What Is Mining in Cryptocurrency? Crypto Mining Explained

Crypto mining is as old as blockchain itself, how does it all work?

Miner excited about finding a gazer full of crypto coins outside the city.

15 years after the Bitcoin (BTC) white paper was published, ‘What is mining in cryptocurrency?’ is still the question on the tip of everyone’s tongue. The birth of blockchain technology and the crypto market began with Bitcoin mining. 

Initially, Bitcoin miners could mine new coins with a laptop in their bedrooms. Today, professional mining operations are worth millions, with ASIC mining farms burning through a huge amount of energy to earn new Bitcoin payouts.

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Crypto mining isn’t only about earning digital currency through block rewards; it also helps secure the blockchain network. 

Despite crypto mining being an iconic industry staple, the mining process remains complicated and inaccessible to most people. In this article, we’ll break down cryptocurrency mining for beginners and unpack how it works.

What Is Cryptocurrency Mining?

Cryptocurrency mining is the process by which new blocks are added to a blockchain and new coins are ‘minted’, or created. In the case of the Bitcoin network, miners receive new bitcoins in exchange for validating transactions on a decentralized public ledger.

Crypto mining is a competitive game. Miners want to accumulate as many bitcoins as possible, so having large mining rigs with powerful mining hardware gives them a better chance of earning the right to create new blocks.

enormous warehouse full of crypto mining hardware

Source: Bloomberg

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When you have thousands of individual miners and mining farms trying to create new blocks for a distributed ledger like the Bitcoin blockchain, there needs to be an algorithm that decides who ‘wins.’ We call this the Proof-of-Work consensus mechanism.

What Is Proof-of-Work?

In a Proof-of-Work consensus mechanism, Bitcoin miners compete to create new blocks and earn mining rewards. In its simplest definition, powerful computers work to solve complex mathematical problems and validate Bitcoin transactions. The first miner to find the answer creates the new block and earns their mining rewards.

Diving a bit deeper, every new block generates a target hash. The target hash is a 64-digit hexadecimal number. These digits are made up of not only numbers from 1-10 but also letters A-F. The first miner to guess a number lower or equal to the target hash gets to create the next block and earn the reward.

diagram explained hexadecimal numbers

Source: Union Journal

With trillions of possible solutions, the odds of guessing these numbers are extremely difficult. Miners with powerful mining equipment can make more ‘guesses’ faster, giving them a better chance of being the first to find the number. 

While Bitcoin is the classic example of a Proof-of-Work chain in action, there are plenty of other examples. These include altcoins like Dogecoin (DOGE), Litecoin (LTC), and pre-merge Ethereum (ETH).

Before taking a closer look at the specifics of crypto mining, let’s have a quick recap:

  • Cryptocurrency mining creates new blocks for a blockchain network and mints new coins to the circulating supply.
  • Miners compete amongst themselves to solve complex equations, verify new transactions and earn mining rewards.
  • Higher computing power increases the chance of being the first miner to solve an equation.

How Does Bitcoin Mining Work?

When Satoshi Nakamoto first published the Bitcoin white paper, bitcoin mining was far more democratized than now. Anyone with a computer could start mining at home with a half-decent GPU (Graphics Processing Unit). 

Bitcoin mining has since become a serious business, with ASIC (Application-Specific Integrated Circuits) mining farms reaching explosive hash rates and boosting mining difficulty. 

Individual miners struggle to compete with the larger players. To compete in the crypto mining monopoly, smaller miners often join forces to create mining pools, where each miner gets their fair share of new coins. 

Mining Difficulty

As the name would suggest, mining difficulty refers to the complexity of the problem each miner is trying to solve. Remember the hexadecimal number that every miner tries to find that we mentioned earlier? The more miners competing to create new blocks, the more possible solutions there are that miners have to guess correctly.

When mining difficulty is high, that generally means that market conditions are bullish for Bitcoin or whichever PoW cryptocurrency is being mined. Another way of looking at crypto mining demand is a network’s hash rate.

Hash Rate

A blockchain’s hash rate is an indicator of its computational power. Put simply, a network’s hash rate measures how many guesses all miners in the system make per second. To give you an idea, in Q1 2023, Bitcoin averaged a hash rate of roughly 310 million terahashes per second.

BTC historical hashrate chart

Source: BitInfoCharts

A hash rate can also refer to the computational power of individual mining units or groups of miners. Powerful ASIC miners with high hash rates have a better of solving the mining puzzle first, making them far more desirable than smaller CPUs.

