This is because the market is still very volatile and can crash at any time especially if you are invested in a particular digital coin. Whereas if you put your investment with infrastructures that support crypto, it can be more profitable because these infrastructures can scope anything from mining cryptocurrencies to crypto exchanges. The efficiency of interaction between businesses and individuals is growing smoothly with the introduction of digital currency in the market. With this trend booming as time progresses, traditional finance systems are slowly being overshadowed by emerging innovations like blockchain technology.

One other way to deal with cryptocurrency without direct interaction with it is to maintain a portfolio of companies that have crypto interests. Make sure that their shares are included in any mutual or index fund where you are going to invest your money. This way, your investments are diversified to a broader fund. Be reminded that the success of particular crypto is largely dependent on speculative bets/speculative investments, so buying mutual or index funds that entail a higher fee can potentially hinder your financial growth.

4. Look for a mining pool

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What is a mining pool, you say? A mining pool is what you call a group of miners who are combining their computational powers to increase the probability of them solving the algorithm of a blockchain more effectively. These pools can offer a sustainable return of investment (ROI) in a short period, but this greatly depends on the type of cryptocurrency that they are mining. So be sure to do your homework as well and know the trends of each cryptocurrency in the market before choosing to invest in a mining pool.

Forecasting the dollar rate for particular crypto should also be like a hobby. You must always remember that even if a particular coin dominates the market today, it cannot always retain its value for a long period. You can also do a background check regarding their pool track record, reputation, transparency, and the frequency of their payout if need be. You can also go for successful mining pools, as most of them have already proven their reputation when it comes to mining.

Final Words

In the end, what is important when you are an investor is that you should accept the high degree of volatility for this type of market. The risks associated with this emerging technology at this point may not be fully mapped out until it becomes widely used, so you should always have a keen foresight when it comes to anything related to digital assets.

About the author

Quentin Hack