The decentralization inherent in cryptocurrency is made possible by mining, the process by which new transactions are added to the blockchain and confirmed as legitimate. Mining involves verifying each block in the blockchain, with each miner competing to be the first to solve a numeric problem—which involves more luck than mathematical skill. As a result of the massive volume of possible guesses, miners typically invest in high-performance equipment to aid in their work.
The Purpose of Mining
Crypto mining serves several purposes. Other than ensuring that the system can operate without double-spending, (the same bitcoins being used through illicit duplication) miners are incentivized for their work with a reward of cryptocurrency. The process is arduous, with no guarantee of success—but this hasn’t stopped individuals from trying their luck despite long odds. Mining also creates newly minted cryptocurrency to be circulated throughout the system. In the case of Bitcoin, the total number of coins is capped at 21 million, a figure which is projected to be reached by 2140.
With potential revenue at stake, it’s no wonder that many businesses across the world have started taking an interest. Some organizations form coin mining pools, groups that combine computing power to solve blocks and split the resulting coin reward. These pools represent a disproportionately large amount of cryptocurrency mined and are often the safest way to ensure that miners receive a return on investment for the equipment they must purchase. The requirements to successfully mine become higher over time. This is by design—with more and more machines working on mining, the difficulty of each hash and therefore the processing power required has to increase to keep the mining rate stable.
Right Tools For the Job
Some companies have chosen to capitalize on this by creating the tools miners need. Every type of cryptocurrency has its own mining algorithm, such as SHA256, used by Bitcoin. Application-specific integrated circuits, or ASICs, are chipsets optimized to run a specific function, with Bitcoin’s algorithm being the most common. For other cryptocurrencies, hardware such as graphics processing units (GPUs) and field-programmable gate arrays (FPGAs) can accomplish similar tasks. All of these products use silicon wafers produced by companies such as Samsung and Taiwan Semiconductor. These wafers are seldom tested and packaged by the manufacturers, with most of that work outsourced to companies such as Taiwan’s ASE Group or Amkor Technology.
From there, chips are designed and sold by companies that often adapt them for use with specific types of cryptocurrency. The biggest player in the GPU market is NVIDIA with 70% of the market, followed by AMD with 18%. For ASICs more commonly associated with a specific type of crypto, Bitmain, Canaan, and Pangolin Miner hold the majority of the market share.
Mining Pools
Interestingly enough, many of these manufacturers also use their equipment to mine, creating their own coin mining pools that may be public or private. Some of the major players in the mining pool industry space include AntPool, an organization run by China’s Bitmain, and F2Pool, another Chinese company also known as DiscusFish. The latter holds the distinction of generating the largest Bitcoin transaction ever to clear up a cloud of tiny Bitcoin transactions possibly intended to clog the network.
Other players in the crypto mining industry vary from technology companies with other offerings to unknown entities that nevertheless hold a significant percentage of the market. Any mining organization can range from small operations of 5-10 machines to massive, industrialized farms of over 1,000. Some groups boast having over 100,000 machines worldwide operating on their networks.
The Profitability of Crypto Mining
As time goes on, the odds of an independent miner hitting a return on investment for their equipment becomes lower and lower, particularly as the necessary computing power increases. For a smaller organization or independent miner, joining a mining pool is the best option to contribute and see consistent returns. This requires research into the market outlook of various cryptocurrencies as well as the pools themselves. Many so-called crypto mining companies are fraudulent, hoping to lure in ignorant miners to do work on their behalf without correctly reporting coin rewards. Services such as PoolWatch can help aspiring miners find a pool that fits their needs and provides fair treatment.
Profitability is also tied to the value of the currency in question, as this is what miners are paid in. Bitcoin is popular among miners due to its transparent supply schedule and fixed currency cap, which makes it less prone to wild fluctuations than other cryptocurrencies.
As previously mentioned, the profitability of crypto mining for some companies lies in the products or services they produce that facilitate mining. While these companies have a vested interest in the long-term growth of cryptocurrency mining, their revenue is tied to their ability to tap into the market the same as any other business.
Some have chosen to sell hashrate to individuals interested in getting into the crypto industry. Hashrate represents the percentage of a chance a miner has of solving the next block of a given cryptocurrency, and as such, buying hashrate is an onramp to miners looking to attain profitability. Hashrate is contingent on the number of miners in an ecosystem, with the value of an individual miner increasing the fewer others there are.
Legality
As with any other disruptive new technology, cryptocurrency necessitates new laws to best regulate it. While cryptocurrency is legal in most countries around the world, regulatory standards can vary from place to place. Some countries have banned virtual currency entirely, though more common are countries that have placed restrictions on it or discouraged its use. Some individual banks have banned use in transactions, such as the Bank of Montreal (BMO) and the Reserve Bank of India (RBI). China’s State Administration of Foreign Exchange announced in early 2018 that it would crackdown on Bitcoin mining. Many mines were shut down in this period, although China is still heavily represented in the crypto mining industry.
Outlook
While it’s harder than ever to break into the crypto mining industry, savvy investors can consider investing in the hardware that powers it as well as prominent coin mining pools. Additionally, the rise of groups or individuals selling hashrate offers an additional avenue for newcomers to become profitable—though it should be noted that any of these approaches requires a significant investment to even have a chance of success.