Cryptocurrency mining

Quick definition

Copy link to section
Updated: Dec 28, 2023

Cryptocurrency mining is the process of using a computer to solve equations to verify transactions.

Key details

Copy link to section
  • ‘Mining’ refers to the practice of using a powerful computer to solve equations and add new transactions to a blockchain, which helps to keep cryptocurrencies secure in the absence of a central governing authority.
  • Networks that use this technology are referred to as ‘proof of work’ blockchains. The most famous proof of work blockchain is the Bitcoin blockchain.
  • Those who mine cryptocurrency receive rewards; for example, with Bitcoin, miners earn 6.25 BTC for every block (group of transactions) they mine, though this figure halves every four years

What is cryptocurrency mining?

Copy link to section

Mining is a means of creating and approving new transactions on a blockchain. Transactions are grouped together, into ‘blocks’, and added to the blockchain all at once. To add a new block, miners must offer up their computer power to solve a complex equation and confirm the transactions are genuine.

Once each block has been mined, the owner of the computer that solved the algorithm first receives a reward, and this varies from blockchain to blockchain. Some cryptocurrencies (most notably Bitcoin) are more competitive to mine, meaning people must invest large amounts of money in computer processing power and ventilation/cooling systems to keep their hardware functioning optimally and to generate greater returns.

Blockchains that use this method are known as ‘proof of work’ (PoW). Confirming a transaction requires approval from 51% of the miners before it goes through, which means that PoW blockchains are extremely hard to hack; a malicious user would have to control over half the miners on the network to attack it. For a blockchain as large as Bitcoin, it is almost impossible for anyone to achieve that.

Cryptocurrency mining environmental concerns

Copy link to section

In recent years, there has been increased pressure placed on the practice of cryptocurrency mining by environmentalists who feel it consumes a large amount of energy and is bad for the environment. As a result, some have looked towards proof-of-stake (PoS) blockchains that use staking to validate and secure their network rather than mining.

However, many crypto investors, traders and commentators feel that the energy consumption of crypto mining is overplayed, especially in comparison to the existing environmental impacts of TradFi.

What is Bitcoin mining?

Copy link to section

Bitcoin mining is a form of crypto mining based on a ‘proof of work’ consensus mechanism. In simple terms, this means you have to use significant amounts of computer power to solve complex algorithms to earn the right to add a new block to the Bitcoin blockchain.

All miners get paid transaction fees for their work, and one of the miners who worked on the block is rewarded at random with some newly mined bitcoin each time a block is solved.

There is a finite amount of Bitcoins (21 million), and the only way to extract these Bitcoin is through ‘mining’ them.

This means that the first time you buy Bitcoins , hey will go through this process before they can land in your ownership.

What’s the difference between hardware mining and cloud mining?

Copy link to section

Hardware mining requires you mine by using your own physical hardware, such as a processor or a data centre. Cloud mining, on the other hand, is when you effectively lease this hardware from someone else.

These days, it’s extremely difficult for the average person to mine Bitcoin using their own hardware, as it’s simply too expensive to buy powerful enough equipment and then pay for the energy required to run it. Because of that, cloud mining has become more popular as a means to earn some of the profits from Bitcoin mining without such a large capital outlay.

What is a mining pool?

Copy link to section

A mining pool is a group of crypto miners working together and sharing the rewards. Mining pools combine resources and share all their miners’ processing power, splitting the income according to the amount of work each miner has contributed.

By miners banding together in pools, they increase the odds of being rewarded for solving a block, allowing them to have more regular returns. Think of it as a large group of people playing betting on different horses in a race and agreeing to split the resulting winnings between them. The rewards may be smaller, but there’s a far greater chance of consistent income.

How to mine crypto

Copy link to section

In the early days of Bitcoin’s emergence, you may have been able to compete for blocks with an out of the box home PC. However, this has changed drastically in recent years. On Bitcoin’s blockchain, one block is produced every ten minutes.

Every two weeks – or roughly every 2,016 blocks – Bitcoin is designed to evaluate and adjust the difficulty of mining to optimise the rate a which the solution to each algorithm is discovered. This allows block production to stay at this stable 10-minute rate.

So, if millions of mining rigs are working on a problem, there is very little chance a single underpowered setup will solve anything. The network size is simply too vast, and the difficulty level is too high to expect returns if you don’t wheel out something substantial in the way of your setup.

So, if you are serious about mining crypto, you will want to invest in powerful computer equipment like a GPU (graphics processing unit) or, perhaps more realistically, an application-specific integrated circuit (ASIC). The price for this equipment can range anywhere from £500 to upwards of £10,000. Once you have sourced this specialist hardware, you’ll want to find some computer software with a strong reputation that can put your newly purchased rig to work.

Should I mine crypto?

Copy link to section

This really depends on your own personal circumstances. It is important to be realistic – cryptocurrency mining is now a highly commercialised industry with giant warehouses packed full of expensive hardware ready to compete against you.

As a result, if you are looking to mine crypto casually, or if you aren’t committed to investing in a rig, you might be better off spending your time investing or trading crypto and NFTs, staking, or playing blockchain-based games for rewards.

However, if you are willing to put in the groundwork to assemble a high-end rig, and you have the means to power it and maintain it constantly, crypto mining may be an interesting avenue for you to explore. While rewards for Bitcoin mining continue to reduce, they remain strong. We recommend checking out a Bitcoin mining profitability calculator to find out what sort of returns you can expect from your own enterprise.

Where can I learn more?

Copy link to section

To find out more about cryptocurrency mining, check out our crypto hub page for all of the links you need to key learning resources.

Sources & references
Risk disclaimer
Charlie Hancox
Financial Writer
Charlie is a Financial Writer for Invezz. He covers commodities, cryptocurrencies, and breaking news. Prior to joining Invezz he helped grow Crux Investor into the fastest-growing... read more.