What Is Crypto Mining & How Does It Work?

The crypto market is full of profit-taking opportunities. While most crypto enthusiasts stick to trading and holding crypto, some venture into crypto mining to maximize their gains.

Right after the launch of Bitcoin (BTC) in 2009, there were barely a few miners, but as the crypto market evolved, mining digital currencies became a very profitable activity.

In this guide, we’ll take a detailed look at crypto mining and how it works. We’ll also go through the details of Bitcoin mining since most miners focus on Bitcoin, and we’ll find out what mining methods are the most profitable.

Crypto Mining and Bitcoin

Crypto mining wasn’t popular during the first couple of years of the crypto market when there was only Bitcoin and a few other altcoins on the market. The crypto community was very small, and it didn’t look like cryptocurrencies had a bright future. However, thanks to the high reliability of the BTC network, more users started joining the market and experimenting with Bitcoin as a financial asset. 

During the early 2010s, this resulted in the growth of the crypto community and the launch of the first crypto exchange platforms in 2010. In turn, the market capitalization and the price of Bitcoin started growing.

At first, Bitcoin was worth just a few cents. In 2013, it crossed the 10 USD value, while in 2017, it broke the 1,000 USD per coin threshold. In line with the growing value of BTC, crypto mining also started to become more popular.

Many crypto enthusiasts realized that if they engaged in Bitcoin mining, they could earn huge amounts of money by generating new Bitcoin units. However, crypto mining requires a lot of upfront investment. The mining hardware is quite expensive if you want equipment that can mine BTC efficiently. Also, mining consumes extremely high amounts of electricity and needs to be operational 24/7. 

Generally, crypto mining can really become a great source of income, but to mine efficiently and maintain a profitable mining operation, you need to do your calculations right and get the best possible hardware according to your budget.

Other Mineable Cryptocurrencies

Although most crypto miners focus on Bitcoin, there are numerous cryptocurrencies that you can mine as well. Up until the Ethereum (ETH) merge event in 2022, when Ethereum moved to a different blockchain mechanism called Proof-of-Stake (PoS), Ether mining was also extremely popular. 

As far as other altcoins are concerned, Dogecoin (DOGE), Litecoin (LTC), Bitcoin Cash (BCH), Monero (XMR), Zcash (ZEC), and Dash (DASH) are just some of the numerous cryptocurrencies you can mine, as they all use the Proof-of-Work (PoW) blockchain mechanism.

The Bitcoin Blockchain

Since Bitcoin is the most popular mining cryptocurrency, we’ll take a deeper look at the BTC blockchain to explain how mining works. The process is similar if you use other mineable cryptos, except that they use a different hashing algorithm to create new coins. Bitcoin uses the SHA-256 hashing algorithm to produce new blocks of the blockchain.

The BTC blockchain itself has the form of a chronological line of data blocks that each house 1MB of transaction data. When a user wants to send some Bitcoin from one public address to another as a form of payment or as part of a crypto exchange deal, they initiate a blockchain transaction.

The first step of the transaction is to send the transfer data into the blockchain’s memory pool where it waits for miners to select it for processing. 

Transactions are encrypted messages that carry information about the sending and receiving public addresses and the exact amount of transferred coins and have a unique transaction timestamp and transaction id (TXID). With the help of the transaction ID, users can track their transactions on the blockchain. The timestamps are used to locate specific transactions in blockchain data blocks. 

Miners choose transactions based on their attached transfer fees. The transactions with higher fees get processed faster. When a miner starts to process a transaction, they use the computing power of their mining hardware to search for the right transaction hash manually. In the case of Bitcoin, transaction hashes are 64-digit strings of letters and numbers. 

Depending on the miner’s hashing power, it can take quite some time for them to find the right hash. Because of this, miners team up into mining pools where thousands of miners join their hashing power to find transfer hashes faster and share block rewards. 

