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What Is Crypto Mining?

Last updated 30th Nov 2022
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Crypto mining refers to the process where a global network of computers compete with each other to ensure that transactions are legitimate and added correctly to the cryptocurrency’s blockchain. It is an essential component of cryptocurrencies that increases the number of cryptocurrencies in circulation and ensures that the blockchain's ledger is continually updated and maintained.

This comprehensive guide will teach you how cryptocurrency mining works, the necessary mining hardware equipment, how to calculate profitability, and the best cryptocurrency mining software. To give you a clear overview of the topic, we'll also discuss the advantages and disadvantages of cryptocurrency mining.

By the end of this guide, you'll have a better understanding of what it takes to mine cryptocurrencies like Bitcoin and whether it's something you want to pursue.

What is Crypto Mining?

Crypto mining or bitcoin mining is the process of validating new transactions in the network, which results in the addition of new blocks and the generation of new coins. Mining validates crypto network transactions, which are then recorded into the blockchain ledger.

Now, in this technique, miners (a group of computers) compete with one another to solve a complex mathematical puzzle for validating the transactions. These mathematical puzzles are so complicated that you need powerful computers that are assembled using sophisticated GPU cards. The first computer to solve the puzzle receives the block reward in the form of crypto and the process begins again.

How Crypto Mining Works

Crypto mining, used in the blockchain networks using a proof-of-work consensus mechanism requires the miners to work together and solve complex mathematical problems to verify the transactions and add them to a block.

Miners must arrive at the right or closest response to the puzzle in order to complete the mining process. The process of guessing the correct number (hash) is known as proof of work. Miners guess the target hash by randomly making as many guesses as quickly as they can using the computational power. The mining difficulty only increases as more miners join the network.

Understanding Blockchains

Blockchain is a public distributed ledger in which transactions are recorded in chronological order. Any record or transaction added to the blockchain cannot be modified or altered, meaning the data stored is safe from any kind of alteration. Blockchain is a growing list of immutable records stored in blocks, that are linked and secured using cryptography. Each block has the following key components: data, hash, previous hash, and metadata (timestamp, block number).

  • Data in a block could be a simple string such as “Blockchain Data” or a list of transactions.

  • Hash is a unique identifier for a block and is analogous to a fingerprint for a human.

  • Previous Hash is the hash value of the previous block in the blockchain.

  • Metadata is information about the data; e.g., block number, timestamp, etc.

Now that we have understood the fundamentals of blockchain, there are three major principles you need to know to better understand this technology - this sets the stage for the significance of crypto mining.

  • Public distributed ledger: Public Distributed ledgers rely on independent computers (called nodes) to record, share, and synchronize transactions in their own electronic ledgers (instead of keeping data centralized as in a traditional ledger).

  • SHA-256: By digitally signing blocks using SHA-256 encryption, unwanted access to the blockchain network is prevented. The algorithm takes one string and creates another, and the process is irreversible..

  • Proof of work: During crypto or Bitcoin mining, miners validate transactions by solving difficult mathematical puzzles. This process is called proof of work. A miner’s primary objective is to get the nonce value, which is used to generate a hash.

What Is Required for Crypto Mining?

Below we have shared the must-to-have resources to make crypto mining work including the mining equipment.

  • Computing hardware: Miners need to acquire mining hardware such as graphical processing units (GPUs). This kind of mining equipment is often expensive.

  • Power: computing power or electricity is necessary to run the GPUs and initiate crypto mining. The mining profitability can vary based on location as the cost of kWh is not the same all across the world.

  • Mining software: Mining software provides the miners with access to important information on various critical aspects of a mining operation including but not limited to mining hardware temperature, fan speed, idle threads, and more. This helps a lot in managing the rigs to ensure maximum efficiency.

  • Cryptocurrency Wallet: A crypto wallet is an application that stores the private keys of your cryptocurrency holdings. Private keys unlock access to your cryptocurrency holdings, hence it must be kept secret, protected, and not shared with others. There are two types of cryptocurrency wallets: cold wallets and hot wallets. Cold wallets like Ledger Nano X offer offline storage of private keys whereas hot wallets like MetaMask offers online storage.

What is Crypto Halving?

