Cryptocurrency Mining For Dummies

Peter Kent and Tyler Bain are coauthors of Bitcoin For Dummies, 2nd Edition. Peter created the Crypto Clear video course to assist would-be investors in understanding cryptocurrency. He is also the author of SEO For Dummies. Tyler is a professional electrical engineer and an active crypto miner.

Introduction 1

About This Book 1

Foolish Assumptions 2

Icons Used in This Book 2

Beyond the Book 3

Where to Go from Here 3

Part 1: Getting Started with Cryptocurrency Mining 5

Chapter 1: Cryptocurrency Explained 7

A Short History of Digital Dollars 8

First, take the Internet 8

Add credit card confusion 8

Add a dash of David Chaum 9

Result? DigiCash, E-Gold, Millicent, CyberCash, and More 10

The Bitcoin white paper 10

Bitcoin: The first blockchain app 11

Who (or what) is Satoshi Nakamoto? 12

What’s the Blockchain? 13

Blockchain around the world — the blockchain network 13

Hashing: “Fingerprinting” blocks 14

Blockchain is “immutable” 15

Where’s the Money? 16

What’s the Crypto in Cryptocurrency? 18

Public Key Encryption Magic 20

Messages to the blockchain 21

Signing messages with the private key 22

The blockchain address — your money’s home 22

Sending a transaction message 23

Unraveling the message 24

The Basic Components of Cryptocurrency 25

What’s in a wallet? 25

Private keys create public keys 26

Public keys create blockchain addresses 26

The private key controls the address 26

Where Does Crypto Come From? The Crypto Mines (Sometimes) 27

Chapter 2: Understanding Cryptocurrency Mining 29

Understanding Decentralized Currencies 30

Exploring the Role of the Crypto Miner 31

Making Cryptocurrency Trustworthy 32

Reaching Agreement through Consensus Algorithms 34

Looking at the Cryptocurrency Miner 35

Making the Crypto World Go ‘Round 37

Chapter 3: Building Blocks: The Transaction’s Journey to the Blockchain 39

The Cryptocurrency Network 40

Submitting Transactions 44

Looking at transaction fees 44

Change address 46

Verifying the transaction 47

Competing for Bitcoin, the ten-minute contest 48

Winning the Bitcoin 50

Chapter 4: Exploring the Different Forms of Mining 53

Proof-of-Work Algorithms 53

Proof-of-work applications 55

Proof-of-work examples 56

Upsides 58

Downsides 59

Proof-of-Stake Algorithms 60

Proof of stake explained 60

Proof-of-stake selections 62

PoS example cryptocurrencies 63

Upsides 64

Downsides 64

Hybrid Proof of Stake/Proof of Work 65

Hybrids explained 66

Hybridized examples 68

Upsides 68

Downsides 69

Delegated Proof of Stake 69

Delegated Byzantine Fault Tolerance 69

Proof of Burn 70

And More 71

Part 2: the Evolution of Cryptocurrency Mining 73

Chapter 5: The Evolution of Mining 75

Proof of Work Mining Evolution 76

CPU mining 76

Adoption of GPUs 76

Rise of the FPGAs 77

Dominance and efficiency of ASICs 77

The Days of Solo Mining 79

Pool Mining 80

What is a mining pool? 80

Choosing a pool 81

Pros and cons of pool mining 82

Cloud Mining 83

Pool mining versus cloud mining 84

Pros and cons of cloud mining 84

Chapter 6: The Future of Cryptocurrency Mining 85

Incentivization of Energy Exploration 85

Underutilized hydroelectric dams 86

Oil and gas flaring 87

Continued Computational Efficiency Improvements 88

Doing more with less 88

Approaching the limits of physics 88

Corporate and Nation State Participation 89

Nation states 89

Corporations 91

Future speculation 91

The Mythical Miner Death Spiral 92

Block difficulty 93

Block difficulty adjustment algorithm 93

Miners of last resort 95

Part 3: Becoming a Cryptocurrency Miner 97

Chapter 7: Mining Made Simple: Finding a Pool and Preparing an Account 99

Understanding How Pool Mining Works 100

Choosing a Pool 102

Pools that are good starting points 103

A few of the largest pools 103

Incentives and rewards 105

Pool ideology 108

Pool reputation 108

Pool fees 110

Pool percentage of the total network 110

Setting Up a Pool Account 113

Server choice 113

Mining equipment pool settings 113

Payout addresses 114

Payout thresholds 115

Researching Mining Pools 115

Cloud Mining 116

Working with Cudo Miner 118

Chapter 8: Picking a Cryptocurrency to Mine 123

Determining Your Goal 124

Mineable? PoW? PoS? 126

Researching Cryptocurrencies 127

Mining profitability comparison sites 127

Algorithms and cryptocurrencies 131

The cryptocurrency’s details page 138

Mining-profit calculators 140

The cryptocurrency’s home page 141

GitHub 142

The cryptocurrency’s Wikipedia page 143

Mining forums 144

Going Deep 144

Longevity of a cryptocurrency 144

Hash rate and cryptocurrency security 145