The Proof-of-Work Consensus Mechanism

When a miner or a mining pool finally finds the right hash for a transaction, they send that hash out to the rest of the blockchain as Proof-of-Work. Several additional randomly selected miners then double-check the hash’s validity before giving final approval to the transaction. This is how the Proof-of-Work consensus mechanism ensures only valid transactions are added to the new blockchain blocks. 

Because of the PoW mechanism, it’s impossible to spend the same funds twice. The Bitcoin network nodes automatically detect double-spending attempts and discard the second transaction. 

When a transaction receives final approval, it’s added to the next block of the blockchain. The miners involved in the hashing of the new block get rewarded with transaction fees and fresh bitcoins. These new bitcoins are called block rewards and are distributed among miners in proportion to the hashing power of their mining hardware. 

All mineable cryptocurrencies use this same blockchain consensus mechanism to ensure that no one cheats the network. The only way hackers would be able to process double-spending transactions or alter the contents of approved data blocks is by taking control over 51% of the network nodes. This is practically impossible because there are thousands of Bitcoin miners around the world that serve as blockchain nodes. 

Crypto Mining Methods

There are various methods for mining crypto, however, the most efficient ones can be quite expensive. You need to have really strong and efficient mining hardware, with a high hashing power to earn considerable amounts of crypto from mining.

CPU Crypto Mining

Right after the launch of Bitcoin in 2009, the first BTC miners used the computing power of their central processing units (CPUs). CPU mining was quite efficient during this early stage of crypto development because the Bitcoin mining difficulty was relatively low, and users could mine BTC easily with their computers. 

However, as the crypto community grew and more miners joined the Bitcoin network, they began to compete with each other. Miners with stronger CPUs had the advantage over those with weaker machines.

Soon enough, Bitcoin miners realized that the hashing power of CPUs is quite low in regard to the rising difficulty of Bitcoin mining and they found out that graphics processing units (GPUs) are a much more efficient alternative. At this point, CPU mining was quickly abandoned by most miners because it couldn’t compete with the efficiency of GPUs.

While it’s still possible to mine Bitcoin and many other digital currencies with a CPU, you can’t expect to earn any considerable mining rewards using this method. In fact, CPU mining is more of a way to utilize your CPUs hashing power while your computer is idle and earn micro amounts of crypto in the process. 

GPU Rig Mining

When miners found out that GPUs have an incomparably higher hashing power than CPUs, the whole crypto-mining community shifted toward GPU mining rigs.

The hashing power of GPUs is measured in megahashes per second (MH/s), which is millions of hash combinations per second. This amount of hash combinations is far superior to CPUs whose hash rate is measured in kilohashes per second (KH/s), or thousands of hash combinations. 

This is how GPUs were suddenly repurposed for more than rendering complex 3D images and powering PC games. Since GPUs are individual hardware components for PCs, miners need to connect them to other essential hardware elements, such as the motherboard, CPU, power supply, and cooling system.

Plus, GPU mining rigs usually have multiple graphics cards. The number of GPUs in a rig is usually between two and eight GPUs, but the number can go even higher. Miners must connect all the rig’s GPUs to the other core hardware elements. This is usually done by fitting the GPUs into a huge mining rig frame that houses all the hardware components.

Since mining rigs consume vast amounts of electricity and need to be operational 24 hours a day, they also generate a lot of heat. Without proper cooling, the mining hardware will quickly malfunction, which means that miners need to install efficient cooling systems with multiple cooling fans within the rig frame. Some miners even choose to use an open rig frame for extra cooling. 

Rigs aren’t pre-manufactured. Miners get to build their own GPU rigs by choosing which components they want to install in the rig frame. Generally, miners tend to invest most of their budget in the GPUs because they determine the efficiency of the whole rig. You can create a mining rig for a few hundred US dollars, but it won’t be really efficient. Powerful mining rigs with the best GPUs can even cost several thousand USD.

ASIC Crypto Mining

Most miners today use GPU mining rigs to mine crypto because they have control over all of the components and can set up a mining operation according to their individual budgets. However, ASIC miner machines allow users to mine crypto even more efficiently.

