What is cryptocurrency mining?
We’ve all heard the stories.
“Kid who mines Bitcoin from mom’s basement now worth $100,000,000!”
OK, maybe that headline is made up. But ever since Bitcoin launched in 2009, cryptocurrency mining has become increasingly popular, especially since the price of one Bitcoin has gone from about $0.01 to over $35,000 in the span of a decade.
But what exactly is crypto mining? Is it something you can do at home?
In this article we’ll cover the details of how crypto mining works, what hardware is needed to mine for Bitcoin and other crypto, how much crypto miners earn, and whether it’s worth it to start crypto mining today.
What Is Cryptocurrency Mining?
Cryptocurrency mining is the process of verifying and adding new transactions to the blockchain in return for a potential reward of a predetermined amount of the currency. This competitive process rewards the first miner to solve a complex math problem to decrypt a 64-digit hexadecimal number known as a “hash.”
This competition gives an advantage to the miners with the most computational power.The more mining resources that join a given crypto network, the more difficult it is to solve for the number first, making it harder to earn mining rewards. This is known as a proof-of-work (PoW) consensus mechanism.
Having multiple miners competing in this way helps keep the blockchain network secure by creating a decentralized network of independent miners.
Crypto mining was developed by Satoshi Nakamoto when Bitcoin first launched, and is still used for Bitcoin and other proof-of-work crypto projects.
For Bitcoin, mining has become an energy-intensive process because the competition involved now requires a large amount of commercial-grade computer hardware to even have a chance of solving for the hash and earning Bitcoin.
How Cryptocurrency Mining Works
Cryptocurrency mining is a computational process that involves solving complex math problems to solve for a 64-digit hexadecimal number (a “hash”) that helps verify a block of transactions on the network.
Without getting too complicated — I know, too late for that — a miner uses processing power to guess through trillions of possible combinations of the number until it reaches a number that is equal to or less than the “target hash.”
The winner of the mining process is able to add the next “block” in the blockchain, which contains all of that cryptocurrency’s network transaction data in sequential order. This block is added to previous blocks, and contains all the information of past blocks, which makes the blockchain an ever-increasing ledger of transactions.
In addition to adding the next block, the miner unlocks a predetermined amount of cryptocurrency for solving the hash, and is able to collect the crypto as a reward for mining.
In the case of Bitcoin, the amount of crypto collected for each mined block is reduced for every 210,000 blocks mined, or about every four years. This means it will become twice as hard (and half as valuable) to mine Bitcoin as time goes on. This increases the processing power of the network, but also increases the potential value of Bitcoin due to the ever-decreasing rewards and limited supply.
Should You Mine Cryptocurrency?
Due to the competitive nature of the process, it is difficult for individuals to successfully mine Bitcoin. But mining smaller proof-of-work crypto projects still can be a successful venture for individuals, albeit with expensive, powerful hardware to help “win” more blocks.
There are also crypto mining pools, which allow individuals to join a group of other miners and “pool” together their processing power, further increasing their chances of mining a block and receiving the rewards. Pools are probably the best way for individuals to mine for popular proof-of-work crypto projects, such as Bitcoin and Ethereum.
That being said, crypto mining is very competitive, and you may end up investing thousands into hardware and still never recoup your cost. It also may come with a larger electricity bill and the headache of maintaining your own hardware.
Crypto mining is important to the security and health of PoW crypto blockchains, but it may end up costing you money in the long run.
Pros of Crypto Mining
Crypto mining is needed to maintain blockchain networks and keep an accurate record of transactions, keeping the network secure. Mining crypto can also be profitable to miners, especially if the cryptocurrency you’re mining multiplies in value over time. Here are a few pros to mining crypto:
- Crypto Rewards. Miners are incentivized with crypto rewards, paying out a predetermined amount of cryptocurrency for each block that is mined. These rewards can become very valuable if a project takes off and obtains mass adoption and demand.
- Securing the Network. Miners help secure the network by validating the transactions on a blockchain, making it extremely difficult for bad actors to manipulate it. The more miners on a given blockchain network, the harder it would be for someone to take it over.
- Mint New Cryptocurrency. For proof-of-work (PoW) crypto projects, the only way to create new coins is for miners to mine them. Most of these types of crypto projects have a hard cap on how many coins will ever be created, and mining is the only process for how they are created. Mining helps increase the supply of coins available to trade and use.
- Voting Power. Miners typically have some type of voting power over proposed changes to the cryptocurrency network they are mining on. The more mining power employed, the more weight your vote gets. This helps give miners influence over the future of the crypto protocol and over matters such as forking the network.
Cons of Crypto Mining
Crypto mining can be lucrative, but it also consumes a lot of energy. Smaller miners without much processing power may also never solve for the hash, and thus never earn crypto rewards if a network is too competitive. Crypto mining can be great, but also may not work out for some users. Here are a few disadvantages for crypto mining:
- Energy Consumption. Since proof-of-work (PoW) projects require processing power to solve for the hash, more miners on a given network means that it requires exponentially more processing power to win against competing miners. This turns into an energy-intensive process. Bitcoin is the leading example of this, with some reports showing that global Bitcoin mining consumes as much power as a small country.
- May Never Make Money. On competitive networks such as Ethereum and Bitcoin, miners without a massive amount of processing power at their disposal may never solve for the hash, thus earning no block rewards. Even when pooling together resources in a mining pool, it may be cost prohibitive to mine cryptocurrency.
