Similar to mining in the common sense of the word. Just like you would mine for gold, you mine for cryptocurrency, just using computer. Instead of posting a huge post over the process (trust me the remaining part of my post will be long enough), BTC Wiki https://en.bitcoin.it/wiki/Mining gives a good overview. Make sure to look at the links in the “see also” at the end. The process remains the same for other cryptocurrencies, the other cryptocurrencies just use different algorithms and provide different rewards. The computer you set up to mine works to confirm the transfer of a cryptocurrency from one user to another. Numerous other computer around the world also work to confirm this transaction. Once the transaction confirmed, the blockchain (ie: ledger) get updated to show the transfer. As a miner, I get rewarded for this work with cryptocurrency.
IMO, mining BTC coin directly, by yourself, individually would not be a profitable endeavor. You may have to mine for over a year, just to get one reward. Or you would have to spend millions of dollars to create a mining farm to do your mining. The difficulty (the amount of time it takes to confirm transactions to get a reward) are too high for small miners. What does a small miner do. Instead, small miners band together to mine in pools.
Mining pools are groups of small miners who work collaboratively to confirm the mining transactions to get the reward. If I combine my mining power with 10000 other small miners, we each take a small portion, and we could cut our reward time down to a few days. We then split the reward between everyone who contributed to confirming it. This improves my rewards, but BTC coin itself still requires a ton of work to get a reward. Even with the split, I may only earn a buck a day.
Cryptocurrencies are set up, however, to require more and more work to receive less and less reward as time goes on. Similar to mining precious metals from the ground. When BTC coin itself started mining years ago, it might have only taken confirming 10 transactions to get 100 BTC. Years later, now it may take millions of confirmations to get 10 BTC. The BTC algorithm only has a set number of coins that can ever be mined, 21 million (other cryptocurrencies have different limits). As time goes on, it will take longer and longer for less reward. Just like precious metals, those who have BTC (either through mining or trading) and hold their BTC without selling will see an increase in price. Just like buying and holding precious metals. Only so much precious metals exist and the more limited the market gets, the higher the price. So what can a small miner do; a buck a day sucks. Now we get into the arena of other cryptocurrencies.
Other groups have launched their own cryptocurrencies to rival BTC coin itself. Because they are based on the same principal of limited number of coins, but the coins are younger, I can get higher rewards for mining them.
Cryptocurrencies can serve other purposes than being just a unit of value. For example the coin XRP Ripple works as a clearhouse for confirming other transactions of value (ie: fiat currencies, commodities, frequent flier miles, etc). https://en.wikipedia.org/wiki/Ripple_(payment_protocol)
As you can see by the following link https://www.coinwarz.com/cryptocurrency numerous coins exist (these are just some of the big ones, many more exist). The market uses these coins for various reasons, but each pays a reward for confirming the transactions. As you can see by the list, BTC is only the 10th most profitable coin to mine right now. But just like a regular market, the profitability of a coin may rise and fall on a daily basis. What a small miner to do; I can’t sit around and switch my machines from one coin to another. We use multipools.
A mining multipool is just like a regular mining pool where small miners band together to mine. The difference occurs because the pool checks to see what coin has the most profitability and automatically sends the transactions to my miner which will generate the most profit. This allows me to set my miner to work only for this multipool, and they do the switching for me. The multipool owner takes a very small percentage for this work. This allows my miner to generate the most profit. I may now be making 5+ dollars a day. Further, besides pools which switch algorithms, you can have mining software which switches multipools. I use a software called Awesome Miner. This software allows me to designate which multipools I would like to mine from (some multipools have less owners fees or mine different sets of coins). The software then looks to see which multipool then provides the highest reward and switches between the pools and the coins within the pools to give me the best reward. I have now bumped my reward up to maybe 7+ dollars a day.
Mining different coins, creates its own issues, however, in now I may have 10 different coins. I don’t want 10 different coins because I only want the most stable coins. Most good multipools are set up with a autoexchange function. The multipool has an agreement with a cryptocoin exchange. I tell the multipool the coin in which they should reward me. The multipool then takes all the other coins I earn, automatically exchanges them on the coin exchange for the coin I want, then rewards me with the coin for which I asked. I only use multipools which have an autoexchange function.
The above is the basic functionality of mining. A well set up small miner with with 4-5 machines costing less than $10k total to set up could easily earn $40-50 bucks a day. I have machines which have run for 3+ years so I have spread the start up cost over time and I am definitely in the black. I like the mining function to serve as an offset against price swings in the crypto market. It works just like dividends with stocks and the idea of dollar cost averaging. I haven’t focused on too much trading of cryptos, but I have done some.
This gets us into [quote=“TexHorn, post:43, topic:2189”]
Care to share any coins/tokens that you’re particularly bullish on?
IMO, I do not like to hold any other the smaller coins. I prefer to have coins with a significant trading volume. In this way I know I would not get stuck with a coin I could not trade or would get little value as no one else wishes to buy it. If you use the link above and change the sort from profitability to exchange volume, you can see BTC dwarfs all the other ones. This link gives an overview of the bigger coins. http://www.visualcapitalist.com/comparing-bitcoin-ethereum-cryptos/ I posted above about my opinion on BTC. IMO, I would have it as a hold until the hard forking issues resolve themselves. IMO I like ETH Etherium https://en.wikipedia.org/wiki/Ethereum, XRP Ripple, and XMR Monero https://en.wikipedia.org/wiki/Monero_(cryptocurrency) for different reasons. ETH and XMR’s ability to be used for other businesses and transactions (see proposed uses) IMO shows a potential for enormous growth into everyday use unrelated to cryptocurrencies, giving them a staying power other cryptocoins may not have. XMR’s ability to be untraceable has many benefits. In effect XMR is cryptocurrencies version of cash. People may say it can be used for illicit transactions, true, but I don’t see drug dealers using debit cards, but greenbacks. Cash will always have its place and IMO XMR is cryptocash.
The above is just a very short overview. I have, and will continue to research a lot on cryptocurrencies and find new info, uses, etc. all the time. Please don’t take any of the above as investment advice! Just like any investing, cryptocurrencies involve risk. I have only provided my opinion. I have decided to make cryptocurrencies as part of my portfolio, but they are NOT my total investments, you need to make your own decisions and reach your own comfort level. IMO, cryptocurrencies are here to stay and a person could generate some very good wealth from them.