Crypto halving reduces the rewards generated for mining cryptocurrencies by exactly half, and the mechanism exists to reduce the rate at which the cryptocurrency goes into circulation, thus slowing down the inflation rate of the digital currency.

For example, in the case of Bitcoin, the halving event occurs once every 210,000 blocks are mined, which happens around every 4 years. This information is detailed in the Bitcoin protocols, so Bitcoin miners can transparently see how their operation will be affected in the future.

Is Bitcoin Mining Profitable?

Bitcoin mining is the process by which miners earn bitcoins for validating bitcoin transactions by using their computer power. However, calculating the profit produced by Bitcoin mining requires technical expertise. Bitcoin mining first started utilizing CPUs and simple AI algorithms, which made Bitcoin mining profitable and less expensive.

Also, with factors like bitcoin halving, more bitcoin miners joining the network, rising electricity costs, and the entry of large institutional players into the Bitcoin mining ecosystem, economics have changed. Individual miners should perform a cost-benefit analysis, taking into account variables such as electricity costs, efficiency, and bitcoin price before committing themselves to mine crypto.

The Bitcoin mining process has become both expensive and regulated, which marginalizes the smaller bitcoin miners despite the existence of home operators who run Bitcoin mining businesses from their dwellings. But that's not to say mining Bitcoin at home is impossible, if you want to make money with Bitcoin mining, you should be prepared to shell out lots of money for custom mining hardware. The first step to start mining Bitcoin is to invest in appropriate computer hardware.

How Does Bitcoin Mining work?

Verifying Bitcoin transactions and recording them on the blockchain involves solving complex algorithms. This is all part of Bitcoin's proof of work consensus mechanism, which aims to add a new block every 10 minutes. The more computing power a miner has, the more likely it is to win blocks.

How to Calculate the Bitcoin Mining Profits?

Calculating Bitcoin mining profits involve a cost-benefit analysis to figure out the break-even price. However, this calculation does not consider the upfront costs, this is purely for operational costs once the mining starts.

Here are the factors that determine crypto mining profitability:

  • Power costs: Energy is a core expenditure when mining crypto. A lot of power is used to mine crypto and also for cooling off the GPU units to prevent overheating.

  • GPU Cards: More time invested in mining results in more income. However, the lifespan of the GPU cards degrades when they are used consistently.

  • Coin’s value: The profitability of mining operations fluctuates with changes in the coin’s price. If you’re mining a volatile cryptocurrency, then it will be harder to predict profitability. You may want to hold onto the mined coin to sell at the right time for maximum gain.

  • Efficiency: Mining efficiency can be affected by low voltage, slow computers, and other factors.

What is Cloud Mining?

Cloud mining allows you to mine crypto without using the computing power of your hardware in the garage. Instead, you’ll utilize the computing power of the hardware devices available in the cloud. You’ll need to make an account with the cloud mining provider and pay a fee for using their equipment.

This form of remote mining allows more people to get involved in the mining process and the start-up costs are lower. That’s because you don’t have to buy hardware or rent out a warehouse for storing your equipment. The lower risk means anyone can get started without spending a fortune on startup costs.

Top Software To Mine Crypto

You’ll need software while mining crypto and there are many options available for you to consider. In this section, we’ve shared a few of the top ones so you can get started right away.

CGMiner - Best Overall Choice

CGMiner is an open-source crypto mining software compatible with multiple hardware options (ASIC, GPU, and FPGA) and operating systems (MAC, Windows, Linux). The flexibility and availability make this the top choice. Also, it’s the oldest Bitcoin mining software, so it has a good reputation. You can download CGminer for free via GitHub.

However, the drawbacks of CGMiner include the basic command line interface, which means it’s not beginner friendly. Those who understand command line interfaces will see the simplicity of the software. Also, it’s hard to install on Windows 10 computers because the Windows Defender software can give CGMiner a hard time connecting.

BFGMiner - Best Choice for Customizations

Luke Dashjr released BFGMiner in 2012, and it’s the second most popular crypto miner, after CGMiner. The depth of customization is what allows this software package to stand out. The functionalities include

  • Monitoring hardware temperatures

  • Managing rigs remotely

  • Detecting and starting idle threads

However, it’s only compatible with FPGA and ASIC hardware because at the time of creation, GPU miners were happy with the quality of the CGMiner. It also runs on C and you can run on multiple operating systems, including Windows, Linux, and MAC.

