Cryptocurrency mining

Quick definition

By:

Charlie Hancox

Charlie is a Financial Writer for Invezz. He covers commodities, cryptocurrencies, and breaking news. Prior to joining Invezz he… read more.

Updated: Jan 20, 2023

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

Key details

• ‘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?

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

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.

How to mine crypto

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?

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?

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