What is crypto mining?
Crypto mining for beginners. Learn the pros and cons of crypto mining and see how you can get started.
7 min read
The following statements do not constitute investment advice or any other advice on financial services, financial instruments, financial products, or digital assets. They are intended to provide general information. The following statements do not constitute an offer to conclude a contract for the purchase or sale of financial instruments and financial products or an invitation to submit such an offer and to buy or sell any particular digital asset. Cryptocurrencies are subject to high fluctuations in value. A decline in value or a complete loss are possible at any time. The loss of access to data and passwords can also lead to a complete loss.
What is crypto mining? There’s more to it than you might expect. Yes, crypto mining is a way to generate cryptocurrencies. But it’s about more than just creating new coins—it’s also the way crypto coin transactions are validated.
So, how does crypto mining work? Essentially, miners solve complex math problems using ultra-high-powered computers and receive coins in return. But mining comes with a range of risks from environmental to financial you should know about. We’ll dive into these topics and more as we explore the ins and outs of crypto mining.
How does mining cryptocurrency work?
Let’s take a look into how cryptocurrency mining works. The name is a bit of a misnomer because it’s not just about obtaining, or “mining,” new coins. Crypto mining serves two purposes—generating new cryptocurrency (what we’d instinctively think of as “mining”) and verifying the legitimacy of cryptocurrency transactions on their blockchain.
So, when a Bitcoin miner completes the process of verifying a block of transactions, they get compensated. And what do they get? Newly minted Bitcoins—which increases their coffers, and the total number of Bitcoins in circulation.
What is proof of work (PoW)?
Cryptocurrencies need something called a “consensus mechanism” to ensure all their stakeholders agree on which transactions are legitimate, and to prevent people from spending the same money twice. Bitcoin and many other cryptocurrencies use the proof of work strategy to achieve these verifications. In proof of work, once a transaction block has been filled, miners race to be the first to solve complex mathematical problems. Once they solve the equation, they’ll generate a 64-character hash, which validates the transaction and enables the miners to generate Bitcoin for themselves.
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What is Bitcoin mining?
Bitcoin mining is a way for people to earn new Bitcoins by performing the validation process for Bitcoin transactions. Each miner who validates a block of transactions is rewarded with a certain amount of Bitcoin. In other words, it’s a dual process that both generates new coins and enables the coins in circulation to be used securely.
Why do Bitcoins need to be mined?
Mining is the system Bitcoin uses both to make new Bitcoins and to validate transactions in pre-existing ones. If no one validated transactions, the decentralized nature of the blockchain could allow fraudsters to spend Bitcoins, and other cryptocurrencies, more than once at the same time. However, using mining to verify transactions prevents fraud, shoring up users’ trust in the cryptocurrency.
Is Bitcoin mining profitable?
Why do people mine Bitcoin? Because it can be profitable—if you earn more than your mining costs. However, your profit depends on many factors, including the upfront cost of equipment and the ongoing operation expenses, such as electricity.
How much do Bitcoin miners earn?
What can you earn in return for these costs? For every block you successfully validate and add to the blockchain, you currently receive 6.25 Bitcoins. But be warned—this amount halves roughly every four years or so! As of December 2021, 6.25 Bitcoins were worth roughly $222,800 USD—not a bad payday, if you can beat off the competition to validate the block first!
What do I need to start mining cryptocurrency?
So, you understand what crypto mining is and you’re interested in getting involved. But how can you get started with mining cryptocurrency? There are some core aspects to consider, whether you opt for Bitcoin or Ether. For starters, mining on a regular laptop won’t really cut it, since mining cryptocurrencies efficiently can take a lot of time and computing power.
In terms of hardware, you’ll need to set yourself up with a special mining rig. The exact rig you’ll need will depend on the currency in question—Bitcoin, for example, is primarily mined using ASIC (application-specific integrated circuit) rigs that can cost thousands of dollars each. It’s also worth thinking about your electricity supply. You’ll be going through a lot of power, so you’ll want to ensure you’re paying the cheapest tariff possible.