What Is the Bitcoin Halving?

The Bitcoin halving is an event that happens every 210,000 blocks, or roughly every four years. After each halving, the number of new bitcoins in each block reward is cut in half. 

When the Bitcoin blockchain first went live, each newly minted block paid out 50 bitcoins to miners. Since then, we’ve witnessed three Bitcoin halvings, bringing the block rewards to 6.25 bitcoins per newly created block.

Some miners anticipate that the last Bitcoin will be mined sometime around 2140. If this eventually comes to pass, miners will still earn rewards paid in BTC. However, these rewards will come from network transaction fees rather than newly minted block rewards.

The Bitcoin Halving is considered a significant event that historically marks the start of a new bull run. This is because when new emissions of BTC are cut in half, the selling pressure that miners generally provide evaporates. After every recorded halving, the price of Bitcoin has reacted positively.

Crypto Mining Pros and Cons

While crypto mining can be a good way to acquire new coins and help secure a blockchain network you want to support, many drawbacks remain.

Pros

Earn Crypto Rewards

The main benefit that attracts people to crypto mining is simple. Crypto mining can be a profitable enterprise if managed correctly. Mining cryptocurrencies like Bitcoin or Dogecoin gives investors a revenue stream of their chosen cryptos. 

For miners with a long-term outlook, this is a great way to accumulate new coins without buying them from a crypto exchange like Coinbase.

Secure and Decentralize a Network

On top of earning rewards, miners also help to keep the blockchain safe from hacks and malicious actors. Moreover, running a mining operation also helps to decentralize and further distribute the blockchain, making it less reliant on central points of failure.

This aligns with the original vision of the Bitcoin network, which is to provide a distributed public ledger owned and operated by the people, for the people.

Cons

Sustainability Problems

Perhaps the biggest issue facing Bitcoin and its mass adoption is its monstrous energy consumption. The Proof-of-Work consensus mechanism demands an enormous amount of power. For example, when Ethereum transitioned to a Proof-of-Stake mechanism, the network reduced its power consumption by 99%.

Bitcoin energy consumption compared to small countries

Source: Bitcoin Energy Consumption Index

According to the Bitcoin Energy Consumption Index, the network consumes as much energy as the entire nation of Kazakhstan over a year and has a carbon footprint equivalent to that of Singapore.

High Costs

Starting a mining operation is a risky business. First, there’s no guarantee that you’ll be able to turn a consistent profit through crypto mining. Volatility in the crypto market presents a constant and significant risk to new miners trying to enter the mining business. 

Not to mention the expensive mining equipment and high electricity costs associated with crypto mining.

On the Flipside

  • Due to Bitcoin’s immense energy consumption concerns, emerging blockchains are moving away from crypto mining and the Proof-of-Work algorithm. Top blockchain protocols like Ethereum, Cardano, and Avalanche all use a variety of a Proof-of-Stake mechanism, which is far more energy efficient.

Why You Should Care

With time, crypto mining outside the Bitcoin blockchain might cease as emerging networks opt for more sustainable alternatives.

FAQs

What happens to Bitcoin when mining stops?

When the final Bitcoin is mined, miners will continue to secure the network and earn rewards from transaction fees.

Can beginners mine crypto?

Yes, beginners can mine crypto. However, the crypto mining industry has become increasingly competitive. Inexperienced miners are likely to be outperformed by more experienced miners using more powerful mining equipment.

Is crypto mining profitable?

If the revenue earned from mining crypto is greater than the costs of maintaining the operation, crypto mining is profitable. As we know, the crypto market is volatile, and mining profitability is expected to swing with the highs and lows of the market. 

Who pays you for crypto mining?

If you’re earning from crypto mining, you receive crypto emissions in exchange for validating transactions and helping secure the network. No one is paying you directly for mining other than the block rewards of the protocol you’re mining.

How long does it take to mine one Bitcoin?

Theoretically, the Bitcoin network’s block time is approximately ten minutes. An optimal mining rig can mine one BTC in ten minutes. However, this depends on a miner’s hash rate and the network’s mining difficulty.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
Finn Miller

Finn Miller is a New Zealand-based blockchain writer for DailyCoin who specializes in simplifying complex blockchain topics. He is experienced in crafting whitepapers, researching on-chain data, and advising emerging crypto projects, and uses his unconventional approach to learning and passion for knowledge to provide cornerstone educational content for readers of all levels. When not exploring the depths of DeFi, Finn can be found exploring his other passion, the great outdoors.