At its peak, cryptocurrency mining was an arms race that drove up demand for graphics processing units (GPUs). Indeed, Advanced Micro Devices, a GPU manufacturer, reported impressive financial results as stock demand skyrocketed and shares traded at their highest level in a decade.
Despite the increased demand for GPUs, the crypto mining gold rush was short-lived, as the difficulty of mining top cryptocurrencies such as Bitcoin increased at the same rate.
Mining cryptocurrencies, on the other hand, can still be profitable. So, what exactly is cryptocurrency mining, is it legal, and how do you get started? This article delves deeper into these issues.
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What Exactly Is Crypto Mining?
Most people consider crypto mining to be merely a method of creating new coins. However, cryptocurrency mining also entails validating cryptocurrency transactions on a blockchain network and adding them to a distributed ledger. Most importantly, crypto mining prevents digital currency from being spent twice on a distributed network.
When a member spends cryptocurrency, the digital ledger must be updated by debiting one account and crediting the other. The difficulty with a digital currency is that digital platforms are easily manipulated. As a result, the distributed ledger of Bitcoin allows only verified miners to update transactions on the digital ledger. This places additional responsibility on miners to protect the network from double-spending.
Meanwhile, new coins are created to reward miners for their efforts in keeping the network secure. Because distributed ledgers lack centralized authority, the mining process is critical for transaction validation. Miners are thus incentivized to secure the network by taking part in the transaction validation process, which increases their chances of winning newly minted coins.
A proof-of-work (PoW) consensus protocol has been implemented to ensure that only verified crypto miners can mine and validate transactions. PoW also protects the network from outside attacks.
Proof-of-Work
Mining for cryptocurrency is similar to mining for precious metals. While precious metal miners find gold, silver, or diamonds, cryptocurrency miners cause new coins to enter circulation. Miners must deploy machines that solve complex mathematical equations in the form of cryptographic hashes in order to be rewarded with new coins. A hash is a shortened digital signature of a piece of data. To secure data transferred over a public network, hashes are generated. Miners compete against one another to find a hash value generated by a crypto coin transaction, and the first miner to crack the code gets to add the block to the ledger and receive the reward.
Each block refers to the previous block using a hash function, forming an unbroken chain of blocks that leads back to the first block. As a result, peers on the network can easily verify whether certain blocks are valid and whether the miners who validated each block solved the hash correctly in order to receive the reward.
The difficulty of equations on the network increases over time as miners deploy more advanced machines to solve PoW. Simultaneously, competition among miners grows, increasing the scarcity of cryptocurrency.
How to Begin Mining Cryptocurrency
Mining cryptocurrencies necessitates the use of computers equipped with specialized software designed to solve complex cryptographic mathematical equations. In the early days of the technology, cryptocurrencies such as Bitcoin could be mined using a simple CPU chip on a home computer. However, due to increasing difficulty levels, CPU chips have become impractical for mining most cryptocurrencies over the years.
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Mining cryptocurrencies today necessitates the use of a specialized GPU or an application-specific integrated circuit (ASIC) miner. Furthermore, the GPUs in the mining rig must always be connected to a reliable internet connection. Every crypto miner must also be a member of an online crypto mining pool.
Different Cryptocurrency Mining Methods
GPU mining is a different way to mine cryptocurrencies. It maximizes computational power by combining a number of GPUs into a single mining rig. A motherboard and cooling system are required for GPU mining rigs.
Different methods of cryptocurrency mining necessitate varying amounts of time. For example, in the early days of the technology, CPU mining was the preferred method for most miners. However, many people today believe that CPU mining is too slow and impractical because it takes months to earn even a small profit, given the high electrical and cooling costs and increased difficulty across the board.
ASIC mining is a similar method of mining cryptocurrencies. ASIC miners, as opposed to GPU miners, are specifically designed to mine cryptocurrencies, and thus produce more cryptocurrency units than GPU miners. They are, however, expensive, which means that as mining difficulty increases, they will quickly become obsolete.
Cloud mining is becoming more popular as the costs of GPU and ASIC mining continue to rise. Individual miners can use cloud mining to tap into the power of large corporations and dedicated crypto mining facilities.
