Cryptocurrencies that use the proof-of-work process require the so-called miners to confirm transactions and generate new coins. Crypto mining became known to the general public in 2009 when the Bitcoin White Paper was published under the pseudonym Satoshi Nakamoto.
In early 2009, he mined the first 50 bitcoins and started the process of generating new bitcoins on the blockchain. Based on the terms prospecting and mining, mining describes solving cryptographically encrypted arithmetic tasks and creating new units of a cryptocurrency.
What is Crypto Mining?
The term crypto mining appears in conjunction with cryptocurrencies. Starting with Bitcoin, mining became popular all over the world. By using mining rigs, hash values are calculated for certain cryptocurrencies. In the early days of the success story, individuals who wanted the computing power of their computers demanded it bitcoin network offer, make a profit. Today, Bitcoin mining is no longer considered lucrative for individuals and is also increasingly criticized for its high energy requirements.
Miners are the owners of suitable hardware on a network who compete with each other to find new blocks. Crypto mining is essentially about being the first to do the encryption of the previous block. And add a new record to the new block to encrypt it again.
This one safety mechanism prevents tampering and acts as a wax seal. Crypto mining confirms the validity of the previous block. And the miner who was the first to solve the previous hash is currently rewarded with 6.25 Bitcoin.
Crypto mining leads to the addition of a new block to the data chain, the final confirmation of the transactions made and the Generation of new Bitcoin. The supply of new Bitcoin is limited to 21 million by the software it uses.
This maximum number is expected to be reached in 2140. Until then, halvings reduce the rate at which new Bitcoins are created by half. The mechanism prevents the inflationary development of Bitcoin.
Cryptocurrencies that Proof-of-Work process use for consensus building can be gained. A similar approach is staking for cryptocurrencies using the Proof-of-Stake consensus mechanism.
How does crypto mining work?
As the name suggests, the blockchain is a concatenation of blocks. The blocks are data blocks and contain the Transaction History. Making bitcoin is one of the tasks in crypto mining. The other is to validate the previous block to add the new one to the data chain, ultimately validating the stored transactions. Anyone who wants to get involved in crypto mining should know that the rewards only sound lucrative at first glance.
Crypto mining needs a fast Computers with a high computing power. The included graphics card has to be powerful, which drove up the prices of products from market leaders like NVIDIA.
This was due to strong demand for vacant stores. If the expensive hardware were not needed, crypto mining would be possible for free. The software and applications are freely available, free and open source.
The computing power provided is available to the network and the miner is rewarded with Bitcoin. The difficulty of solving the hash puzzle is continuously increased so that the number of blocks created remains constant within a fixed time.
As crypto mining takes longer due to increasing complexity, private miners with traditional hardware rarely enjoy rewards. Crypto mining is in one mining pool or as the owner of one mining farm with low electricity costs at the same time.
What hardware is required for crypto mining?
The high acquisition costs come from the hardware required for crypto mining. The graphics cards need special properties in order to use them. Of course, the entire PC has to be adapted to the performance of the graphics card, which usually does not entail high additional costs.
the Graphics processor unit, short GPU, form the core of the mining process, more precisely they were. Miners could solve the initially easy tasks with their computers’ processors. Miners then found out that graphics cards were much better suited and most participants switched to so-called GPU mining.
Later these were no longer sufficient, because the level of difficulty increased. There are now special chips, the ASICs, that are specially developed for mining. You can solve the arithmetic tasks set by the algorithm even faster.
through the Cryptocurrency explosion crypto mining became more popular. In the long term, this leads to mining companies that have sufficient technical, energetic and financial resources to carry out the mining process profitably.
Mining companies mainly in China, North America and Russia
Since mining cryptocurrencies is an energy-intensive process, mining farms have mainly established themselves in countries with cheap electricity prices. With 22% of the global mining stocks Chinaprobably mainly due to increasing regulation, only second among the countries with the largest share of global hash rate.
According to the Cambridge Centers for Alternative Finance, in September 2021, the stock’s hashrate increased North America for bitcoin mining from 35% (September 2020) to 428%. Russia is also a world leader in bitcoin mining, mainly in the Siberian region. Just like in Iceland, there are many hydroelectric power stations that provide affordable, sustainable energy. Washington State attracts miners from the US with the lowest electricity prices in America. So the mining market is shifting from China to America.
Another way to participate in crypto mining is through a mining pool. In this, several miners come together to form a group. The rewards are distributed in proportion to the computing power. The combination and the high computing power increase the chance of solving the puzzles. Participants can participate in multiple mining pools, which also makes it rewarding. You should pay attention to the associated fee for the pools.
A Bitcoin mining card can be found here ⇒
Difference between active and passive crypto mining
From a tax point of view, it is important whether a miner actively or passively participates in crypto mining. For the Tax and Customs Administration, active mining means performing a commercial activity. If a miner is a participant in a mining pool, passive mining can be assumed, which is not subject to trade tax.
This also applies to occasional mining on a private scale. There is an exemption limit of 256 euros, until then the profits from crypto mining remain tax-free. 1 euro more leads to full tax liability.
Is crypto mining legal?
According to the latest regulations, profits are subject to business tax. The federal government, in consultation with the EU, has determined that miners must carry out a commercial activity and must register a company for this. The company registration must be registered within 3 months after the start of the activity.
As a result, there is an obligation to pay business tax. In principle, crypto mining is legal in Germany, sometimes still a gray area. What is illegal are third-party systems that engage in cryptojacking. These are programs that secretly mine digital currencies on hijacked systems by using their computing power.
What will crypto mining look like in the future?
Competitive pressure among miners is increasing, regulations in several countries are leading to changes in the leading mining companies. GPU mining is no longer recommended with increasingly expensive electricity prices. Large mining companies monopolize the market and follow cheap energy costs.
Because of the increasing criticism of the high power consumption new concepts on the proof-of-stake instead of the proof-of-work earose. For this reason, Ethereum, which can also be mined, is switching from PoW to PoS in the so-called merge.
When staking, no new coins will be distributed, depending on the computing power provided. Users who own the coins will receive the rewards. Each individual protocol sets minimum limits on the number of coins holders can use to become a validator on the network. As before, validators confirm the blocks’ transactions and receive coins for them.
Frequently Asked Questions: Crypto Mining
Crypto mining is not for individuals, especially when it comes to bitcoin. There are new developments where the developers rely on new consensus methods like staking. Crypto mining is usually only worthwhile for mining farms that operate large data centers in countries with cheap energy prices.
There is crypto mining software from the cryptocurrency developers that is available open source. Other mining software is generally discouraged as it can be cryptojacking.
Bitcoin mining is currently only rarely worthwhile for individuals. On the other hand, crypto mining for Ethereum is also worthwhile for small mining systems, but the proof-of-stake consensus change is imminent, making mining obsolete.
The exemption limit in Germany is currently €256 per person on crypto mining profits. However, the federal government classifies crypto mining as a commercial activity that requires a license and leads to an obligation to pay trade tax.