What is cryptocurrency mining, how it works and how to do it

Cryptocurrency Mining: the term is crucial when talking about Bitcoin and digital currencies. But what does it mean and how does it work exactly?

Knowing how to become a miner and how to proceed and earn with cryptocurrency mining is a growing interest, considering the popularity of Bitcoin and other cryptocurrencies on the rise.

In the US, according to the 2024 study by Security.org on crypto, 40% of American adults now own cryptocurrencies compared to 30% in 2023.

Therefore, digital currencies are no longer considered a niche investment. This is why many today are wondering what is it and how do you earn money with mining, the process of creating new units and validating transactions on the blockchain.

It is a complex activity that requires a huge expenditure of energy to be able to solve the complicated algorithms in exchange for a reward. In this guide we see all the information on how to mine.

What does cryptocurrency mining mean? The meaning

The term mining comes from the English to mine, which means to extract, recalling the phenomenon of the gold rush in California in the late nineteenth century.

Consequently, cryptocurrency mining is the process of creating - in the proper sense of extracting - new crypto units through a decentralized calculation process with which to protect, process and verify each transaction.

In simpler words:

Mining is the process through which computer networks create and put new digital currencies into circulation, verifying the transactions carried out in the blockchain.

Blockchain literally means "chain of blocks", understood as a computer network of nodes to uniquely and securely manage a register made up of a series of data and information. An example are transactions, which are managed in this way openly and distributed without any central control.

Miners are those who carry out mining. They are rewarded for monitoring and verifying the legitimacy of transactions only if they are the first to solve a series of complex mathematical problems.

How mining works

Mining is a fundamental activity that leads to the addition of new blocks to the blockchain (based on proof-of-work protocols). Let’s now see how the mining process works by examining the Bitcoin blockchain.

To complete the mining process and obtain the reward, miners must solve mathematical algorithms and guess a certain value that can be added to the other information present in the block, returning a specific hash code.

The target hash is a 64-digit hexadecimal number composed of numbers and letters from A to F. A hash is a true fingerprint of a block of data and is generated to protect data transferred over a network through an irreversible process.

When a miner finds the solution, that is, one of the missing numbers of the hash (which is called nonce), he can validate the block and the others present in the network will have to confirm the correctness of the result and attach the new block to the chain of previous blocks.

If positive, the miner who validated the block will get his reward: this mechanism is called proof-of-work.

What do you need to mine

To mine cryptocurrencies you need:

• buy hardware with a high processing capacity and a cooling system;
• install software or a cryptomining app and configure it;
• open a cryptocurrency wallet

To start mining you also need to know that:

• Mining requires enormous computing power that comes from the users’ hardware. For this activity to be profitable, you need to have a performance video card, with a high hashrate, capable of consuming as little as possible. The minimum investment for a solution of this type is 1,500 euros, which can be made on your home computer. To mine competitively, miners need to have hardware with a CPU, an ATI graphics card (GPU) or specific integrated circuits (ASIC). The latter can cost from $500 to thousands of dollars.

• you need to download software, completely free, that takes care of data processing. The most popular, among the many in circulation, are GMiners, CGMiner, EasyMiner and BFGMiner. Some of these software are open source and free, while others require a fee, such as Awesome Miner

• it is necessary to open a wallet to contain the cryptocurrencies that will be created

How to mine cryptocurrencies

Attempting to extract cryptocurrencies with your computer could be difficult and expensive. Since the processing power of a personal computer represents less than 0.001% of the computing power of the network, it could take a long time before being able to validate a block.

To overcome this problem and facilitate the extraction of cryptocurrencies, mining pools were born, companies that coordinate and manage groups of miners. The participants in the pool optimize the mining process by using different values for the nonce so as to save computing power for the creation of the same block.

To allow multiple miners to combine their computing power, a server is needed that acts as a connection capable of maintaining a constant rate of block production and allowing even the smallest miners to obtain profits. It will therefore be necessary to install and configure cooperative mining software (BFGMiner, p2pool, ecoinpool).

Thanks to this mechanism, participants obtain earnings that they could not achieve individually without spending much more time. All miners participating in the pool receive a reward based on their mining power, but no one is left without earnings, no matter how small their contribution.

The main mining pools present today are:

• AntPool, the main Bitcoin mining pool by hash rate power, with an operational base in China
• Nanopool, the largest pool on the Ethereum network and for the extraction of popular altcoins
• F2Pool, which allows the extraction of Bitcoin and Altcoins

Is it worth investing in mining? How is it done?

The growing popularity of Bitcoin and cryptocurrencies in general has prompted many to ask how do you earn money with mining and whether it is worth investing in this activity.

First of all, you need to know that as the number of miners increases, the calculation difficulties increase and the revenues decrease. Furthermore, not all cryptocurrencies are easy to extract and in many cases the operation can be uneconomical. There are sites that calculate the mining profitability for each cryptocurrency, allowing you to make the most appropriate choice.

In the case of Bitcoin, for example, approximately every four years, the reward for mining is halved: this means that if in 2009, when the first Bitcoin was mined, the earnings were 50 Bitcoin, in 2012 this value dropped to 25 Bitcoin until reaching 3,125 Bitcoin in April 2024, when the last halving->article150389 was [performed].

It is not easy to be the first to solve the complex equation that leads to iidentifying the correct hash to close the blockchain: the computing power needed to extract the hash has increased compared to the first years, limiting the earnings. Furthermore, the electricity needed to power the supercomputers involved in the calculation must be considered, which must remain on 24 hours a day.

The other cryptocurrency par excellence created through mining is Ethereum which follows the same rules as Bitcoin mining. Only cryptocurrencies based on the proof-of-work validation system can be mined: among these we mention Litecoin, Bitcoin Cash and Dogecoin, but there are also more recent cryptocurrencies. In these cases, before starting a mining activity, it is necessary to collect as much information as possible and carry out in-depth studies on the validity of the project.

In general, cryptocurrency mining is impossible without the appropriate and competitive tools: the profitability of a miner depends, in fact, on the hashing power supplied to the network.

Risks of Mining

Mining is not free from risks, both financial and regulatory.

From a financial perspective, the purchase of all the hardware and software infrastructure for a value of hundreds or thousands of euros may not be repaid by the final compensation.

Furthermore, the cost of electricity consumed for extraction and the consequent environmental impact must be considered.

This last aspect has pushed some countries to ban or limit mining, precisely because of the high consumption.

Then there are risks related to security, especially when using public internet networks. In fact, they are often not protected and allow hackers to install malware to obtain additional computing power in mining.

Original article published on Money.it Italy. Original title: Cos’è il mining criptovalute, come funziona e come si fa