In fact, the hashing power of ASICs is measured in terahashes per second (TH/s), which means trillions of hash combinations within a single second. Even the strongest GPU mining rigs with a bunch of brand-new graphics cards can’t compete with an average ASIC machine.

ASIC stands for an application-specific integrated circuit, which basically means that an ASIC is a machine manufactured to serve only one purpose and run a single app. ASIC miners produce huge computing power, and all of it is focused on mining crypto. Also, every ASIC miner can only mine cryptocurrencies that use the same hashing algorithm. 

For example, ASICs that use the SHA-256 hashing algorithm can only mine Bitcoin, Bitcoin Cash (BCH), and other coins that use this algorithm. If you want to mine Litecoin (LTC), you need an ASIC that supports the Scrypt hashing algorithm. 

An ASIC machine comes in the form of a fully autonomous device with all the hardware components integrated within the device’s frame, including the cooling system. You just need to connect it to the web and to a power source to start mining crypto. 

Unlike GPU mining rigs, you can’t make your own ASIC miner because ASIC components aren’t available for sale. The only way to buy an ASIC miner is from a manufacturer like Bitmain or an online shopping platform like Amazon or eBay. 

Also, ASIC miners are far more expensive than GPU rigs. They can cost thousands of USD per machine, but they are also far more profitable for crypto mining. Individual miners rarely use ASIC miners because of their high prices. Instead, mining companies and entrepreneurs that deal with crypto mining as a business are the main users of ASICs.

Cloud Mining

Apart from running your own mining operation, you can also use cloud mining to earn crypto. This type of mining doesn’t require any upfront investment in hardware or any technical knowledge. You can simply buy some hashing power from a cloud mining company, connect your crypto wallet to the platform and receive mining rewards on a regular basis.

There are numerous companies that run mining farms with hundreds or even thousands of ASIC miner machines. These companies rent their hashing power to users around the world for a fee. This is a great way for crypto enthusiasts who don’t want to buy mining hardware to join the industry and earn crypto.

However, cloud mining can also be pricey in the long run because the platforms charge high fees. These fees are usually paid upfront to guarantee the mining company that you’ll stay with them for a certain period of time since they need to pay for electricity and hardware maintenance. 

It pays off a bit more to set up your own mining hardware, but if you want to avoid any hassle with hardware maintenance and don’t have much time to spend on your crypto operation, then cloud mining is an excellent choice. Some of the most popular cloud mining platforms are Bytebus, ECOS, and Genesis Mining. 

Crypto Mining Profitability

Crypto mining can be incredibly profitable, but you can also lose a lot of money fast if you aren’t careful. The most efficient methods for crypto mining are GPU rigs and ASIC miners, but both of these methods consume enormous amounts of electricity. This means that if you plan to buy some hardware and start mining, you need to take electricity costs and the amount of electricity you’ll be consuming into account. 

Before you buy GPU rig components or an ASIC, you need to calculate the amount of power you’ll need on a monthly basis, the monthly bills you’ll pay, and the amount of crypto you’ll be earning. You can either calculate these variables manually or use an online crypto-mining profitability calculator such as the one on Nice Hash or the Whattomine calculator.

Also, keep in mind that your mining hardware isn’t a one-time investment because its efficiency will gradually decrease over time because of the growing mining difficulty associated with most mineable cryptos like Bitcoin. This means that you should always allocate a portion of your mining profits for future purchases of stronger mining hardware. 

Conclusion

Crypto mining, with a special focus on Bitcoin, has become immensely popular during the last few years because of the potential profits from the volatility of crypto prices. However, you need to be very careful if you plan to engage in crypto mining because it’s quite complex, and you can easily end up with unprofitable mining hardware that consumes a lot of electricity. 

Be sure to calculate your hardware’s potential profitability before buying it, along with the electricity costs, in order to project your potential gains and expenses.