- Regulatory Hurdles. Bitcoin mining is outright banned in some jurisdictions, such as China and Kosovo. It’s a risky proposition to spend the upfront capital to set up a mining rig for Bitcoin if it could be banned in the state or country where you live. Although other crypto projects don’t have as many hurdles as Bitcoin currently, this is always a risk miners assume.
How Much Do Crypto Miners Earn?
Crypto miners earn fixed rewards for successfully solving for the hash first, and thereby mining a block on the crypto blockchain. These rewards vary by cryptocurrency, and profits can be split between miners if joined into a mining pool. In 2021, Bitcoin miners earned over $15 billion in annual revenue, and Ethereum miners earned over $16 billion.
Bitcoin started in 2009 and paid 50 BTC per block mined, but rewards are reduced by 50% every 210,000 blocks. As of 2022, the block reward is currently 6.25 BTC. At an average value of around $30,000 per BTC, this is a reward of almost $200,000 per mined block.
Because Bitcoin mining is ultra-competitive, these rewards usually end up split between a mining pool or go to a professional company that owns a massive amount of Bitcoin mining hardware. Very rarely will a single Bitcoin miner solve for the hash themselves and mine an entire block alone — although it has happened as recently as January 2022.
Ethereum pays out about 11 ETH per block mined currently, which is the equivalent of about $22,000. Again, with the competitive network, it may take a substantial hardware investment to win block rewards. Many Ethereum miners join pools to get a share in each block reward.
There are also smaller PoW crypto projects that are less competitive, but the prices of those coins are also far lower than Ethereum and Bitcoin and are much more volatile.
Overall, crypto miners typically make money by owning and operating very expensive hardware — sometimes tens of thousands of dollars for an individual miner — and winning the competitive race to solve a hash before everyone else. How much they earn is dependent on how their mining system is set up and whether they are part of a pool or a professional crypto mining company with commercial real estate and equipment dedicated to mining coins.
How to Get Started Mining Cryptocurrencies
If you want to mine crypto, the most straightforward way to get started is to buy a crypto mining hardware setup and load it with mining software.
There are a wide range of choices for hardware, with the application-specific integrated circuit (ASIC) computers being the most popular (and powerful). These systems can go for over $30,000, depending on the specs of the computer. Machines of this caliber are pretty much required for Ethereum and Bitcoin mining solo.
That being said, most individual mining is now done by joining a pool. There are mining rigs that cost less than $1,000 that can earn rewards as part of a crypto mining pool.
Once you have purchased a hardware setup, you can download mining software for your desired cryptocurrency. The software allows you to launch a mining program and begin mining in only a few clicks.
Bitcoin has an entire wiki page devoted to mining software, but it is a bit difficult to navigate for the uninitiated. GCMiner seems to be the most popular Bitcoin mining software (and one of the oldest), but do your own research before loading any mining software to your computer.
The software typically allows you to join a mining pool; once the program is launched, you contribute your mining power to the pool and share in the rewards.
If you want to dive down the rabbit hole of crypto mining hardware, software, and profitability, the site WhatToMine.com offers a massive list of resources to learn more about mining cryptocurrency.
Crypto Mining FAQs
Crypto mining is necessary to secure proof-of-work (PoW) crypto blockchains and process the massive amount of transactions on each network. Here are the answers to a few common questions about crypto mining:
Is Crypto Mining Legal?
Crypto mining is legal in most jurisdictions, but there are an increasing number of countries and locations banning crypto mining, specifically Bitcoin mining. China is the largest country to ban Bitcoin mining, but others have followed suit, including Egypt, Iraq, Nepal, and Morocco. These countries have an outright ban on cryptocurrencies, which includes mining.
Overall, cryptocurrency is outlawed in nine countries and implicitly illegal in 42 more, according to a Law Library of Congress study in November 2021.
What Are Mining Pools?
Mining pools are a network of connected miners that “pool together” their mining resources to provide enough processing power to earn crypto block rewards. These pools can be distributed across the internet, but are connected by software. The “work” of solving the hash for a particular crypto is split up between miners.
Rewards are typically split in proportion to the processing power contributed by each miner, and some mining pools may charge a fee to join.
How Is Crypto Mining Taxed?
Crypto mining is viewed as business income and is taxed at the ordinary business income rate. Some mining pools or programs may report your earnings to the IRS in the form of a 1099-NEC. The cost basis of the cryptocurrency is the value of the crypto on the day you receive it, and if you sell it, you will need to report a capital gain (or loss) to the IRS.
Cryptocurrency mining has become insanely popular over the past few years, with mining processors and graphics cards exploding in price due to the massive demand for crypto mining hardware. With the ability to stand up hardware and launch a program with a few clicks, the barrier to entry for crypto mining is continuing to go down. And with the advent of crypto mining pools, individuals can still participate, even competing against professional mining companies.
Crypto mining has been highly profitable for early adopters, but is becoming extremely competitive, especially for Bitcoin and Ethereum mining. Because the process involves using processing power to solve a complex problem the fastest, the expense of the hardware involved to begin crypto mining may be cost-prohibitive to some, and others may never recoup their upfront costs.
Crypto mining has been wrought with controversy as well, with Bitcoin mining consuming more energy than some small countries, and Ethereum migrating away from mining in 2022. And most new crypto projects do not include proof-of-work PoW crypto mining as part of their blockchain network.
Overall, crypto mining is still alive and well, but is not as profitable (or sustainable) as it was just a few years ago.