What you need to know about crypto mining and staking?
On our page ‘What is Bitcoin?’, we gave an explanation of Bitcoin and cryptocurrency in general. Now we will take a closer look at two terms that are often mentioned in the same breath, namely crypto mining and staking. Both are interesting methods for those who want to accumulate a passive income, although they differ substantially from each other. How the two methods work, you can read on on this page.
It should be no secret that getting into cryptocurrency is one of the most interesting forms of investment of the last few years. For example, the price of Bitcoin was on the rise in 2020, which in some cases led to sky-high returns. At the same time, the trend of mining this digital currency increased, which manifested itself, among other things, in a run on powerful PC parts. But why is that? And what does this mean?
Bitcoin mining, what is it?
Cryptocurrencies such as Bitcoin can be traded for real money or other coins, for example on an exchange. This is of course all about taking the maximum advantage of the price movements of the coin. Because the price of one Bitcoin is very high right now due to the price increase, not everyone gets the possibility to own an actual coin. Instead, people can also buy a portion of Bitcoin, also called Satoshi. One Bitcoin equals 100 million Satoshi, which can be obtained on a trading platform or through a broker.
But there are also many people that try to make a buck in crypto trading in a different way: through crypto mining. Bitcoin is known to have a limit of 21 million coins that will ever be in circulation. Those coins are not all here yet, they must first be ‘mined’. If you compare Bitcoin to a gold mine, then those who mine Bitcoin are similar to miners.
When mining Bitcoins, your PC collects transactions by others within a special network called the Blockchain. This network, as the name suggests, consists of a chain of blocks. These blocks contain information about all kinds of transactions that need to be checked and bundled, a puzzle for which the solution is still missing. And strong hardware helps calculate that solution, which was the motivation for many to look for a so-called mining rig.
Since gaming PCs generally have powerful video cards and other hardware, they are commonly used as mining rigs. Thus, such a purchase means initial costs on eventually high power consumption, but there is a reward in return. Miners receive a reward in the form of Bitcoins for every completed block they add to the network. Why? Because they contribute to the development and security of Blockchain technology and collectively make all transactions transparent.
Is crypto mining still worth it?
To draw another comparison with the gold mine; in the beginning mining is often easy and can go fast. But in the long run, there are less solutions to be solved and there is an interest from more people so it becomes harder to keep mining. This is of course also the case with Bitcoin. It is the person who is the first to mine a block who receives the award. Moreover, the reward is halved every 210,000 new blocks. So without the right equipment, it is easier to focus on other coins. But because of Bitcoin’s high value, mining this crypto currency still remains the most attractive to many people.
Proof of Work
The reward system for bitcoin mining is also called Proof of Work, and involves increasing the amount of computing power needed to mine in the blockchain. The total of this is called hashrate. Based on the hashrate, the difficulty of processing transactions in the blockchain is determined. If more people are mining with increasingly powerful hardware, the hashrate goes up and with it the degree of difficulty for mining. The opposite is also true: if computers leave the network, the degree of difficulty goes down.
Proof of Work is therefore a reward for work. On the face of it, this may seem like a flawless system, but it is not without its drawbacks. For example, mining Bitcoin, and thus the expansion of the blockchain, requires more and more energy. In terms of the environment, this is a frequent criticism. Also, the chance of an attack by hackers is relatively high for small blockchains. This requires at least 51% of the total computing power. Today, Bitcoin is so large that it is practically impossible for hackers to amass that much computing power, but there are also smaller blockchains with the Proof of Work concept.
What is crypto staking?
The flaws of Proof of Work are leading to increasing support for another system, Proof of Stake. Ethereum is a cryptocurrency that is transitioning from Proof of Work to Proof of Stake. But what does this entail?
Proof of Stake
Let’s use Ethereum as an example, which is the first coin to transition to Proof of Stake and thus can serve well as an experiment for the rest of the coins. If the transition is successful, it is likely that more and more cryptocurrencies will eventually follow. These will then enter a new phase, or in other words an upgrade to 2.0. In the case of Ethereum, this is Ethereum 2.0 or ETH2.
The Proof of Stake concept removes some of the flaws of Proof of Work. For example, the need for an expensive mining rig and the energy consumption to create a block is a lot lower. The ‘mining power’ depends on the percentage of coins a miner has. The one with the largest stake is appointed to create a new block and receives a fee for it.
This prevents multiple people from having their PCs calculated unnecessarily, as there is less competition this way. In addition, the risk of a ‘51% attack’ is a lot smaller than with Proof of Work, because with this system people with bad intentions have to own more than half of the coins instead of computing power.
What is staking?
Staking is buying crypto currency with the intention of holding it for an indefinite period of time. The coins disappear into your crypto wallet with which you own value and receive interest on your investment at the end of the period. The blocks in the blockchain that run on Proof of Stake are created with this process, so by someone holding crypto through staking.
The longer you hold coins in a wallet, the higher the interest you receive as a reward. The staking process stops as soon as you remove the coins from the wallet. The interest varies from coin to coin and is usually paid out in the form of the coin itself. Compare it to putting money into a savings account. In this case, you are helping the blockchain by validating data from the network. Instead of competing based on computing power, the blockchain selects validators by looking at the number of coins they want to stake.
Which coins for staking?
Not all cryptocurrencies can be staked. Because for the process of staking, you need coins that work on the basis of Proof of Stake. Well-known choices are Binance Coin (BNB), Ethereum (ETH2) and Cardano (ADA). Sometimes there are conditions attached to the staking of the coins, such as a minimum term or value at which someone wants to stake.
Which coin has your preference for staking, depends on several elements. Try to consider not only the expected return, but also the lower limit that applies as a condition for discontinuation and price fluctuations. A coin that is worth little will yield little interest. Besides that, the coin in your wallet will fluctuate along with the exchange rate. So in short: you have a chance to profit from a rising price, but also run the risk of loss from a falling price.