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What is cryptocurrency mining, and how does it work? Mikhail Hipo Author Mikhail Reviewed by Jana Kin Updated
May 30, 2025 16:02Between 2019 and 2021, mining became a common phenomenon among cryptocurrency enthusiasts to the extent that it led to a doubling in demand for graphics processing units (GPUs). During that time, many crypto enthusiasts wanted to own their own mining farm. By 2024, the hype around digital mining had significantly decreased. However, profitable mining is still possible, and the potential income from mining will exceed electricity costs. Despite the end of the gold rush period, launching tokens can still be successful if done wisely. Through this review, you will learn how to build a blockchain, what the proof-of-work protocol is, and why every miner needs to know this. You will also learn how to process transactions and confirm new blocks of virtual currencies. Additionally, you will read about the primary obsession of all professional miners - the increasing difficulty of mining and what it can lead to. The article covers the following topics: Important points
Important Points What are the stages of cryptocurrency mining? Methods of cryptocurrency mining Mining pools and profitability considerationsMining using mobile phones and personal computersAdvantages and disadvantages of cryptocurrency miningLegitimacy and regulatory uncertaintySustainability and the future of cryptocurrency miningConclusionFrequently asked questions about cryptocurrency mining
Cryptocurrency mining is a technically complex process that requires significant investments and ongoing maintenance. The profitability of mining heavily depends on the exchange rate of the mined currencies and the cost of equipment.What are the stages of cryptocurrency mining?In simple terms, cryptocurrency mining, including Bitcoin or any other currency that operates on a Proof of Work (PoW) consensus protocol, involves the following stages:1. Mining farm participates in validating transactions and aggregating them;2. The farm performs calculations;3. After completing the calculations, the miner gains the right to add a block to the blockchain;4. Bitcoin miners receive a reward for the newly mined block being added to the chain.Miners perform specialized computational operations and solve complex mathematical equations to mint currency tokens. The first miner to find a solution adds a new block to the blockchain and receives a digital currency as a reward. This algorithm is called Proof of Work or PoW.
The second most common consensus in blockchains is Proof of Stake (PoS). For this type of mining, low-power computing equipment is sufficient. The advantage of receiving rewards does not go to the person who solves more problems quickly, but to the person who stakes the largest share of blockchain coins. The most famous blockchain with the PoS consensus protocol is Ethereum.In blockchains, regardless of the consensus mechanism, mining is essential for confirming transactions, aggregating transactions, and adding them to the public ledger. That is to say, through the efforts of the miners, the necessary permissions for the operation of the digital currency are provided. This mechanism is used by Bitcoin and other popular alternative currencies like Ethereum Classic, Litecoin, and Monero.The number of blocks depends on the total computational power of the mining equipment, which is usually measured by a global performance metric known as the hash rate. The graphics processor used in mining plays a crucial role in the performance of mining farms. The more powerful the mining facility, the greater the reward, meaning the extraction of tokens.Not all cryptocurrencies are mineable.Mining Process and Incentives It is difficult for an inexperienced user to understand how something comes from nothing, i.e., the digital monetary values that can be exchanged for paper money. It is not entirely clear how network security relates to mining farms. To understand the mining process, let's take a look at some terms: A wallet is a unique pair of public and private keys, and wallet addresses are encrypted hashes of the public keys. A transaction is a record of the history, sender, receiver, and amount of the asset that is created when transferring money from one wallet to another. The hashes of the transactions are signed using the sender's private key and sent to all participants in the blockchain who are waiting for the transaction to be confirmed; this is a 32-bit random number that miners try to discover. Confirming the transaction ensures prevention of double spending. Metaphorically, the blockchain is like a ledger where all transactions are recorded. However, it is impossible to decode and read the records without the keys. Before a transaction gets confirmed, it is stored in a transaction pool. The confirmation itself occurs when a new block is found. This is where it connects.
Methods of cryptocurrency mining are employed by miners using various techniques based on blockchain technology: cloud computing, ASIC mining platforms; mining using farms with a range of video cards; mining using GPU chips to launch the main nodes. You don't even need a mining farm to start receiving mining rewards for blocks and adding them to the blockchain. The computations can be transferred to computers in a data center located thousands of kilometers away.
