What Is Mining Coin?

What Is Mining Coin?

Cryptocurrency mining is the mechanism that allows blockchains, the digital ledgers that verify cryptocurrency transactions, to function in a peer-to-peer decentralized manner without the need for an overseeing entity like a bank. The process involves networks of specialized computers that validate and secure transactions, earning the winners new coins in return.

While this may sound complex, the fact is that the mining process is very simple. Miners use specialized computers to generate hashes, which are 64-bit hexadecimal numbers that represent a piece of data. These hashes are then combined with a random number (called the nonce) to generate a second hash, which is also a 64-bit hexadecimal number that represents the new piece of data. The guessing continues until a hash is generated that matches the target hash, which gives the miner the right to update the blockchain.

Once a valid transaction has been recorded, it’s added to the blockchain network in groups known as blocks. A miner is awarded a predetermined amount of bitcoin for adding the latest block to the chain – which happens on average every ten minutes – and this is credited directly to their crypto wallet.

This process is crucial for the success of blockchains and cryptocurrencies, because it prevents double-spending by creating a record that shows when a currency has been used once and not twice. If you spend your Bitcoin twice, the two records will conflict and the blockchain system will revert to the last successfully validated record. Until the blockchain system is fixed, the chances of someone reversing your transactions are very high.

The reward that miners receive for updating the blockchain is also a big incentive, although it won’t last forever. There are only 21 million bitcoin in existence, and once they’re all mined, the mining reward will drop to zero. As of late, each verified block of transactions earns the winner 6.25 bitcoin, which is paid directly to their crypto wallet.

For people interested in getting involved, starting a mining operation can be as easy as setting up a home computer and connecting it to a fast internet connection. However, it’s not cheap. Mining rigs require very expensive equipment, and they consume large amounts of electricity – one ASIC can use the same amount of power as half a million PlayStation 3 devices, according to the University of Cambridge Centre for Alternative Finance.

Even if you’re successful in finding winning hashes, it can still be difficult to turn a profit due to the upfront cost of the hardware and ongoing electricity costs. And if you end up selling your mined Bitcoin, it will be taxed just the same as any other capital gain. Check out Bankrate’s cryptocurrency tax guide to learn more.