How Does Crypto Mining Work?

In this buzz: All you need to know about Crypto mining. What does it mean, how does it works, and can you make money from it?

We’ve all heard the term Bitcoin mining, but do we know what it means? Can you make money from crypto mining? I’ve had all the same questions, so don’t worry. I’ll explain everything. Here I’ll go over all the key terminology you need to know to understand crypto mining, explain how it works, and go over how you can make a profit doing it.

Strap in. We’re about to get technical.

1. Key Terms

To understand crypto mining, it is necessary to become well-versed in cryptocurrency terminology. There are many terms, some of which are pretty complex, so bear with me.

– Cryptocurrency

Cryptocurrency is currency like any other, except for two key elements. One: it only exists in a digital space. Two: it works without a centralized authority or ledger.

Unlike centralized or traditional banking systems, where one authority is solely responsible for organizing and maintaining one ledger, cryptocurrency is decentralized. It relies on several parties to run and maintain the system.

It is important to note that there are thousands of cryptocurrencies, and not all of them are minable. Some of the most popular cryptocurrencies are Dash (DASH), Monero (XMR), Ethereum (ETH), and, most notably, Bitcoin (BTC).

– Nodes

Nodes refer to the individual miners and computers that do the actual mining, and these are the parties that make up the decentralized system.

– Transactions

Transactions are the exchanging of cryptocurrency.

– Hexadecimal

Just as binary is a two-digit system consisting of ones and zeros, a hexadecimal system is used in computing where each value has 16 options. As only the numbers zero through nine can be used in a single value space, hexadecimal systems also incorporate the letters A through F.

– Hashes

Hashes are how varying or arbitrary data is mapped at a fixed value. Miners use them to verify the legitimacy of transactions. Hashes are 64-digit hexadecimal numbers that make up the unique code of each block. They are a combination of the previous block’s header and a nonce.

– Nonces

A nonce –also known as the target hash – is a random, non-repeating value. Nonce stands for number only used once. The miners are searching for the nonce.

– Blocks

A block is a list of verified transactions. It is impossible to modify.

– Blockchain

The blockchain is a chronological series of blocks that have been verified. The transaction ledger that makes up the cryptocurrency system, and it is a publicly accessible account of crypto data that includes transactions and hashes.

2. What is Crypto Mining?

Now that I’ve defined all the terms for you, we can get down to brass tacks. What is crypto mining?

In its most basic sense, crypto mining is how cryptocurrency transactions are verified and added to the public ledger. It is also responsible for the introduction of new currency into circulation. Crypto mining is the most prominent element that supports the peer-to-peer system of cryptocurrencies and eliminates third parties like banks.

The primary purpose of crypto mining is to monitor transactions, but it also helps miners turn a profit. It can also grant influence within the system as miners generally get a vote on upcoming changes.

By mining cryptocurrency, miners help maintain the system and build the ledger. They can prevent fraud and illicit token copies by verifying blocks of transactions. Miners are paid by the block; however, only the first miner to find the nonce gets paid.

One of the biggest draws for miners is receiving cryptocurrency without buying it directly. You can also earn cryptocurrency through specific blogging sites, shopping, and interest-earning crypto accounts. Of course, you can also purchase cryptocurrency or exchange it between different types (e.g., buy bitcoin tokens with Ethereum ones).

It can be an arduous process and is often based on chance. Miners with better computing power and higher hash rates are more likely to find the target hash first. Once the block is validated, it becomes a part of the blockchain.

Additionally, crypto mining may not be legal in your country, and if it is, it may be taxable. You will have to check which, if any, cryptocurrencies are legal in your country. Take note that there are strictly illegal mining methods, and hijacking other computers through malware to sponge off their computing power is a prime example.

3. How Does Crypto Mining Work?

Now you know what crypto mining is, but say you want to get into it, you need to know precisely how it works. What is the actual process behind cryptocurrency mining? Firstly, we have to recognize the differences between mining various currencies. For instance, bitcoin mining and Ethereum mining will not look exactly the same.

I will try to keep the process as general as possible, but to ensure enough detail in the explanation, I will be focussing on Bitcoin mining specifically. So without further ado, here is cryptocurrency mining explained.

To begin, there are two things you need to do to get paid for mining. To earn bitcoins, you must verify a megabyte-sized block of transactions and be the first miner to find the correct or closest 64-digit hash number. So, how do you do this?

Step 1: Verification

When the currency is exchanged, a node must verify that transaction. The node, either a miner or their computing rig, checks to make sure the bitcoins are the real deal and not just copies. They do this by cross-referencing it with the blockchain and previous hashes.

Step 2: Collection

Once the transaction is confirmed, it is added to a collection of other transactions in an unconfirmed block. This block is a set of data that shows the course particular bitcoins take. It is used to prevent copying or double-spending bitcoins.