Alongside hardware, you’ll also need some specific software. To carry out the actual mining, you’ll have to download mining software. Some options, like CGMiner, are open-source and free to use, whereas others, like Awesome Miner, are fee-based. You’ll also need to set up a crypto wallet, so the coins you earn have somewhere to go. Depending on what approach you decide to take, you might also need to set up a mining pool membership.
Solo mining vs. pool mining
A pool membership? What’s that—a nice afternoon swim? Not in this case. Solo mining is when a miner acts alone. But in pool mining, a miner works together with other miners and shares their resources and proceeds with the other members of the pool. If you don’t have a huge amount of computing power yourself, pool mining can be a way to get a foothold in mining.
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Are there downsides to crypto mining?
While crypto mining offers the prospect of tantalizingly high returns, there's a catch. Crypto mining currently uses oodles of electricity, which gives it a giant carbon footprint. And, it's associated with financial and regulatory issues too:
- Crypto mining is a massively power-intensive process. It’s been estimated that Bitcoin mining, for example, uses more electricity than the entire country of Finland. This means a mammoth carbon footprint and extreme costs. That's why miners tend to congregate in regions of the world where electricity costs are low. But this, in turn, places disproportionate amounts of pressure on often antiquated infrastructures, which only aggravates the environmental problem.
- It’s not just the ongoing costs that can mount up—the upfront costs of getting started as a miner can be prohibitively expensive. The hardware miners need (specifically, their mining rig) can set them back at least a few thousand US dollars each, with higher-spec set-ups upward of $10,000 USD.
- Bitcoin mining isn’t for people who don’t know their way around a computer—just understanding how the process works and setting up all the necessary equipment requires an understanding of computing and blockchain infrastructure. Not to mention the skills required to troubleshoot if you run into an issue!
- Even if you’ve got your rig all set up so you’re able to mine, you might not be allowed to. Some countries discourage cryptocurrency mining—such as China, which banned it outright in 2021 due to its environmental impact and decentralized nature. Some countries, like Sweden, want the EU to follow suit—which would drastically reduce the number of territories that miners can legally operate in.
Should you mine for crypto?
Proof-of-work cryptocurrencies couldn’t function without the work done by their miners, but should you join them? The answer depends on your knowledge, resources, and risk tolerance.
The first question to ask yourself is whether you understand the process well enough to set up the hardware and software, as well as troubleshoot any problems. If you can answer yes to that, the next question is whether you can cover both the upfront costs and the ongoing expenses involved in mining a cryptocurrency. Do you have access to the cash, equipment, and electricity capabilities to make this venture profitable? If so, then have you considered the legal and environmental impact? And finally, you’ll want to think through the financial risk. When you mine, you're paid in the cryptocurrency that you're mining. But cryptocurrencies can be subject to massive price swings so your reward for mining could be a huge payoff or a small pittance.
If you've got the knowledge and the resources, and you're also in a position to tolerate this risk, then you could be ready to join the ranks of miners who keep proof-of-work cryptocurrencies working.
FAQs about crypto mining
Which cryptocurrencies can be mined?
Mining is an integral part of many cryptocurrencies, but not all. Many of the big names, including Bitcoin, operate a “proof of work” validation model based on mining. But others—such as Ripple and EOS, as well as Ethereum in 2022—follow a “proof of stake” model. This model has a network of "validators" stake their own crypto in exchange for a chance to validate new transactions, update the blockchain, and earn some crypto as a reward. So, these currencies cannot be mined like the traditional proof-of-work process.
Is mining the only way to get Bitcoin and other cryptocurrencies?
Mining is definitely not the only way to get Bitcoin, or other cryptocurrencies! Besides mining, the two main ways to get coins is either buy them on an exchange (like you would with foreign currencies), or exchange goods and services for them (like running a shop with “regular” currency).
How do I start mining Bitcoin?
At a bare minimum, you’ll need a mining rig, an affordable electricity source, a crypto wallet, and an understanding of the process. We recommend giving it some thought, since there are both pros and cons to Bitcoin mining.
How do I start mining Ethereum?
If you want to start mining Ethereum, you’ll need the same tools as you would for mining Bitcoin—a mining rig, electricity, and a crypto wallet. Plus, you’ll need to understand how the process works, which differs from Bitcoin’s. The same mining considerations apply—plus remember Ethereum is planning to move to a proof-of-stake model in the near future.
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