Cloud mining is suitable because the future miner does not need to invest a lot of money upfront to buy a mining farm, design cooling systems, maintain equipment, and try to increase profitability. Instead, you can rent a certain hash rate (hashes per second) or even ASIC mining equipment, which are separate physical platforms.Mining using cloud service power can be more profitable than a mining farm. Data centers incur lower power costs and buy components at supplier prices, significantly reducing operating costs. Cryptocurrency miners can access massive amounts of computing power, which can be utilized if mining difficulty increases. There are no issues with outdated equipment. The lessor bears most of the potential risks and losses, and your losses cannot exceed the cost of renting mining farms or ASIC units in the data center.
ASIC mining devices - computing units for mining Bitcoin and its forks. Mining farms consisting of ASIC devices produce efficiently. However, the drawback of these mining farms is that they are usually designed to operate with a specific algorithm. That is, they are application-specific integrated circuits. For example, if a mining farm is operating on the SHA-256 algorithm, it will produce digital currencies such as Bitcoin, Bitcoin Cash, Bitcoin SV, and about thirty other cryptocurrencies. It is difficult to reprogram these mining farms for other algorithms.The next most common method for mining Bitcoin and other cryptocurrencies is mining with graphics processing units (GPUs). GPU-based mining farms have lower noise levels than ASIC units, which is why they can be installed even in residential apartments. You can configure video cards for any algorithm and mine hundreds of digital currencies.
The next most common method for mining Bitcoin and other cryptocurrencies is mining with Graphics Processing Units (GPUs). GPU-based mining farms have lower noise levels than ASIC units, which is why they can be set up even in residential apartments. You can configure the video cards for any algorithm and mine hundreds of cryptocurrencies.CPU mining is effective for only a few cryptocurrencies. The most famous algorithm that uses CPU resources is RandomX. For example, the Monero blockchain runs on XMR code. To receive a substantial mining reward while working on this algorithm, the cryptocurrency miner will need a multiprocessor mining rig built on a powerful server platform.Since the launch of the China project in 2021, mining farms equipped with a set of hard drives have emerged. The Chia blockchain allows cryptocurrency miners to generate new blocks using hard drives. However, cryptocurrency miners have already forgotten about this project. Therefore, it is better to postpone the idea of building a mining farm on a hard drive.
The next most common method for mining Bitcoin and other cryptocurrencies is mining with Graphics Processing Units (GPUs). GPU-based mining farms have lower noise levels than ASIC units, which is why they can be set up even in residential apartments. You can configure the video cards for any algorithm and mine hundreds of cryptocurrencies.CPU mining is effective for only a few cryptocurrencies. The most famous algorithm that uses CPU resources is RandomX. For example, the Monero blockchain runs on XMR code. To receive a substantial mining reward while working on this algorithm, the cryptocurrency miner will need a multiprocessor mining rig built on a powerful server platform.Since the launch of the Chia project in 2021, mining farms equipped with a set of hard drives have emerged. The Chia blockchain allows cryptocurrency miners to generate new blocks using hard drives. However, cryptocurrency miners have already forgotten about this project. Therefore, it is better to postpone the idea of building a mining farm on a hard drive.
Depending on the number of participants, a distinction is made between solo mining of cryptocurrencies and mining pools - associations of miners. Mining pools allow thousands of users to combine their computational resources with their mining farms. This collective approach increases the chances of successfully adding blocks for new transactions, thereby reducing the financial risks for each participant. Running a masternode grants you rewards in the form of commissions at the miner level. These are the masternodes with advanced powers, without which some networks would not function. For example, the DASH network is supported by masternodes. Operating a masternode is equivalent to mining cryptocurrency, although this is not entirely correct technically. For investors, masternodes provide good business opportunities. Mining devices after discussing cryptocurrency mining methods, let's move on to the technical issue. Which mining device would be more effective for certain tasks?
ASIC platforms are a solution for professionals. ASIC-based mining rigs generate loud noise, making them unsuitable for home use. They offer good energy efficiency and high hash rates, but their prices are extremely high and are designed for specific algorithms. Also, with the increasing complexity of mathematical problems, ASIC mining farms quickly become outdated, and it will be difficult for the average cryptocurrency miner to resell the old equipment.
