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Crypto Mining—what is it, and how does it work?

Henning Taeger
Henning Taeger
Henning is a writer and editor here at Dollargeek who is passionate about personal finance and cryptocurrency. He enjoys sharing his knowledge about financial management and cryptocurrency with readers, helping them make informed decisions about their money. In his spare time, Henning can be found playing the latest video games or jamming on his guitar. He is constantly on the lookout for new ways to improve his financial literacy and stay up-to-date on the latest trends in the world of cryptocurrency.

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Crypto Mining
Table of Contents

What is Crypto Mining and what does it have to do with Cryptocurrency?

Cryptocurrencies work by keeping track of all transactions on a ledger. Crypto mining is the process that confirms new transactions onto the ledger by using complex math problems solved by computers to verify new transactions onto the ledger. 

This process of solving a math problem to confirm new transactions is referred to as “mining”. Anyone can become a crypto miner and since the mining network is made up of miners from all over the world it makes cryptocurrency “decentralized” as it does not rely on any central authority like a central bank or government.

Mining is also the way crypto tokens are released into circulation, as the miners who verify transactions get paid in crypto for their work. This crypto reward that miners receive is the incentive that encourages people to mine crypto and help legitimize and monitor crypto transactions to ensure their validity and secure the network from attacks.

How does Crypto Mining work?

Crypto mining works by having a network of miners who use their computers to solve complex computational mathematical problems to validate transactions. 

The miner who successfully cracks the code and solves the problem will be able to validate a block of transactions to be added to the blockchain, in return for solving the problem they will be rewarded crypto. 

Once a miner has solved the problem, other miners in the network will verify their solution before it gets added onto the public ledger, also known as the blockchain.

In the Proof of Work mechanism used in Bitcoin, miners will race to solve the complex math problem to validate a block of transactions, with the first miner to solve the problem being rewarded bitcoin. 

This also means that miners with more computing power will have a greater chance of solving the complex computational math problem first. The total computing power used on the Bitcoin network is known as the Bitcoin Hash, the higher the hash rate, the more difficult it becomes to mine Bitcoin and vice versa.

Is Crypto Mining legal?

The legality of mining crypto will depend on which country you live in. Whilst crypto mining is completely legal in most countries, there are a few places where crypto related activities, including mining, is illegal.

A few countries that have made crypto mining illegal are China, Qatar, Algeria, Bangladesh, Egypt, Morocco, Nepal, Oman, Pakistan, and Vietnam.

The main reason for countries banning crypto mining surrounds environmental concerns, given that mining Proof of Work cryptocurrencies use a significant amount of energy. Bitcoin, the largest Proof of Work cryptocurrency, has seen an exponential increase in its energy consumption recently, which most countries say is a cause for environmental concern. 

Due to this concern, crypto miners are making efforts to reduce their environmental impact by using renewable energy sources for mining, such as solar power or geothermal energy.

It’s worth noting that even in countries where it is legal to mine crypto, you may be liable to additional taxes. Some countries class crypto mining as a business or money transmitter, so you will be subject to the laws that govern those activities.

Israel, for example, treats crypto mining as a business and miners are subject to corporate income tax.

What are the Methods of Crypto Mining?

Most crypto mining is done through either GPU mining or ASIC mining. GPU mining involves using a specialized graphics processing unit, found in most high-end computers, for its computational power to solve mathematical problems. 

If you want to start GPU mining, you will need a motherboard as well as an adequate cooling system to go along with your GPUs. In addition to that, you will need to have your rig always connected to a stable internet connection.

ASIC mining uses an application-specific integrated circuit that is specifically designed for mining cryptocurrencies faster and more efficiently than GPU mining. Whilst ASIC mining can produce more crypto than GPU mining, the machines themselves are a lot more expensive to buy. 

However, if you are trying to mine a cryptocurrency like Bitcoin where there are over 1 million miners racing to be the first to complete the computational math problem, you will need to invest in an ASIC miner as a traditional GPU mining rig won’t be able to keep up.

