Here we will discuss the blockchain technology in brief, explain what is mining and how it works, what equipment is required for mining, and most importantly, what is cloud mining and how to not get scammed when you subscribe for cloud mining contracts.
Blockchain and Its Elements
Blockchain technology can be described as a decentralized and distributed ledger that records the origin of a transaction. What do all these words mean?
Decentralized means that no one can own the chain, as all participants have access to information in it. Distributed Ledger Technology (DLT) is another name for blockchain. To understand blockchain technology, imagine a Google Doc. The document is shared with a group of people, rather than transferred or copied. This is called a decentralized distribution chain accessible to everyone anytime. All changes are recorded in real time, which makes them absolutely transparent.
Blockchain technology consists of three important components, namely blocks, nodes, and miners. We’ll skip the technical details of blocks and nodes (or write about them in the next article, if you comment so below). However, mining is a popular topic that emerges a lot in the flow of links through I Refer You platforms. Let’s look deeper what it is and how it works.
Mining allows you to earn crypto currency without the need to buy it for money;
Miners of Bitcoin receive Bitcoin as the incentive to complete ‘blocks’ of verified transactions, which then belong to the blockchain;
Bitcoin rewards are delivered to the miner who is able to solve a complicated hashing puzzle;
The puzzles are solved with the help of a GPU (graphics processing unit) or ASIC (application-specific integrated circuit).
Often crypto mining can be painful, not always rewarding, and sometimes costly. However, many people who are interested in cryptos get benefits in the form of crypto tokens. But before you devote your efforts, time, and other resources, let’s find out if mining is really for you. This article will mostly cover Bitcoin as the first developed and most popular cryptocurrency.
The main attraction for Bitcoin miners is the ability to receive rewards with Bitcoin tokens. Nonetheless, not only miners may possess crypto tokens. You can purchase Bitcoin using other currencies, including other crypto currencies (such as Ethereum). You can earn cryptos by playing games, writing blog posts on platforms that offer crypto payments, or performing other tasks.
Bitcoin tokens that are offered to miners is a reward which is the motive for people to help in the main goal of mining - namely, to support and monitor the crypto network and its blockchain, thus making it legitimate. These responsibilities are not kept within one user or a restricted group of users. Rather, it is spread across numerous miners around the globe, which makes cryptocurrencies decentralized. One of the main advantages of Bitcoin and other cryptos is that they do not rely on a government or central bank in terms of regulations.
Miners perform the role of auditors. They virtually verify cryptocurrency transactions that have been performed before. This activity is designed to maintain the honesty of Bitcoin users. Verified transactions ensure that there is no double-spending (the risk that a digital currency such as Bitcoin can be spent twice).
Even successful solution of the hashing puzzle does not guarantee that you will receive Bitcoin. Actually, two conditions must be met, whereas the second condition is a matter of luck.
Firstly, you need to verify about 1MB worth of transactions. This part depends on your hardware and is considered to be the easier.
Secondly, you have to be the first person among miners who got the answer right. In other words, you need proof of work.
How are the puzzles solved?
You don’t need sophisticated formulae, advanced calculations and math to solve hashing puzzles. When we say that miners are solving complicated mathematical problems, we mean that they are trying to be the first who finds a 64-digit hexadecimal number, also referred to as ‘hash’. The hash must not be higher than the target hash, and the solution of the puzzle is based on guesswork.
The guesswork is extremely complicated, though. There are trillions of possible guesses to the puzzles. In order to be the first miner to solve it, you need huge computing power. Having a high hash rate is one of the important requirements - it is measured in MH/s (megahashes per second), GH/s (gigahashes per second), and TH/s (terahashes per second).
Besides making crypto currency for miners and supporting the integrity of Bitcoin, mining fulfills another important function. Specifically, it is the only way to issue more currency into circulation. As of early 2020, the number of Bitcoin is close to 20 million, and almost each of them was created by miners.
How Much Miners Make?
Since more computational power is required to create every next Bitcoin, the rewards for miners are halved about every four years. The first mined block in 2009 would have earned you around 50 BTC. Nowadays this reward may be as low as 6.25 BTC, but taking into account the currency BTC price, this seems like a good incentive anyway.
Equipment for Mining
The choice of equipment for mining is based on two major factors: hash rate and energy efficiency. The complexity of mining tokens makes the choice of hardware especially important.
Hash rate is the number of calculations per second that the hardware can deliver. A higher hash rate parameter increases the chances of the miner to solve the problem. The computation is based on random inputs that are supposed to provide an output. The more inputs your hardware is able to analyse, the higher your chances to mine a token are.
