Cryptocurrencies like Bitcoin, well almost exclusively Bitcoin, have been getting some play time in the popular media. Hopefully you understand what they’re talking about, if not check back to my earlier post “A Change in Direction”. Now you might be asking yourself, “How do I get some?”
Mining Cryptocurrencies is essentially using electricity to generate Cryptocurrency. Not all Cryptocurrencies can be mined. For those that can, the process involves looking for a new block in the currency’s blockchain. The miner who finds the block is rewarded with some units of the currency.
The process of looking for a block involves math, complicated and difficult math. The sort of math that would take you or me 30-45 minutes to do by hand with a calculator. Additionally, the more miners doing the same math for a currency increases the “Difficulty” of the math. New or less popular currencies are easier to mine until they become more popular. The more miners or powerful mining hardware working away at the currency, the more the completion rate of the calculation must be slowed down to keep the reward rate stable. The “Difficulty” of the calculations is proportional to the “Hash Rate” of the currency’s network and must adjust to speed up or slow down the reward frequency.
A later post will look at mining in more detail, but I will briefly touch on hardware concepts. Mining can be done on a computer’s CPUs, though the video card(s’) GPU(s), or with application-specific integrated circuit (ASIC) hardware.
Staking also involves electricity, but does not require math. With staking, one is rewarded for operating a node in the Network and holding on some units of the currency. The more currency held in the wallet the more often the wallet receives a deposit from the currency’s network. When I say, staking requires electricity, remember that Cryptocurrencies are digital, requiring computing hardware, which requires electricity. When the computer (desktop, tablet, laptop, ARM device, phone) is not running and connected to the network, Staking does not occur. Staking currencies to not require miners to generate more currency.
The acts of maintaining a node and holding a balance of currency results is two things. First, having more nodes in the Network increases the speed of transaction verification and keeps the network well distributed and healthy. Holding back portions of the currency from trading increases the rarity of the currency and helps support higher trading prices through the laws of supply and demand.
Master Nodes are very like Staking, but there some major differences. The amount or frequency of reward does not change with the amount of currency in the wallet of the node. Master nodes take a portion of the coins mined. Networks require a certain balance of the currency to qualify as a master node.
If you want to increase your reward with Staking, buy and hold more currency in your staking wallet. If you want to increase your reward with Master Nodes, create a new master node and buy the minimum amount of currency required to run the master node.
You’ve heard of New York Stock Exchange (NYSE), right? There are several others around the world where people trade fiat currencies for pieces of a company. You may not have heard of FOREX exchanges. These market places are where people come to trade currencies.
Conceivably, you could trade or exchange some US Dollars (USD) for Great British Pounds (GBP) one morning at the Exchange rate of 1.60 USD for 1 GBP. Later that day the rate has changes and you can change your 1 GBP back to 1.80 USD. So over the course of the day you’ve made 20 cents just moving your balances from one currency to another.
The same concept is available in Cryptocurrencies. You can move your balances between Bitcoin and Altcoins, Bitcoin and fiat, fiat and Altcoins…. Altcoins and Altcoins.
Upcoming posts will break out some topics introduced in this blog and cover other concepts in detail.
Wikipedia – Bitcoin
Bitcoin Forum – The most popular place to discuss all Cryptocurrencies
Cryptocurrency Trading Charts
Most Profitable Mining Calculations