Crypto Mining – How Does It Work?

You may have heard of crypto mining recently due to tech leader Elon Musk’s ‘pro-ESG’ assessment that Bitcoin energy consumption was not environmentally friendly. This guide shows how Bitcoin is created and how crypto mining works.  

What Is Crypto Mining?

The rise of cryptocurrencies brought new tech terms into people’s everyday lives. “Mining” is most certainly on the first page of the crypto dictionary and it is used to describe the process of generating new blocks on a permanent data chain (referred to as a ledger). By generating these blocks, miners, or powerful computers set up by anyone with the means can get paid for dedicating their computing power to the Bitcoin network. In the most basic terms, this is how Bitcoin and other cryptocurrencies are created.

In order for the bitcoin miners to generate new blocks, they must solve complex equations generated by the network. The computing miners work on these equations nonstop in a competitive race against all other miners on the network. The first eligible miner to crack the code is given a block reward. 

Even the most powerful computers cannot solve the equation on the first try. Instead, they have to generate trillions or quadrillions of possible solutions per second. It’s a race to see what miner can generate the right solution the fastest, and those with the most computing power have an advantage.

How Do Bitcoin Miners Make Money?

The first bitcoin miner to find the winning hash along with submitting a block of transactions that is verified by the chain wins some free coins! The current amount you get for mining Bitcoin is fixed for only 4 years, after that, it will halve as is the rule set by the original rules of the coin. This is the current schedule for the next 11 years until 2032.

When the bitcoin network was created by Satoshi Nakamoto in 2008, the block reward was pre-programmed to reduce the reward for mining every 4 years by half (the most recent halving was May 11, 2020). Currently, the block reward for generating a solution is set at 6.25 bitcoin per block. As the price in 2021 has reached as high as 65,000 USD, mining Bitcoin has become extremely competitive. There are millions of miners competing for a new block reward every 10 minutes. 

Many cryptos that came after bitcoin (also called “altcoins”) are not mined by energy-intensive computational work. In the case of some coins like the popular Cardano – also called ADA – the supply was made available in its entirety when the coin came to the market. Such coins require virtually no energy consumption to operate. The process used to verify the transactions on those coins’ networks are referred to as “proof of stake” or “proof of authority” as opposed to the “proof of work” systems that support bitcoin mining.

Is Bitcoin Mining Profitable?

Bitcoin profitability is determined by the power of your crypto mining rig. The days where you could mine for cryptocurrency using only the technology of a personal computer were very short-lived. Due to the shockingly high conversion value of Bitcoin, miner competition is as fierce as it’s ever been with massive investments and even though government entities’ dislike of crypto is well-known, unofficially, some of them are competing to solve computations and earn scarce crypto rewards.

At the very least, you’ll need to have a powerful GPU (graphics processing unit) to begin any type of crypto mining, and they come with a hefty price tag. This may be good news for PC gamers, who might already have high-end graphics cards to run the latest titles. Many serious crypto miners choose to buy several GPUs and wire them together to create a “rig”.

For the more valuable currencies like Bitcoin and Etherum, even the best GPUs probably won’t cut it. There are machines called ASICs (application-specific integrated circuits) that are made specifically for cryptocurrency mining and can cost even more than the GPUs. The astronomical computing power of ASICs makes it all but impossible for anyone who does not use them to successfully mine cryptocurrency.

The electricity costs alone can be very high making mining cryptocurrency a risky endeavor. If you are using specialized equipment like ASICs, expect to spend hundreds of dollars on electricity every month for each ASIC. Even then, you’re by no means guaranteed to make any money as the race for better equipment makes even the newest mining rigs obsolete in months.

Alternative Types of Cryptocurrency Mining  

If you want to know how to get started with crypto mining but don’t want to invest many thousands of dollars in equipment, you might be interested in one of these other options.

Mining Pools

Mining pools are groups of people or legal companies who “contribute” their computer’s processing power to generating new coins. If any of their computers manages to crack the equation and mine a Bitcoin, the reward is distributed amongst the members of the pool, proportional to the number of computing resources each individual member contributed.

If you have a powerful computer and don’t mind a higher electricity bill in exchange for the convenience of someone else handling the technical burdens of mining, joining a mining pool may be a good way to make a bit of extra money.

Cloud Mining

Cloud mining is the use of popular storage and bandwidth by fee instead of running mining rigs on your own power sources. Common suppliers of cloud computing include Amazon web services and Google cloud.

Until 2015 it was quite common for newbies unfamiliar with the expense of real crypto mining to be lured into cloud mining by unscrupulous marketers. They set up a website and allocated space on these cloud platforms. What they didn’t explain clearly was that the cost of cloud computing was so high the amount of bitcoin you could cloud mine was so small the only profit went into the business that set up the accounts. If you encounter one of these schemes you are best advised to avoid cloud mining.

Mining’s Environmental Impact

There is a lot of talk about the sustainability of crypto mining. As mentioned, mining larger coins requires vast amounts of computing power, which means a lot of fossil fuel consumption. A single ASIC is not enough to mine profitably on the Bitcoin or Ethereum network.  Mining farms now with thousands of ASICs working at full power are required to turn a profit in crypto mining. The power consumed by the Bitcoin mining industry alone is estimated to be larger than in countries like Argentina or Sweden; although this data is widely disputed by crypto experts.

As recently as May 2021 some of the largest mining groups in North America have banded together in a commitment to promoting renewable energy sources as a viable alternative to fossil fuels such as oil and coal. Already there are projects using wind, solar, and even lithium battery-based solutions which are already active in mining crypto. Inspired by Elon Musk many crypto insiders decided that the sustainability of crypto mining (increasingly referred to as pro- ‘ESG’) should be a priority for the industry to thrive in the long term.