Community support 146

Knowing That Decentralization Is a Good Thing 148

Finding Out It’s an Iterative Process 151

Chapter 9: Gathering Your Mining Gear 153

Selecting the Correct Computational Mining Hardware 153

Specified hash rate 154

Specified power consumption 156

Equipment cost and other considerations 161

Length of time your hardware will be viable 162

Mining Equipment Manufacturers 164

ASIC rig producers 164

Mining container producers 165

GPU rig producers 165

Finding a Wallet to Store and Protect Your Private Keys 166

Where to Mine? Selecting a Viable Location 166

Vet your home for cryptocurrency mining 166

Communication requirements 167

Power source thoughts 168

Data centers and other dedicated commercial locations 172

Chapter 10: Setting Up Your Mining Hardware 175

ASIC Mining Rigs 175

Racks 176

Power supply 177

PDUs 179

Network and Ethernet connection 180

A computer to control your rig 181

GPU Mining Rigs 183

Getting your GPU rig online 183

Building your own GPU miner 185

CPU Mining 195

Mining Software 196

Pool mining 196

Solo mining 200

Part 4: the Economics of Mining 201

Chapter 11: Running the Numbers: Is It Worth It? 203

Factors That Determine Mining Profitability 204

Cost of equipment 204

Hash rate of your equipment 206

Mining rig efficiency 210

Cost of electricity 213

Total network hash rate 217

Information about your pool 217

Block earnings 218

Cryptocurrency conversion rate 218

Calculating Your ROI 218

Your block earnings 219

Your expenses 223

Calculating ROI 223

Knowing the unknowns 224

Online profitability calculators 225

Historical estimates 226

Chapter 12: Reducing Negatives and Gaining an Edge 229

Profitability through Efficiency 230

Upgrading aging equipment 230

Mining different cryptocurrencies 230

Using exhaust heat 231

Reducing electricity bills 232

Knowledge Is Power 234

Why current events are important 235

The “fork wars” 236

Your forking decisions 240

Here Today, Gone Tomorrow 244

Evaluating Your Mining Resources 245

Increasing mining competition 245

Increasing block difficulty 245

Diminishing returns due to halving events 246

Chapter 13: Running Your Cryptocurrency Business 249

What to Do with Your Mined Cryptocurrency 250

Convert your cryptocurrency 250

Buying equipment and paying bills 250

Paying with crypto when you can’t pay with crypto 251

Expand or upgrade your mining operation 253

But don’t forget the tax 253

Hodling your cryptocurrency 253

Invest your cryptocurrency 255

Donate your cryptocurrency to charity 256

Gift your cryptocurrency 256

Determining When to Sell 257

Cryptocurrency market indicators 257

Where to sell: Cryptocurrency exchanges 260

Dollar Cost Averaging 260

Dollar cost averaging your purchases 261

Cost averaging your exits 262

Custodial exchange risk 262

Tax and Your Mining Business 263

But you’re mining, not investing 263

It gets complicated 264

Scaling Up? 265

Do not overextend 266

Milestones to meet before you reinvest 266

Planning your expansion 268

Part 5: the Part of Tens 271

Chapter 14: Ten (or So) Tips for When the Market Dips 273

Have a Plan, Hedge Your Mine 274

How Long Can You Last? 275

Learn from Market History 277

Don’t Panic! (Keep Calm and Carry On?) 279

Buy the Dip 280

Look for the Advantages 281

Anticipate the Market Recovery 281

Learn From Your First Dip 282

Consider Market Volatility 283

Switch to Another Cryptocurrency 285

Stop Mining! 286

These are simple calculations 287

Stop or go? 289

Chapter 15: Ten Ways to Boost Your Return on Investment 291

Doing Your Homework 291

Timing Your Entry 292

Playing the Markets 293

Identifying Low Hash Rate Alternative Cryptocurrencies 293

Mining the Start of a Chain 294

Starting Small 297

Scaling Choices 297

Finding Cheap Electricity 298

Cooling Efficiently 299

Scoring Hardware Deals 300

Chapter 16: Ten Types of Cryptocurrency Resources 303

Cryptocurrency Market Trackers 304

Mining Profitability Estimation Tools 304

Cryptocurrency Reddit Pages 304

Blockchain Explorers 305

Data Visualizations 306

Cryptocurrency Data and Statistics 307

Cryptocurrency Wikis 307

Cryptocurrency White Papers 308

The Satoshi Nakamoto Institute 308

A Cypherpunk’s Manifesto 309

Bitcoin Guides and Walkthroughs 309

Chapter 17: Ten Criticisms of Cryptocurrencies and Mining 311

Energy Consumption 312

Wasted Processing 315

Scalability, Transaction Speed, and Throughput 317

Coin Distribution Fairness 319

Market Bubbles and Volatility 319

Centralization 320

Scams and Rip-offs 321

Hardware Price Inflation and Scarcity 322

Fire Hazards 323

Neighbor Complaints 323

Index 325