How to Mine Crypto in 2024?
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Ever wonder where new cryptocurrency coins come from? Is there a metaverse mint responsible for minting new tokens? Or a virtual vault? Not quite.
In this guide, we’ll discuss the process of “mining” cryptocurrency and learn more about this increasingly popular source of passive income.
What is crypto mining?
Crypto mining refers to the process by which a global network of computers all connected to the same blockchain work to verify that transactions on that blockchain are legitimate and added to the blockchain correctly. It’s also one of the ways new cryptocurrency coins or tokens are created.
In addition to generating new crypto coins or tokens, mining helps ensure the security of the underlying blockchain by decentralizing the verification process for transactions. Large networks of “miners” responsible for verifying transactions make it very difficult for a single bad actor to hijack more than 50% of the processing power needed to make fundamental changes to the blockchain.
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Is crypto mining legal in Canada?
Yes. Crypto mining in Canada is legal in all provinces, including Ontario.
How does crypto mining work?
While some people acquire cryptocurrency by volunteering to participate in the minting process, this is an expensive and risky undertaking. Here is how it works:
- New transactions are bundled by blockchain verification.
- The blockchain broadcasts this new “block” of unverified transactions to “miners”.
- Miners compete to verify transactions and validate a block by solving complex mathematical puzzles using sophisticated algorithms.
- Validated blocks are added to the blockchain and the miner receives new coins in exchange for the work.
For example
For example, Alice decides she’d like to purchase a Murakami Flowers NFT she’s had her eye on for some time. As part of the purchase process, she enters her private key, which sends a request for a transaction to the blockchain. The blockchain bundles Alice’s request into a potential new block and broadcasts a request for verification to particular computers that have volunteered their processing power.
These computers, called “miners” compete to generate a series of numbers, called a hash, that satisfies specific conditions set by the blockchain. The first miner to solve the puzzle shares the solution with other miners. If everyone agrees, the block of transactions is considered validated. The miner who solved the puzzle receives cryptocurrency in exchange for solving the puzzle and validating the block.
This type of system, where a miner provides proof of work (PoW) in exchange for new tokens, helps protect the blockchain by decentralizing the verification process across hundreds, sometimes thousands of people. It would be very difficult for a bad actor to compromise the entire blockchain because doing so would require either taking over an extensive part of the network or creating a single computer with processing power greater than 51% of the entire network.
Some people also use the term “mining” to refer to the process by which individual validators earn coins in a proof of stake (PoS) blockchain. In this guide, however, we’ll focus on the more commonly known PoW protocol.
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What is the purpose of crypto mining?
In addition to creating new coins, crypto mining has a number of other important functions for the underlying blockchain:
- Creating new blocks. New blocks can be added to the chain only after the transactions they contain have been independently verified by miners.
- Security. The more miners available to verify transactions, the harder it is for bad actors to take over 51% of the network power required to modify existing blocks or override community decisions.
- Validating transactions. Without validation, buyers and sellers exchanging goods and services via the blockchain can’t complete their transactions.
Let’s explore this a little deeper. At the heart of every blockchain is something called a “consensus protocol”, a mechanism by which independent members of a specific chain validate individual transactions and agree on their incorporation into the public ledger that is the chain itself. Miners, therefore, play a critical role in maintaining and expanding the chain by verifying exchanges.
Verifying transactions takes time and resources. Efficient mining requires specialized equipment and can make big energy demands on the individuals running it. To compensate miners for doing this important work, blockchains offer them cryptocurrency in exchange for validating blocks and adding them to the blockchain.
The consensus mechanisms of which miners are part also ensure the security of the overall blockchain. By distributing the work of verifying transactions over a global network, blockchains make hijacking the process extremely difficult. In a traditional, centralized system, bad actors only need to take over a single device to gain control over an entire system. With a decentralized network, the bad actor would have to create a device with more power than 51% of the entire network or take over enough devices to control 51% of that network - a virtually impossible task.
How to start mining crypto?
Ready to start bitcoin mining? Are you asking yourself what equipment Is needed to mine crypto?
If you’re interested in mining crypto, you’ll need to purchase the components for a specialized type of computer known as a mining rig.
Because they require enormous amounts of processing power, mining rigs don’t run cheap. While you can purchase a pre-built model from a specialist manufacturer, it may be cheaper to build a crypto mining rig from individual hardware components if you have the know-how.
If you choose to buy a crypto mining rig, you’ll need to look for a crypto mining setup with a powerful graphics processing unit (GPU). As a rule, a good crypto-mining GPU will have at least 5GB of RAM. You’ll also need crypto mining software for your preferred blockchain ecosystem to solve the mathematical problems embedded in new blocks.
In addition to building a mining rig, you’ll need to take into account the cost of electricity to run it. Mining a single Bitcoin requires around 1500 kWh - about the same amount of electricity that the average Canadian home uses in three months.