Individual crypto miners can use the internet to find both free and paid cloud mining hosts and rent a mining rig for a set period of time.This is the most hands-off method of mining cryptocurrencies.
Pools of Mining
Mining pools enable miners to pool their computational resources in order to improve their chances of discovering and mining blocks on a blockchain. If a mining pool succeeds, the reward is distributed proportionally to the amount of resources contributed by each miner to the pool.
Most crypto mining applications include a mining pool; however, crypto enthusiasts can now collaborate online to form their own mining pools. Miners can switch pools whenever they want because some pools earn more rewards than others.
Official crypto mining pools are considered more reliable by miners because they receive frequent upgrades as well as regular technical support from their host companies.
CryptoCompare is the best place to find mining pools because it allows miners to compare different mining pools based on their reliability, profitability, and the coin that they want to mine.
Is Crypto Mining Profitable?
Several factors influence whether crypto mining is profitable. Whether a prospective miner chooses a CPU, GPU, ASIC miner, or cloud mining, the hash rate, electric power consumption, and overall costs are the most important factors to consider. In general, crypto mining machines consume a lot of electricity and produce a lot of heat.
For example, the average ASIC miner will consume approximately 72 terawatts of power in order to create a bitcoin in about ten minutes. These figures are constantly changing as technology advances and mining difficulty rises.Even though the machine's price is important, it's also important to consider electricity consumption, local electricity costs, and cooling costs, especially with GPU and ASIC mining rigs.
It is also necessary to consider the level of difficulty for the cryptocurrency that a person wishes to mine in order to determine whether or not the operation will be profitable.
The Tax Consequences of Crypto Mining
The taxation of cryptocurrency mining is still an important consideration.
In general, cryptocurrency miners will face tax consequences (1) when they are rewarded with cryptocurrency for mining activities, and (2) when they sell or exchange the reward tokens. Concerning (1), the IRS has issued Notice 2014-21, which specifically addresses the tax implications of cryptocurrency mining. According to the Notice, upon receipt of the reward tokens, a miner will recognize gross income in an amount equal to the fair market value of the coins at the time of receipt.Furthermore, if a taxpayer's mining activities are a trade or business, or if the taxpayer performs such activities as an independent contractor, the reward tokens/virtual currency payments are deemed to be self-employment income and thus subject to self-employment taxes. Similarly, if a taxpayer works as an employee in the mining industry, cryptocurrency payments are treated as wages subject to federal income tax withholding for Social Security/Medicare and unemployment taxes.
See Taxation of Crypto Mining for a more in-depth examination of the tax implications of crypto mining. See Charitable Remainder Unit Trusts ("CRUTs") and Cryptocurrencies, Taxation of Crypto Margin Trading, and Estate Planning and Cryptocurrency for more information on crypto tax planning. Also, see The IRS's Voluntary Disclosure Practice for the most recent information on IRS Voluntary Disclosures for previously unreported cryptocurrency gains.
Is it legal to mine cryptocurrency?
Most jurisdictions and authorities have yet to enact laws governing cryptocurrencies, which means that the legality of crypto mining remains unknown in the majority of countries.
Crypto miners are considered money transmitters by the Financial Crimes Enforcement Network (FinCEN), and as such, they may be subject to the laws that govern that activity. In Israel, for example, cryptocurrency mining is considered a business and is subject to corporate income tax. Regulatory uncertainty persists in India and elsewhere, despite the fact that Canada and the United States appear to be supportive of cryptocurrency mining.
However, with the exception of jurisdictions that have specifically prohibited cryptocurrency-related activities, very few countries prohibit cryptocurrency mining.
Conclusion: The Longevity of Crypto Mining
Curiosity and a strong desire to learn are simply required for aspiring cryptocurrency miners. As new technologies emerge, the crypto mining space is constantly changing. Professional miners who earn the highest rewards are constantly studying the space and optimizing their mining strategies in order to improve their performance.
Climate change activists, on the other hand, have grown increasingly concerned as more and more fossil fuels are burned to power the mining process.
Such concerns have prompted cryptocurrency communities such as Ethereum to consider shifting away from PoW frameworks and toward more sustainable frameworks such as proof-of-stake frameworks.
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