One of the stand-out features of BFGMiner is the ability to mine more than one cryptocurrency simultaneously. A command line interface is also used with this mining software and customizable hotkeys are available. Therefore, the lack of a GUI (Graphical User Interface) can put off miners with limited experience in using command-line interfaces.

MultiMiner - Best Choice for Beginners

MultiMiner is the best choice for beginners because it offers a GUI (Graphical User Interface) that’s relatively easy to learn. It’s built on the BFGMiner engine and was released in 2013. The quick start possibility of the software is a good choice for miners that want to mine without a long learning curve.

No coding skills are required to mine using MultiMiner, so beginners can install the software and set up the mining process - including linking to a mining pool and setting the average hashing power.

If a mining pool succeeds, the reward is distributed across the mining pool, in proportion to the number of resources that each miner contributed to the pool. Most crypto mining applications come with a mining pool; however, crypto enthusiasts now also join together online to create their own mining pools.

MultiMiner is an optimum choice for the Windows platform. To use it on Linux or MAC, you will need to download additional files. Using the software, you can easily switch between rigs and access advanced features like API settings. Like the other crypto mining software on this list, it’s free to download and use.

Pros and Cons of Crypto Mining

In this section, we will cover the benefits and drawbacks of crypto mining to give you a balanced overview of this operation.

Pros

Profitable

Generating an additional stream of income is the primary reason you want to get into cryptocurrency mining. Once the hardware and software requirements are set up, you will need to select a location offering low-cost electricity to maximize your profitability.

Assets Offer Flexibility

You’ll earn the cryptocurrency that you are mining, which is a decentralized form of value you are free to spend, transfer or hold. There is no bank or other centralized organization that will dictate how much cryptocurrency you can mine and how it should be used.

Promoting Cryptocurrencies

You might not be mining Bitcoin and other cryptocurrencies as a “Good Samaritan”, but you’ll be contributing to its ecosystem. The process of verifying transactions and introducing coins into circulation is the backbone of what makes cryptocurrencies tick. Therefore, you’ll be contributing to the development, maintenance, and evolution of crypto and Web3 technologies.

Cons

Increase in GPU Costs

The average crypto-mining operation requires large amounts of processing power, and GPUs are the best choice for the task. Therefore, crypto miners buy large quantities of graphics cards, leading to a reduced supply and a rise in cost. This is one of the reasons why users trying to build a gaming or streaming rig are having a hard time finding GPU cards at a reasonable price.

Unpredictable Profitability

The volatility of cryptocurrencies means it's hard to make long-term predictions about the profitability of a mining operation. Miners can switch between cryptocurrencies to mine ones that are increasing in value or mine several of them simultaneously to hedge their bet. Also, crypto halving means that the quantity of crypto generated will halve at specific intervals, so miners need to stay on their toes by switching the mined coins.

Massive Energy Consumption

The large amount of energy required to mine cryptocurrencies contributes to global warming and climate change. Therefore, improvements in mining technology must be made to avoid such reliance on non-renewable sources of energy. Ethereum has tackled this problem by getting rid of the “proof of work” and merging into the “proof of stake” consensus

Final Thoughts

To summarize, crypto mining is an operation followed in the Proof-of-Work based blockchain networks. The miners contribute their computational power to solve the sophisticated puzzles for verifying the transaction and adding them to the block. For their contribution to maintaining and running the network, they are rewarded with the cryptocurrency of the network.

To start crypto mining, you’ll need hardware equipment, storage space, electricity, and mining software. However, cryptocurrency volatility, changes in regulations, bitcoin halving, and increasing energy costs mean that keeping up with the crypto mining profits for the long term is challenging.

Once the crypto mining process is complete and you have acquired the cryptocurrency, it can be traded on centralized exchanges like Binance and Coinbase for fiat currencies.

FAQs

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Keith Hodges

Keith Hodges

Keith is a finance SEO specialist, having worked previously as a journalist in the industry. He is currently the Head of SEO at BanklessTimes and is based in London. Keith has written and worked extensively in the personal finance and investment industries, with particular focus on international and digital currencies.