Step 3: Target Hash

This spending record is then compounded with the previous block’s header data and a nonce to form the block’s hash. Nodes will then race to verify this new hash before all the others.

Step 4: Confirmation

Once the target hash is found, it is sent to other miners to confirm. This legitimizes the block, and it is added to the blockchain.

Step 5: Reward

This process constitutes proof of work. If you were to find the target hash, you get paid in bitcoins, and if not, you get nothing. Once the block is added to the blockchain, it becomes the most recent entry from which the next block takes its header.

There is more to the technical side of the process, but these are the basic steps of Bitcoin mining.

4. Additional Points of Note

In this section, I’ll give you some extra information on the nitty-gritty of the mining process and answer some questions you may not realize you have. First of all, let’s more closely examine how blocks are compiled.

In step two, each transaction is hashed when it is compiled into a block. This means it is turned from arbitrary data to something categorizable. In the case of Bitcoin, hashes are 64-digit hexadecimal codes.

These newly hashed transactions are then paired and given a new hash. This pairing and hashing happen repeatedly until you are left with a single hash number. This hash set is referred to as a Merkle Tree, and the final hash is called the Merkle root. It gets combined with the previous block’s hash and a nonce to create the block’s hash.

As you know, the first node to find the nonce of the new block is rewarded with bitcoins, but what happens if two nodes find the nonce simultaneously? This is a more frequent occurrence than you would anticipate. In the case of simultaneous answers, the majority selects the winner. In this case, both miners continue to mine and verify transactions.

The miner that verifies the most transactions is given the majority and receives bitcoins. The block of the loser is abandoned and becomes an orphan block or stale block. It is not added to the chain, and all miners continue on the blockchain that now features the winning block.

5. How to Minimize Cost and Maximize Profit

You’ve probably already realized that Bitcoin or cryptocurrency mining is not very lucrative., and it takes a lot of time and patience and can often have diminishing returns. It’s a lot like playing the lottery. People who mine cryptocurrency tend to spend a lot of money on big computer rigs that can handle the processing power it takes to find the target hash.

Additionally, most competitive miners invest in some heavy-duty equipment additional to the mining rig. Expensive GPUs (graphics processing unit) and ASICs (application-specific integrated circuit) are commonplace. If you factor in the mining rig’s cost, add-ons, and the power bill you’ll be running, cryptocurrency mining can be an extreme financial risk.

To mitigate such expenses and increase your odds of making a profit, joining a coin mining pool is a good idea. This way, you can combine computing power and efforts to mine faster and more efficiently. The vast majority of crypto mining is done through mining pools. In a mining pool, you agree to split the profits among the group.

Crypto mining is a painstaking task that is only sporadically rewarding and, not to mention, uses an incredibly detrimental amount of energy. It is also critical to factor in how much you can make mining cryptocurrency.

In the case of Bitcoin, the reward is halved every four years. When mining Bitcoin first started in 2009, the compensation for one block was 50 bitcoins, and as of 2020, the pay is 6.25 bitcoins. That being said, one bitcoin is worth $17,900 today, giving you $111,875 per block.

This is an impressive sum, to be sure, but remember that you only get it if you are the lucky target hash finder; and even then, you may not get anything if you tie and are the minority.

6. Takeaways

There is a lot to unpack when it comes to crypto mining, and all the new terms can be overwhelming, so let’s take a moment to go over some of the essential points. Whether you are interested in partaking in cryptocurrency mining, it is a good idea to make sure you fully understand how it works.

The Process

• Nodes collect and verify transactions
• The transactions are bundled and hashed, becoming blocks
• The block is then given a hash name based on the previous block in the sequence and a nonce
• The first miner to find and confirm the nonce receives cryptocurrency

The Profit

• Crypto mining is tedious and painstaking
• The equipment is expensive
• Individuals hardly win
• Mining pools are the best way to make any actual money
• Payments are sporadic and sometimes nonexistent but can be lucrative

Final Thoughts

When someone asks you what you think of crypto mining, you’ll know what they’re talking about and may even have an answer. If you are not computer savvy, you may lose the nuances of crypto mining in the sizable index of terms. There are many more than I covered. But if you can get your head around the facets of computer workings, the concept isn’t all that different from traditional banking.

In many ways, cryptocurrency offers a more transparent and controllable way to store your money. Crypto mining is merely verifying transactions and maintaining a public ledger. It is the same as what physical banks do, but all the information is publicly available, and the validity is checked by the users rather than a third party.

Though crypto mining can be a difficult and sometimes unrewarding task when you reap the profits, they are remarkably lucrative. Just remember, if you want to improve your chances of making money, join a mining pool.

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-Adam Smith

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