How Mining Works
For most users of cryptocurrencies it is not necessary to understand how the mining process in itself works, but it is fundamentally important to understand that there is a mining process to create the virtual currency. Unlike currencies as we know them today where governments and banks can simply choose to print unlimited amounts (Not saying they do so, just a point), cryptocurrencies has to be mined by users using a mining program that solves sophisticated algorithms in order to release blocks of coins that can go into circulation.
This is part that makes the cryptocurrencies unique, as there is nobody who can simply press a button and get unlimited coins. Everybody can compete equally while mining coins, by buying the same equipment as one another. The different cryptocurrencies uses different types of algorithms in order for the blocks to be released, but in general it is not something that you should be using your computer to do as it takes specific equipment to mine and it will provide you with a huge electricity bill compared to the profits you will be able to make from it. It is also worth noting that the more coins that has been mined from a cryptocurrency, the more difficult it gets to release new blocks and thus get new coins. The algorithms has been made this way, to ensure that all the coins would not be mined instantly and leave room for the currency to stabilize and not be over populated from the beginning, thus not having any significant value for anyone besides the miners.
Cryptocurrencies have a limited amount of coins that can be mined and once they have all been mined, there will be no more of them being created as it is virtually impossible. This means that when all 21 million Bitcoins has been mined, they will be the only coins in circulation forever and no further Bitcoins will be added to the system. Same goes for all other cryptocurrencies, which is why many people see them as a good alternative to the currencies we have today that is based on nothing but goodwill between countries in order to ensure the value of the currency doesn't fluctuate.
There are two simple steps in the mining process for cryptocurrencies, which we will be describing below as user-friendly as possible. Please bear in mind that we do need to use some technical terms in order to correctly describe how it works.
Please be aware that it is currently quite difficult to mine coins for a profit, as equipment, electricity and so on will cost you more than to simply buy a Bitcoin or similar. Instead we suggest that you have a look at different cryptocurrency exchange sites, where you can buy cryptocurrencies easily with your money and save the hassle of having to mine.
Some of the most popular and trusted sites to purchase Bitcoins or other cryptocurrencies includes Coinbase, Cryptsy and AlfaCashier, where you can easily purchase, store and sell your cryptocurrencies.
Cryptocurrency Mining Program
The very first thing you need in order to start mining coins is to obtain the mining program that is associated with the cryptocurrency that you want to mine. For the larger coins you can find different mining programs that all share the same mining pool, while the smaller coins usually just have one mining client, which also works as the wallet of the coin. Simply download the mining program, install it and you are ready for the next step.
When you first download the mining program it will have to connect to the network and synchronize with it. This can take everything from a few minutes and up to several hours, depending on how many blocks you need to solve first before you can synchronize. Once the synchronization is done then you are basically ready to mine.
All you need to do from here is to go to the mining part of the wallet, enter the values you want to have and press the "start mining" button. The system will then begin to "mine" for coins and depending on your system you will see some results within a couple of days. There are a lot more to mining in general, which we have covered in the How To Mine article, where you can read about hashes, blockchain and much more.
Each cryptocurrency has made a decision regarding which algorithm they wish to use to mine their coins, before they are created. There are two different algorithms that are used for almost all the coins that is in existence today, which is the SHA-256 and Scrypt algorithms. They are both very difficult to mine with, becoming increasingly difficult the more coins that has been mined. We have gathered a small explanation of how the algorithms work exactly, so you can understand mining a little better:
The SHA-256 algorithm is the first algorithm that was used with a cryptocurrency, when the Bitcoin was created using it. SHA-2 which the SHA-256 is under is created by the National Security Agency (NSA) and was published in 2001. SHA stands for Secure Hash Algorithm, which makes fine sense for cryptocurrencies as you will need to solve the hash algorithms in order to release coins. The more coins that will be mined, the harder the hash algorithms will become as it is originally used as a security system tool for companies and governments.
The Scrypt algorithm that cryptocurrencies use is a "proof-of-work" algorithm, which is basically using the same idea behind the Scrypt algorithm, but is targeted against releasing blocks rather than block an attack. Scrypt is a key derivation function which was created by Colin Percival, created to require large amounts of memory on a computer performing large scale custom hardware attacks. It was released in 2012 and was quickly used by cryptocurrencies for mining coins as another way than the SHA-256 algorithm that Bitcoin used. Scrypt is seen as a better algorithm for miners as you can buy equipment that will significantly improve your performance compared the SHA-256 where you cannot buy equipment to make ideal mining.