There is an increasingly popular third option when it comes to crypto mining, which is Cloud Mining. Cloud mining is a cheaper alternative to GPU or ASIC mining, where miners leverage the power of large corporations and dedicated mining facilities. 

This involves renting somebody else’s mining rig for a predetermined amount of time. With this method, you won’t make as much as you would if you mined on your own rig, but you won’t have to front the cost of a mining rig.

What Is Proof-of-Work & Proof-of-Stake?

There are two main ways that cryptocurrencies can validate blockchain transactions, Proof of Work and Proof of Stake. These are known as “consensus mechanisms” as the entire network will have to come to a consensus or agreement to verify blocks on the blockchain.

Proof of Work

Proof of Work is the validation method relevant to crypto mining, this is where miners set up computers to solve complex computational math problems to validate blocks on the chain in return for crypto rewards. 

The network of miners will race to complete the math problem, and the first miner to produce the required outcome will share it with the network and will be rewarded with crypto. 

For cryptocurrencies that rely on Proof of Work, this is also how new tokens are introduced into circulation. The largest cryptocurrency to use the Proof of Stake consensus mechanism is Bitcoin.

Proof of Stake

Proof of Stake is a consensus mechanism that requires holders of the cryptocurrency to offer up their tokens as collateral, known as staking, for the chance to validate a block. Token holders who offer tokens as collateral become “validators”, who will be randomly selected to “mine” or validate a given block. 

This randomized selection process saves a significant amount of energy since only the chosen validator will do the work, as opposed to the entire network racing to complete the problem. To become a validator, you will need to stake a specific number of tokens. 

The largest cryptocurrency to use the Proof of Stake consensus mechanism is Ethereum, which recently transitioned from Proof of Work over to Proof of Stake.

Is Crypto Mining Worth It?

Deciding whether crypto mining is worth it depends on a variety of factors. The most popular crypto to mine is Bitcoin, and a combination of rising energy prices and falling crypto prices has had a big impact on the profitability of Bitcoin mining.

It is also costly to start mining, as you will need a dedicated mining machine or ASIC miner which can cost anywhere from $2000 to over $10,000.

As far as rewards go, Bitcoin miners are rewarded 6.25 bitcoins per block successfully mined, however this reward halves roughly every four years. Back when Bitcoin was first mined in 2009, mining one block would reward you 50 bitcoins. The next halving for Bitcoin will happen in 2024 where the block rewards will fall to 3.125. 

In the past, Bitcoin halvings have correlated with boom-and-bust cycles that result in BTC prices higher than before the halving. Block rewards and halvings are worth taking into consideration if you are planning to start mining Bitcoin in 2022.

To find out whether crypto mining is worth it, you need to weigh up a variety of variables such as the power of the mining rig you have, its energy consumption, the price of electricity and the price of the cryptocurrency you are mining. 

For this example, we will be mining Bitcoin using an Antminer S19 Pro, one of the best crypto mining rigs on the market, which has a hashing power of 110 TH/s and consumes 3250W of electricity. 

At the average electricity price of $0.167/KWh in the US you would currently make a loss of $1700 per year given the price of Bitcoin is currently just below $20k as of September 2022. 

Given that the current cost to purchase an Antminer S19 Pro is around $4500 it does not seem financially viable to start mining cryptocurrencies right now.

The Bottom Line

Crypto mining is a critical component to a blockchain ledger’s maintenance and development, it validates all new transactions and secures the network by preventing people double-spending. It is also the method used by cryptocurrencies to introduce new tokens into circulation over time.

Crypto mining can be profitable if you have the right mining rig, but even then, your profitability will rely heavily on the price of Bitcoin and the cost of electricity. When the prices of crypto are down or the cost of electricity is high, it will be much harder to profitably mine cryptocurrencies. 

The high initial investment required to purchase a mining rig powerful enough to mine crypto means that it will take a long time to recoup your investment, if at all, given the current economic climate.

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