Introduction to Crypto Currency Mining Terminology

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  • Written on: February 22nd, 2014

I have been playing around with crypto-currency mining for the past month and one of the things I noticed is that is is still way too technical for the average person to grasp.  I obviously have a technology background and access to some of the best break-fix technicians and facilities in the area, so I was able to figure it out for the most part.

Over the years I built Schrock Innovations Computer Company from the ground up by making technology understandable to the average person whenever possible.

I plan on writing more about my entrance into the crypto mining community, and those posts will have to have technical concepts in them simply because there is no way around it.  I am writing this post to be a central reference point for those technical terms and concepts so that as I write, readers who find these posts have a place to look to understand what in the world I am talking about.

What is a Crypto Currency?

Crypto currency is a digital currency that does not exist in the physical world.  Much in the same way you can spend digital dollars with a credit card that you never held in your hand, crypto currencies like Bitcoin, Litecoin, and Dogecoin can be – to various degrees – exchanged for goods, services, or typical fiat currencies liek US Dollars or Euros.

Crypto currencies are not stored in bank accounts like traditional fiat money.  they are stored in digital wallets that can be save to a computer’s hard drive, a flash drive or even printed out on paper.  Just like a real wallet, if your digital wallet is lost or stolen your money is simply gone.

Crypto currencies can be earned by selling goods or services to another party who sends crypto currency from their wallet to your wallet.  It can also be “discovered” or mined by having your computer solve complex math problems over time.

Just like the Federal Reserve can release more dollars on an ongoing basis, mining releases more crypto currency into the marketplace over time as people use their computers to mine for it.

Unlike the Federal Reserve, each time a computer successfully mines some crypto currency, the next batch becomes harder to mine.  This means that as more of a currency is released, it releases at an ever decreasing rate.  Additionally, each crypto currency has a cap on the amount of total currency that will ever be created.

What is Mining and How Does it Work?

Mining is the process by which a computer solves a complex math problem in the hopes of uncovering a new crypto coin.

Anyone can mine with their computer’s processor, more advanced graphics cards (GPUs or ‘gaming cards’), and specialized hardware (ASIC systems).

The math problems that are solved by mining are so complex that even a top-shelf computer processor (CPU) can’t solve them very quickly (think 150+ days to solve one problem that may or may not pay out any crypto currency).

Modern graphics cards actually have much, much more computing power than a computer’s processor, so they can solve the problems more quickly (think 15 days to solve one problem that may or may not pay out).

All crypto currencies (the two different types are scrypt and SHA) can be mined with CPUs and GPUs.  ASIC equipment can only mine SHA crypto currencies at this point, and they are orders of magnitude faster than GPUs (think 5 hours to solve a problem that might pay out).

No matter which option you choose to mine with you will need a mining client to look for problems to solve and begin working on them.  The most popular clients are cgminer (for AMD based video cards), cudaminer (for NVIDIA cards), and minerd (for CPU mining).  There re a lot of variables to consider in setting up and configuring your mining system.  This post is an overview so I will cover them in more detail in a later post.

How Can You Make Real (i.e. fiat) Money Through Mining?

Once you set up a computer to solve the complex problems they can earn crypto currencies.  These currencies can then be exchanged for fiat money (USD or EURO) throgh crypto currency exchanges.

Some of the most popular exchanges are www.btc-e.com and bitstamp.com.  You can visit these websites to get current exchange rates for the multitude of crypro currencies that are out there.

When you mine your own currency, it gets deposited into your digital wallet.  You then send the currency from your wallet to the exchange, convert it to whatever currency you desire (USD, Euro, or Ruble) or you can try your hand at day trading between different currencies to multiply (or lose) your earnings.

Once your mined currency has been converted into fiat, you can send it to your bank account through a wire transfer.

 What are the Risks and Costs?

If you want to get serious about mining crypto currencies you will need to invest some start-up capital into higher-end graphics cards or ASIC equipment.

You are going to be mining coins that can have violent swings in their value, or become absolutely worthless in a blink of an eye.

You will be dealing with exchanges in foreign counties that are operating completely without regulation.  If an exchange closes down or just disappears all of your currency (fiat or crypto) can go with it (look at what happened to Mt. Gox).

Aside from equipment and time, your only overhead costs are power and cooling.  Mining equipment uses a LOT of power – as much as 300 Watts per video card and will generate more than enough heat to make a small room uncomfortably hot.  With power running about .10/kWh in Nebraska, you need to keep your power costs in the equation when considering your profitability.

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