If the time and expense required to maintain or build a crypto-mining rig seem daunting, not to worry. Crypto cloud mining allows potential miners to “rent” processing power from a cloud computing company. Rather than build their own rigs, cloud miners pay to access the resources of dedicated servers housed around the world. In return, the mining company claims a share of any coins that users receive in exchange for validating transactions.
You can also earn crypto by “staking” some of your existing coins to become a validator on a blockchain or by purchasing them directly on a centralized or decentralized exchange.
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Is crypto mining worth it?
Deciding whether the rewards - new coins - compensate for the time and expense associated with mining cryptocurrency depend on your personal finance priorities and risk appetite.
Solo miners may face challenges competing to validate blocks due to limited processing power, even with an expensive crypto-mining rig. Equally, the reward: cryptocurrency coins, can itself carry risks and tax implications that may affect profitability.
To understand the benefits and drawbacks of cryptocurrency mining as a Canadian, it may help to speak to a professional financial adviser qualified to advise you on how holding or selling cryptocurrency will impact your bottom line.
Which cryptocurrencies can you mine?
In general, any blockchain that uses a Proof of Work (PoW) system to validate transactions will have coins available for mining. This includes Bitcoin, the most popular coin for mining, as well as altcoins like Litecoin, Monero and Dogecoin.
How to get crypto without mining?
If the idea of earning crypto and contributing to a blockchain ecosystem appeals to you, but the high energy costs or expense of a mining rig do not don’t fret. You can still get crypto without mining by participating in blockchains that use a PoS consensus mechanism or purchasing coins directly on an exchange.
In a PoS consensus mechanism, individuals who want to take on the responsibility of verifying transactions consent to lock up some of their existing cryptocurrency, also known as a “stake”, in exchange for the chance to be selected to validate a block. Correctly validated blocks earn new coins, while mistakes can lead to penalties in the form of deductions from their staked coins.
Good to know
Learn more about the benefits of staking crypto to earn coins.
Don’t yet have crypto to stake? Individuals can trade Canadian dollars for coins on cryptocurrency exchanges. Once purchased you can move these coins to a cryptocurrency wallet and stake them on a compatible blockchain to begin validating.
Make money from your coins
Is crypto mining taxable in Canada?
The Canadian Revenue Authority (CRA) has stated that cryptocurrency is taxable as an asset and that those who trade cryptocurrency will need to pay capital gains on any profits.
When it comes to crypto mining, whether you pay taxes and how much will depend on the size and frequency of your mining activities. In some cases, crypto mining may count as a business; however, the CRA has not issued any firm guidelines in this regard. Instead, the agency will decide on a “case by case” basis.
Intensive crypto miners would do well to keep detailed records of their expenses and coins earned and make a full disclosure to the CRA.
How much can you earn mining?
Is crypto mining profitable in Canada? That depends in part on how you go about mining and how much cryptocurrency a given blockchain “pays” miners for their work. Bitcoin, for example, halves the number of coins awarded for validating new blocks approximately every four years. In 2009, a miner earned 50 BTC for creating a block. Today, that work is worth 6.25 BTC.
If you choose to build or buy a cryptocurrency mining rig, you’ll need to consider how hardware and energy costs affect your profits. Likewise, cloud miners must pay rental fees and a commission to the mining company.
What are mining pools?
In the race to validate high-value blocks, solo miners face a distinct disadvantage versus crypto mining companies or large financial institutions with multiple crypto mining machines and the best crypto mining software.
Rather than go it alone and risk reduced profits, some miners combine their resources to create a pool of associated computers all working together. When a pool succeeds in validating or “winning” a block, members split the proceeds.
What is cloud mining?
Less resource intensive than traditional cryptocurrency mining, cloud mining allows individuals to “rent” processing power from a larger company that owns and maintains the hardware and software required for the actual mining. In exchange for the use of their equipment and resources, cloud mining companies will take a percentage of any coins you earn as a result of successful mining.
Derek would like to experiment with crypto mining but doesn’t have the cash to spend on a crypto-mining rig. Instead, he creates an account with a popular cloud mining company and “rents” the processing power.
Marie has invested in cryptocurrency for years and would like to try her hand at mining. She’s also a staunch environmentalist, however, and doesn’t like the high energy costs associated with building and running rigs. By renting processing power from a cloud miner, Marie pools her efforts with other miners, thereby reducing overall consumption.
If the high price of equipment and energy associated with mining crypto doesn’t fit with your budget or your priorities, cloud mining may be the best
What is the best crypto mining software?
In addition to a cryptocurrency mining machine, also called a rig, you’ll need access to crypto mining software. These programs connect your mining rig to the blockchain and allow it to search for blocks in need of validation and communicate results to other miners as part of the consensus mechanism.
To incentivize mining, popular blockchains share their cryptocurrency mining software at no cost. That means that the “best” crypto mining software should be compatible with the coins you’d like to mine - and completely free. For example, if you want to earn Bitcoin, simply download the blockchain’s Bitcoin mining software directly.
Some developers claim to have improved on the basic source code of mining software to make the process more efficient and give minders an edge. These mining apps generally charge a fee, however, and it can be difficult to verify claims.
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