Graphics processing units are designed for moderate cryptocurrency mining and provide a good return on investment. Mining farms on server platforms equipped with multiple video cards are productive and can be reconfigured for any algorithm.When choosing equipment, pay attention to the hash power ratio and electricity consumption. Also, a good cooling design is important to extend the lifecycle of the devices. With increasing mining difficulty, equipment can be sold in the secondary market.Mining pools and profitability considerationsLet’s take ten miners, each owning a mining farm with a capacity of 1% of the total network power. At the same time, 280 blocks of cryptocurrency are mined daily. This means that each individual miner can mine about 14 blocks per week. If these ten people come together and pool their resources, the network capacity will be 10%. This pooling will result in mining 28 blocks per day, which is 196 blocks per week. This means that 19.6 blocks will be mined on average for each miner, which is 5.6 blocks more than individual mining. Pooling resources becomes suitable with the increasing level of difficulty.
Each mining pool is led by one or more coordinators who maintain the reliability of the system, ensuring that miners do not waste energy and consume electricity decrypting the same blocks, and distributing rewards fairly.The profitability factors for participating in the pool are the number of participants and the reward distribution model:PPS - Miners receive a commission for each share, which is a valid attempt to solve the problem.FPPS - The reward is distributed upon completion of the search for a new cryptocurrency block. Commissions are also paid for conducting cryptocurrency transactions in the found block.PPLNS - Proportional payments based on the miner’s contribution to the last N attempts to decrypt a block.Mining using mobile phones and PCsFrom a purely technical perspective, mobile mining is possible, and there are many applications that turn almost any smartphone into a miniature mining platform. For registration, permanent or one-time numbers are purchased, and cryptocurrency is mined using 10, 20, or 100 phones simultaneously.
However, the profits from this mining farm are questionable because smartphones are not resource-intensive or energy-efficient. Additionally, the resistance of phones to high loads is also in doubt. Mining farm owners are concerned about GPU wear due to high temperatures; in fact, the smartphone cannot operate for long under continuously high temperatures. Using phones for mining has an increasing impact on the environment due to the need to frequently replace batteries.Advantages and Disadvantages of Cryptocurrency MiningLet's take a closer look at the advantages and disadvantages of cryptocurrency mining.
The advantages of cryptocurrency mining Mining cryptocurrencies is simply essential. Most blockchain models are designed in such a way that it is impossible to maintain the network's security and overall functionality without the work of miners. Mining farms provide a source of income for the miners themselves. For cryptocurrency enthusiasts and investors, the rewards are the main motivation to use their equipment's power to find new blocks. However, in order to recover the value of the equipment purchased and to achieve a net income from the mining farm after some time, you will need to establish an investment plan that takes into account long-term exchange rate forecasts and the system's hash rate.
Disadvantages of Cryptocurrency MiningBuying a mining farm once does not guarantee the same profit over two or three years. The difficulty of mining continues to increase. Equipment that was earning thousands of dollars monthly yesterday will produce many fewer returns after the difficulty rises. Therefore, cryptocurrency mining is a continuous and carefully studied process for investing in equipment.In many countries, profits from cryptocurrency mining are subject to taxation. This fact should also be considered in the investment strategy. Miners around the world also face a ban on cryptocurrency mining by authorities and other risks that can lead to substantial losses.Legality and Regulatory UncertaintyChina is at the forefront of banning cryptocurrencies. In this country, you cannot open a mining farm and will face a legal ban on cryptocurrency exchange transactions and sales.
Iran has also started to severely restrict cryptocurrency mining. Until recently, this country was attracting mining farm owners in an attempt to enter international trade. However, there were so many miners that the energy sector could no longer cope with the increasing load.A similar situation arose in cold Iceland. Initially, the government offered miners the chance to mine "digital gold" using green energy from geothermal sources. However, due to the general rush, miners began to run out of electricity. Therefore, the country imposed a ban on establishing new mining farms. However, existing miners were not expelled.Regarding the legitimacy of cryptocurrencies and mining, all countries can be divided into:- Banned countries;- Countries suffering from regulatory uncertainty;- Countries where cryptocurrency trading is legal and subject to government oversight.There is also Vietnam, where the law prohibits mining and cryptocurrency payments, but money transfer companies and cryptocurrency exchanges operate freely.Sustainability and the future of cryptocurrency miningEMCD founder Michael Gerlis believes that it should not be expected that the end will come.
