A collection of graphics cards used for crypto mining

24 May 2022

How does crypto mining work?

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This article is not intended to be financial, investment or trading advice. This article is for information and solely for education purposes. It does not protect against any financial loss, risk or fraud.

How does crypto mining work?

Crypto mining is a process to earn cryptocurrency from your computer or set of computers. It is simultaneously a way of generating or releasing new cryptocurrency coins.

‘Mining’ is an attractive term for the process, and imagines the virtual currency in physical form, but no actual mining is involved. It is more similar to earning loyalty points or being rewarded for a computer process – one that keeps the cryptocurrency running.

It works by validating cryptocurrency transactions and then adding them to a shared ledger. Earning cryptocurrency is a reward that is engineered into the process. It provides an incentive for the public to use their own computers to validate the ledger, and therefore ensure the blockchain is kept up to date and kept secure.

One man, sitting in his office next to the mining rig, using his computer to mine bitcoin.

How does blockchain work?

In order to understand how crypto mining works, first the basic structure of cryptocurrency must be understood.

The challenge of a digital currency is that it can be easily manipulated. Someone could easily lie about their balance and create more money than they have earned. If someone can spend more than once with the same balance, the currency is worthless.

A blockchain system ensures that this cannot happen. Simply explained, blockchain is a way to record information about all transactions. Once a transaction has been made, the ledger is updated for the entire system. Any cryptocurrency transaction must comply with this ledger. If a transaction goes through that does not match the ledger (i.e. someone is trying to pay with more than they own) the transaction will be declined.

To maintain this ledger, using blockchain technology, a vast amount of calculations need to be completed, in order to ensure that the ledger is constantly being updated and therefore kept secure. Mining creates an incentive for the public to help with this, and therefore a system where the coin is kept secure by the public, and as a group, rather than a central authority or strict group of individuals.

How can I start crypto mining?

To start crypto mining, you must first obtain the appropriate equipment. There are also different types, so you must decide which crypto mining method to choose. 

It is technically possible to mine crypto with your personal computer. However, due to the rate at which you would earn crypto, compared to your electricity bills from running the computer 24/7, for most people this option is unfeasible. Plus, a crypto mining farm makes for some huge competition. Nowadays, you will need to invest in a proper crypto mining setup, and invest in some crypto mining hardware in order to turn a profit. This would be considered solo mining. However, there are more options, as buying everything you need to create a crypto mining rig can be very expensive. 

Pool mining is another option, and for many people is a more feasible option to mine crypto. With pool mining, you are sharing computational power with other users to share the load using crypto mining software. This means that for larger coins such as bitcoin, you are more likely to earn with pool mining than you would with solo mining.

Cloud mining is another option, and allows you to engage in crypto mining without a computer. Essentially, this involves renting computer power which is then use to mine crypto. For some people, crypto mining without a pool and crypto mining without a GPU can be the most profitable option, as it does not involve buying any expensive hardware.

To find out whether any of these methods are cost efficient for you, you can also use a crypto mining calculator. A crypto mining calculator is a handy tool which allows people to calculate if crypto mining is profitable for them.

It is also important to remember that crypto mining is illegal in some countries, and often, cryptocurrency in any form is illegal in these countries too. Please check that cryptocurrency is legal in your region before getting involved.

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Cryptocurrencies are unregulated in the UK. Capital Gains Tax may apply. The value of investments is variable and can go down as well as up.

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Is crypto mining still profitable?

It is sometimes hard to determine whether crypto mining is still profitable, and most importantly: does crypto mining still work? The short answer is that crypto mining does work, however is significantly less profitable than it used to be, due to increased demand for blockchain processes and the competition of other miners. This might be why some people speak about why crypto mining is not possible.

It is possible to join a crypto mining pool, which cooperatively uses computers to mine cryptocurrency blocks. Some new cryptocurrencies are easier to mine than others, and can often be more profitable, as many of the larger coins are oversaturated with miners.
Bitcoin and many other coins also go through ‘halving’ processes, where approximately every four years (after 210,000 blocks), the payout for mining a new block is only half of what it was before. This is designed to phase out the mining process, so that the currency can eventually be stable and functional in everyday life.

When is the next halving of Bitcoin? 2024.

Is crypto mining bad for the environment?

Bitcoin mining has come under scrutiny for its environmental impact, due to its proof of work (PoW) method to reward miners. Proof of work systems work by randomly selecting miners from anywhere to validate transactions, making the mining process very competitive. This essentially means that many cryptocurrency farms will use a huge amount of electricity in order to cultivate the most amount of profit. 

Thankfully, proof of stake (PoS) systems are being introduced, which combats this problem by reducing the amount of computational power needed to verify transactions. This works by allocating only certain people to be ‘validators’ when they hold a certain amount of the coin, for example in Ethereum’s case, 32 ETH, as the incentive to attack the network is less advantageous. Blocks will then be validated by not only them, but also others, which ensures the security of the blockchain, and that significantly less miners are involved.

It is important to understand the impact crypto mining may have on your environmental footprint, as well as the waste you may produce by upgrading your equipment.

When will crypto mining end?

On paper, Bitcoin mining will last until 2140, when the last bitcoin has been mined. However, due to more halvings, inflation and increasing energy costs, the profitability of mining crypto could decline long before then. However, new cryptocurrencies are being created all the time, and the hierarchy of cryptocurrencies is constantly in motion, so the demand for cryptocurrency mining may change in future.

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