If you do not yet know much about crypto mining, it is important to first have an idea about why you would want to mine. The goal of mining is of course to earn money by means of creating (mining) new cryptofunds. You can namely earn money by:
- selling newly created cryptofunds.
- earning on the transaction fees.
- collecting rewards while mining.
In this article, we briefly and simply explain to you:
- What is cryptofunds?
- What is blockchain?
- What is cryptomining?
What is cryptofunds?
Cryptofunds is value in the form of an amount in a cryptocurrency. This is a kind of digital coin, which is often used as an alternative for regular types of money. The world’s most famous cryptocurrency is Bitcoin. There are currently more than seven hundred kinds of crypto coins in circulation.
In the Netherlands, the value of cryptofunds must be reported to the Tax Service in Box 3. Given the often large fluctuations in value, the valuation date of 1 January takes on extra relevance. Depending on the jurisdiction, it sometimes matters whether cryptocurrency is considered as currency, as in Japan, or other assets, as in the Netherlands and Australia.
What is blockchain?
For the explanation about the blockchain, we limit ourselves to the part that is relevant for mining. There is namely a great deal more to say about blockchain technology.
A blockchain is actually a large, distributed database. It is open to everyone and no one owns it. Just like the internet, with all its websites: everyone with an internet connection can view those pages.
For the use of these databases, a sort of secret code is used, the ‘hashcode’. That code is linked to a certain purchase or transaction. The question is often: is a blockchain secure? The answer is yes: a decentralized blockchain is secure, because every participant can see everything, so they collectively safeguard the security.
The advantages of payments, transactions and transfers via a blockchain:
- Fast, since it is real-time.
- Cheap, since there is no longer any middleman needed.
- Reliable, since the transactions are visible on all computers that are connected to that blockchain. Cheating is therefore nearly impossible.
What is crypto mining?
Simply stated, crypto mining is solving complex math formulas to create cryptofunds, by means of hardware or software.
With mining, everything is documented on the blockchain. Everything is collected in a ‘block’, which then forms a chain of blocks in line with each other. You must remember that additions can only be made behind the block. Transactions from the past always remain a part of the blockchain and cannot be changed.
Incidentally, not only are the transactions stored, but also reference to the previous block (the hash): a difficult to crack mathematical puzzle.
The control over the transactions is usually achieved with what is called a Proof-of-Work protocol (PoW), a hashing algorithm. Or the complicated puzzle that must be solved by the miners. Thanks to PoW, there is agreement about all transactions in the records (Ledger). The computing power that the computer has provided for solving the mathematical puzzle and updating and checking the records is a proof of work. PoW. Thanks to this protocol, you do not need, for example, an accountant or auditor.
With mining, you thus contribute to the security of cryptocurrency. That is, however, not the only advantage of cryptomining. You can namely also receive a reward for the use of the computing power of your miner. The biggest gains, however, can lie in discovering a new block in the blockchain. With Bitcoin, there is now a great deal of competition, and there is therefore a great deal of computing power needed to be able to earn a small amount. This therefore costs your miner a great deal of power. With other, smaller or newer crypto coins (ALTcoins), it can be easier. The value of this currency can always still increase, so that you can earn nice returns over time.
What do you need for mining?
How can you mine yourself? You need the following things to get started on mining.
- A wallet for the specific coin that you want to start mining
- A good miner that is specially built for mining. The days when your own household computer was good enough are over.
- A good and especially reliable internet connection and power supply.
- A good location. The miners can get very hot and can make a lot of noise. It is thus not handy to do the mining in your living room. The best location is a cellar, attic or shed.
- Because the miner gets hot, you also need a cooling system. Think about fans or an air conditioner. It is important to keep your equipment cool.
- It is advisable to become a member of an online mining pool. This is a pool that is mining the same crypto coin you are. By joining, you ensure that your income is more stable.
- When you want to sell the crypto coins, you must be a member of an online exchange where you can sell your mined coins.
- And the most important reason: you have to enjoy mining and be curious about how it all works. It is clear that the degree of difficulty of mining is increasing. The only way to keep up is by constantly teaching yourself about how you can improve your miners. You can see it like a sport: the one who works the hardest ultimately achieves the best result.