What Is Crypto Mining & How Does It Work?

The world has come to think of cryptocurrency as a type of virtual asset protected by a technology known as cryptography.

Being decentralized by nature, these assets rely on a technology known as the blockchain to maintain a clear record of all these transactions.

Since these records are entirely digital, we run into risks of copying, counterfeiting and spending the coin more than once.

For this reason, cryptocurrency relies on a process called mining.

With mining, these risks are eliminated since it now becomes extremely expensive and resource-intensive to try and hack the network.

In fact, in many cases, it becomes more cost-effective to join the network than hack it.

As a result, unlike traditional ledgers that need a central authority, cryptocurrency users can conduct transactions directly, managing all of the associated transactions.

What is Cryptocurrency Mining?

Cryptocurrency mining is a process with two clear objectives.

First, it is a method of bringing new coins into circulation.

Secondly, it involves validating cryptocurrency transactions on a blockchain network and adding them to the distributed ledger.

For this reason, cryptocurrency mining has often been attributed to how cryptocurrency users are kept honest, effectively solving the double-spend problem—more on this to follow.

In practice, cryptocurrency miners use computers and other specialized hardware to achieve this.

A cryptocurrency miner is then tasked with grouping transactions into blocks that must be accepted onto the greater network and creating a larger chain.

How Does Mining Work?

For miners to receive financial compensation for their efforts, they must first verify a certain number of transactions; a step that is not typically too challenging.

However, what is challenging is the second step, adding a block to the blockchain by providing the answer to a complex mathematical problem.

In the first step, a miner will confirm that an individual is the correct recipient of an input.

An input is described as a previous transaction that the sender uses to fund the following transaction.

After conducting this check, they will also confirm that these funds have not already been spent, a confirmation that can be done by reviewing the public database.

Now looking at the second and more complicated step, miners will generate a 64-digital hexadecimal number, which is called a hash in technical terms.

The generated hash must be equal to or less than the target hash to be valid.

Here, we can compare this model to asking a group of people to guess a value between 1 and 10, with the answer being sealed in an envelope.

The only difference is that in the mining process, millions of “miners” are guessing this 64-digit target hash, which is composed of letters and numbers, therefore making it a more complex process.

Definition

We can define a hash as a function that takes data of any length and converts it into data of a fixed length. With a hash, changing any piece of the original piece of data will alter its value. Therefore, a hash becomes useful for verifying digital files, including values held in the blockchain. For example, each block on the blockchain will hold a hash from the previous block, further ensuring that no data is being tampered with.

Fortunately, miners are given an unlimited number of guesses, each made by randomly generating nonces.

Nonces (numbers only used once) become crucial to developing a hash less than or equal to a target hash.

The first miner who successfully completes the block then becomes eligible for a reward.

Since numbers are generated at random, the faster a computer can spit out guesses, the more likely the miner is to earn a reward.

If the miner is successful, they are given the task of updating the blockchain ledger with the now verified transactions.

While this is the standard that Bitcoin popularized, known as Proof of Work (PoW), it is worth noting that this method opens the door to higher energy usage, a significant reason why it has faced criticism in the past.

Alternative models have since arisen, including Proof of Stake (PoS), which requires a network participant to be selected to add the latest round of transactions.

By eliminating the competition factor of multiple devices trying to solve the same problem, this model is believed by many to be more sustainable.

Crypto mining hardware and cooling

Why is Crypto Mining Important?

One of the primary concerns with any digital currency is double-spending, essentially a form of counterfeiting.

With traditional (or fiat) currencies, money can be physically exchanged from point A to point B.

Therefore, you either have these funds, or you don’t.

This is a little different in the digital world since a file such as an online photo can theoretically be copied infinitely, making it impossible to determine which one was the original.

Evidently, a user could take one cryptocurrency and send it to two separate wallets to “double-spend” the same funds.

Cryptocurrency mining effectively addresses these concerns.

Mining ensures that this doesn’t happen by requiring both attempts to move to a list of unconfirmed transitions, where one will be validated through mining, and the other will be thrown away.

Crypto mining then becomes vital in giving people confidence that these assets are trustworthy as a medium of exchange.

A second reason mining is important is that they help control the number of digital currencies brought into circulation.

What is a Crypto Mining Rig?

To mine cryptocurrencies, users will need a device with sufficient hashing power.

In the case of mining Monera, Litecoin and Zcash (at least at the time of writing), users are capable of mining these on a standard desktop or laptop.

Comparatively, coins like Bitcoin require a more significant utilization of hardware to furnish the same computational processes.

Ultimately, we can define a “cryptocurrency mining rig” as the entirety of a miner’s set-up

At a very basic level, a miner will include all the things you find in a standard PC, including a central processing unit (CPU), graphical processing unit (GPU), RAM and storage.

However, since cryptocurrencies, in general, are becoming more difficult to mine, miners have continued to upgrade these features for higher-end equipment with increased power and better cooling systems (since mining generates a lot of heat which may result in fires).

Furthermore, another increasingly popular option is a piece of preconfigured mining hardware known as an Application-Specific Integrated Circuit (ASIC) miner.

How Much Can a Cryptocurrency Miner Make?

Unfortunately, the answer to this question is hardly simple.

Earning money from mining cryptocurrency now involves significantly more considerations than just turning on your computer.

First, several cryptocurrencies can be mined, including Ethereum, Litecoin and Zcash.

Not just Bitcoin! Although many are quick to turn to Bitcoin as being the most lucrative.

However, with the price of Bitcoin being so high, and the increasing difficulty in mining, a consumer-grade computer will not be enough to “win” any blocks.

Instead, specialized hardware known as an ASIC will be required, which is hard to find and expensive.

Therefore, many instead look to Ethereum as the most profitable asset to mine on a consumer-grade computer.

Although there are many variables at play, some estimates from WhatToMine, suggested that with a proper ASIC unit, up to $7 could be made per day.

Other suggestions include pegging the value for an Ethereum miner to be closer to $5, although again, these values depend on several factors.

However, profits must also deduct the cost of electricity, which is about 10% of funds earned by some estimates.

For those that don’t have the funds to make a significant investment in hardware upfront, mining pools become a more realistic option for the average miner.

Users can join forces with other investors in a mining pool to complete a block.

The caveat is that when sharing efforts, they must also share rewards.

Frequently Asked Questions

  • Is Crypto Mining Legal?
  • Is Mining Cryptocurrency Worth It?
  • How Does a Crypto Miner Make Money?

Sarah Jansen is a passionate cryptocurrency investor, copywriter and marketing professional who has been working in the field since 2017. Sarah graduated from the University of Calgary in Canada with a degree in business, where she quickly found her passion in helping people.

She has worked for several major cryptocurrency exchanges, news outlets, and in the content marketing department of a local bank. Starting as a marketing assistant, Sarah quickly specialized in long-form content creation and technical writing. Here, she discovered her place in lowering the barriers to entry for personal investors looking to secure their financial future.

When she’s not staying on top of industry trends, you can find Sarah in the mountains hiking or across the world chasing another bucket list item.