The sustainability of Bitcoin is also secured against the multiple increases in the number of miners and the capacity of mining farms. As production increases, the complexity of the network and computations will increase proportionally. According to the expert, the difficulty redistribution mechanism is activated every two weeks. Additionally, the previous three halving events for Bitcoin were not the last in the history of the digital currency. This means that what is coming will not be the end of Bitcoin.Another expert in the field, financial analyst at the cryptocurrency exchange Mikhail Karkhaliev, believes that it is unlikely for cryptocurrency mining to ever become unprofitable. If financial rewards and other forms of incentives gradually diminish, miners in the future may:- Charge additional transaction fees to expedite transactions;- Implement mechanisms to re-mine lost Bitcoins;- Update blockchain validation processes;- Increase the difficulty of proof of stake as commissions rise.These ideas are relevant to Bitcoin and the alternative currencies that are mined using proof of work and proof of stake protocols. However, concerns related to fossil fuels and the environmental impact of mining should not be overlooked.
In summary, decentralized consensus in blockchain allows it to operate only through the activities of participants who continuously add new blocks to the chain. By contributing, these miners replace central issuing authorities, ensuring the issuance of new coins and validating the blockchain. The motivation for active miners is the financial reward for adding new blocks. Therefore, mining cryptocurrency has a public benefit in the form of network development, and it is personally beneficial for each miner. At the same time, mining is no different from any market or business activity, but it comes with additional risks due to legal uncertainties and high volatility in cryptocurrency prices that fluctuate widely. Every potential miner must carefully weigh the pros and cons before starting. It may turn out that opening a real farm is not a bad alternative to mining.
Frequently Asked Questions About Cryptocurrency Mining
What is cryptocurrency mining exactly?
To provide proof of work, for instance, to confirm the completion of a transaction, a new block containing information about the transfer must be added to the blockchain. Mining farms perform complex mathematical calculations to add the created block to the chain. The first to do so receives a reward in the form of digital currency. This means that bitcoin and other cryptocurrency mining is conducted to validate transactions and issue new tokens.
How much does mining actually pay?
Individual miners who have multiple mining farms can earn thousands of dollars by decrypting cryptocurrency blocks like Bitcoin. The monthly income of a single system can range from several tens of dollars if it is an ordinary PC to hundreds of dollars when mining on ASIC platforms or a mining rig equipped with several powerful video cards.
How does cryptocurrency mining work?
How does bitcoin mining work?
Mining is a complex process of finding new blocks of transactions, which are then added to the blockchain.
Is cryptocurrency mining really profitable?
It is difficult to give a definite answer to this question. Cryptocurrency mining can only be profitable if the electricity costs and the consumption of the mining farm are lower than the reward obtained for decrypting new blocks. The higher the hash rate of the mining farm with the same energy efficiency, the greater the net profit you will achieve.
Can you set up a mining rig at home?
This is possible, but it is not always comfortable. For example, you are unlikely to enjoy living next to a mining farm consisting of ASIC devices. These devices are very noisy and also get extremely hot. However, GPU mining farms are quieter and are often installed in residential apartments. Electricity consumption is also taken into account to ensure that it does not exceed the allowable standards for the apartment.
Is cryptocurrency mining legal?
The legality of mining varies by country. For example, in China, operating mining farms and trading cryptocurrencies is banned. Mining is also completely banned in Iran, Iceland, Vietnam, Indonesia, and other countries.
How does mining confirm transactions?
Information related to transactions, which confirms their validity and prevents double spending, is stored in blocks. In order for network users to conduct transactions, they must be verified by the miner. The miner collects all unprocessed transactions, verifies their validity, forms a new block of verified transactions, and adds it to the blockchain.
Why does mining consume so much electricity?
Mining farms consist of high-performance equipment capable of solving complex mathematical equations. High-performance graphics cards consume a lot of electricity. Therefore, even a home mining farm will consume more than one kilowatt-hour.
Does cryptocurrency mining damage your graphics card/computer?
Cryptocurrency mining does not damage the graphics card, CPU, or any other computing hardware. However, the equipment operates at a constant maximum load, which may cause overheating. Therefore, when designing mining farms, it is important to have good cooling and a reliable power source for the nodes to extend their lifespan.
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