How Are Cryptocurrencies Mined?

Cryptocurrency — it’s the talk of the decade. 13 percent of Americans traded cryptocurrency just last year.

The 21st century has seen the internet transform our lives. Crypto makes use of the internet to transform the way we look at business, the economy, and currency itself.

There are a lot of terms that get thrown around when one talks about cryptocurrency, however. One of these terms is cryptocurrency mining.

We understand why this term is confusing. Cryptocurrency is supposed to be a completely digital currency — what does mining have to do with anything?

If you’ve found yourself asking this question, you’ve come to the right place. This article will walk you through everything you need to know about crypto mining, so you can get one step deeper into the world of cryptocurrency investment.

The Blockchain

Blockchain is another one of those words you hear thrown around with cryptocurrency. But though you hear these terms talked about it often, only 1 in 10 people know how cryptocurrency functions. Blockchain is key to all things cryptocurrency — so what is it exactly?

At the end of the day, blockchain is simply a way of using the internet to verify the authenticity of certain steps in a process. With blockchain, every single step of a transaction is given a serial number entered as a “block” into an internet “chain” that makes sure everything is running authentically.

This is extremely important to cryptocurrency. There are no physical tokens in cryptocurrency, so the only way to make sure people are counterfeiting is to check the authenticity of every cryptocurrency interaction.

Key to understanding blockchain is this: blockchain can work without cryptocurrency, but cryptocurrency cannot work without blockchain.

So how exactly does that cryptocurrency verification work? Cryptocurrency mining!

What is Cryptocurrency Mining?

When each step of a process is entered into a blockchain, it’s given a complex cryptograph, that’s pre-assigned to be one of a kind. Anonymous people solve the cryptograph (with the help of very advanced computers) to check the authenticity of the interaction.

Since no two cryptograph numbers are alike, solving for one — and getting the answer right — means you’ve verified that part of the process.

In cryptocurrency, it’s very easy to motivate people to solve these complex problems. When someone solves one of these, they’re paid in that cryptocurrency.

At the end of the day, in a literal sense, it has nothing to do with mining at all. Cryptocurrency mining is a metaphor. You’re helping bring cryptocurrency into the world, and getting to “take-home” some cryptocurrency in exchange — do you see how it sort of connects to the process of mining a resource?

Understand the World of Crypto

If you jump online into the middle of a conversation about cryptocurrency, you’ll encounter a lot of strange terms that people like to throw around. One of these terms is “cryptocurrency mining”. While people like talking about crypto, not everyone knows what these terms mean.

Understanding the basics of how blockchain and cryptocurrency mining means you have a leg up on others when it comes to the world of investing.

For more articles like this, check out the rest of our blog.

Loan Constant

Is a measure of your annual Cash Outflow as a percentage of the loan amount. It is calculated as Annual Loan Payment/Loan Amount

Annual Spread %

Cap Rate – Loan Constant

Annual Spread $

Cash inflow – Cash Outflow

Unleveraged Return

Calculated by Net Operating Income divided by Cash Required to Close. It is important to compare your Unleveraged Return to Leverage return to determine if you have Positive Leverage (ideal), Neutral Leverage or Negative Leverage.

PMI

Mortgage Insurance if required

Effective Return on Investment

This is similar to Cash on Cash Return but also includes appreciation, and mortgage principal paydown to illustrate a more complete return.

Cash on Cash Return

An annual measure of a real estate investor’s earnings on a property compared to the amount the investor initially spent to purchase it and make it operational.

Your cash-on-cash return is your annual cash flow (pre-tax) divided by your total cash investment.

Capitalization Rate

Calculated by dividing a property’s net operating income by its asset value, the cap rate is an assessment of the yield of a property over one year. For example, a property worth $14 million generating $600,000 of NOI would have a cap rate of 4.3%. That means that you can expect a roughly 4.3% annual operating cash flow given the price paid for the property.

Gross Rent Multiplier

is a screening metric used by investors to compare rental property opportunities in a given market against each other. The GRM functions as the ratio of the property’s market value over its annual gross rental income.

Debt Coverage Ratio

is a metric that looks at a property’s income compared to its debt obligations. Properties with a DCR of more than 1 are considered profitable, while those with a DSCR of less than one are losing money.

Other

Any other costs you will be covering for the property. i.e. if you are going to pay for the pool maintenance then the Gross rent would be higher but you would include that cost here.

Maintenance Percentage

What do you anticipate it will cost per year to maintain the home from a Landlords perspective? Older homes will be higher than newer homes.

Real Estate Appreciation

What do you anticipate the property appreciating annually?

Closing/Fixup/Misc Costs

Include all Buyer costs at closing AND the cost you will put into the property after closing to get it ready to rent.