The power of your equipment directly affects the consumption of energy it requires. Sometimes increases in electricity bills do not compensate for the amount of tokens mined by the miner. The formula to estimate the worthiness of your investment should figure out how many hashes you would be able to get for every watt of electricity consumed by your equipment. Divide the hash count by the number of watts.
The key elements in cryptocurrency mining are CPU, GPU, FPGA, and ASIC. Let’s briefly discuss what these are.
Computer itself (Central Processing Unit) is the least powerful category in crypto mining. Processor mining was rather cost effective in the early days of bitcoin, but nowadays you may spend decades mining using your CPU without getting any tokens whatsoever. So, more powerful elements of hardware are important today.
Graphic Processing Units are developed to deliver high-end graphics in video games. These units are designed to compute complex polygons for gamers, which makes them much more powerful and efficient than CPUs. Eventually, GPUs were combined into mining rigs, although nowadays their efficiency is diminishing just like CPU efficiency has gone. Today, GPU rigs are not able to pay for themselves through mining even if you have free electricity.
Field Programmable Gate Array mining is a circuit that is configured after its production This allows the manufacturers to design them specifically for cryptocurrency mining. FPGAs deliver power efficiency benefits, and they are easy to use.
An Application-Specific Integrated Circuit is basically a microchip that was developed with the only purpose of mining cryptos at the unprecedented speed. Its hashing power is extremely high, while electricity consumption is comparatively low. Some experts argue that ASICs are the ultimate invention in the field of Bitcoin mining, as there is nothing to compete with them in the near future. However, such chips are rather expensive for the initial investment.
Cloud mining is one of the popular topics, especially among the visitors of I Refer You. It allows people to start crypto mining without maintaining their own hardware. Rather, potential miners purchase mining contracts and use shared processing power.
Nevertheless, this approach is related to particular risks. Miners receive only a portion of profits as operators charge commissions over the costs. However, this is not the biggest issue with cloud mining.
Bitcoin mining scams are extremely widespread. Miners do not have control over the hardware for mining. Instead, they transfer the control to the operators. Therefore, operators may stop their activity at any point, taking into account Bitcoin value or any other factors.
Scam in Cloud Mining
Legit Mining Schemes
Legit cloud mining companies are not necessarily profitable or reputable. What makes them legit is that they actually own hardware to mine cryptocurrency. However, the main model such companies follow is a “lose lose” approach. An increase in Bitcoin price means that miners earn less than if they just bought it. A decrease in Bitcoin price implies that miners are not able to earn a penny and lose money they have invested.
Miners not only pay for the mining contract, but are also entitled to pay a maintenance fee to cover the expenses related to running and maintaining the hardware. This means that cloud mining is hardly a profitable approach nowadays. In most cases miners are better off just buying and holding Bitcoins, than investing in cloud mining even when it’s legit.
Scam Mining Schemes
Besides legit cloud mining companies, there are complete scams. They are based on Ponzi Schemes, a.k.a. Pyramid Schemes. This approach implies that miners need to invest money in order to participate. Eventually, those who came first get paid by the ones who join after. At some point, the payouts stop and miners are left with nothing. Most experts agree that cloud mining companies are plain Ponzi schemes. They don’t actually own any mining rigs, but simply use the money invested by some miners to pay out others, until the pyramid collapses.
How to Not Get Ripped Off
If you are committed to cloud mining and make your way in this investment despite the risks, prepare to do thorough research before you actually invest. Look for references and search trusted platforms for reviews. If you are in the number of unlucky miners who were scammed, take your time to report the site to help others out.
Never invest more than you can afford to lose. Miners must understand that cloud mining is a risky enterprise. The way mining companies work is they lure miners in, make them make money little by little, and then suddenly close down without any notice once the earnings are high.
Six Cloud Mining Red Flags
Below is a list of red flags for a company you must check in order to stay safe and not get scammed.
Promised yield is exceptionally high, e.g. over 20% per year.
It is a
The website doesn’t include the ‘About Us’ page, doesn’t provide information about the owners and managers, doesn’t include a registered address, personal social network profiles, etc.
The website domain is less than six months old.
The website promises something too good to be true.
To sum it up, we agree with experts that cloud mining are scams in the majority of cases. Make sure there are no signs of Ponzi Schemes. If you see that the main income will be coming from inviting referrals rather than actual mining, it is probably not the platform you want to give your money and effort to.