Learn Cryptocurrency
22 Nov 2021

What Is Cryptocurrency Mining? How Does it Work? 2021

Akumbenla Jamir

What Is Cryptocurrency Mining? How Does Crypto Mining Work?

Cryptocurrency mining is a method in which transactions for different forms of cryptocurrency are checked and uploaded to the digital blockchain ledger. Cryptocurrency mining is also known as crypto coin mining, altcoin mining, or Bitcoin mining. It has gained in popularity as both a topic of interest and activity during the previous decade.

A hot topic, right?  Let us first define cryptocurrency mining.

Key takeaways:

  • Crypto mining is the method of manufacturing new cryptocurrencies through authenticating and recording transactions in the blockchain.
  • Cryptocurrencies are mined using a proof of work algorithm.
  • Miners verify transactions on the blockchain.
  • Mining has become quite expensive over time because of energy consumption and substantial hardware requirements.
  • Most countries allow it except for Algeria, Egypt, Morocco, Bolivia, Ecuador, Nepal, and Pakistan.
  • It involves financial and regulatory risks.

What is Cryptocurrency Mining?

Most people consider crypto mining to be merely a method of manufacturing new currency. However, crypto mining also includes authenticating cryptocurrency transactions on a blockchain network and recording them in a distributed ledger.

For example, Bitcoin, Ether, Dogecoin, and other cryptocurrencies rely on Blockchain technology, a public ledger protected by complex cryptography. Adding more coins to the ledger requires solving complex mathematical problems that help verify virtual currency transactions. In return for their work, miners get bitcoin, allowing the new currency to circulate. This data is then updated on the decentralized blockchain ledger. 

Now that you know what crypto mining is let’s look at how it works.

How Does Crypto Mining Work?

In a nutshell, crypto miners validate transactions to earn cryptocurrency. To understand cryptocurrency mining is a technical thing, one must first grasp the basics of blockchain technology and the procedures involved. 

While mining, Proof of Work (PoW) is the algorithm used to protect cryptocurrencies like Bitcoin or Dogecoin. Here, Proof of work means a piece of data that is difficult to produce but easy to verify. Miners must perform this process (PoW) to upload new blocks of transaction data to the blockchain. Simultaneously, in the blockchain system, a new block is created only when a miner generates a new winning proof-of-work. Proof-of-work is used solely to prevent users from earning additional money.

Let’s understand the essential jargon used in this process.

For this example, we’ll utilize Bitcoin:

  • Nodes: These are the persons and devices involved in the blockchain (such as your computer and other cryptocurrency miners).
  • Miners: These are nodes that validate unconfirmed blocks in the blockchain by converting letters and numbers into encryption code. A miner confirms a block and adds it to the blockchain.
    For notifying other nodes, the first miner gets rewarded.
  • Transactions: A transaction is an exchange of cryptocurrencies between two parties.
  • Hashes: A hash is a function that turns a string of letters and numbers into an encrypted string of a specified length.
  • Nonces:  A nonce is a cryptographic term for a unique integer. NIST defines a nonce as “a non-repeating value.” In crypto mining, the nonce is the number that the miners are solving for.
  • Algorithm consensus: This is a blockchain technology that enables various nodes in a distributed network to agree on data verification. The initial consensus algorithm is called “proof of work” (PoW).
  • Blocks: These are the parts that make up each blockchain. Blocks, once verified, cannot be changed.
  • Blockchain. The blockchain is a chronological collection of blocks. 

A Step-by-Step Guide to Crypto Mining

A Step-by-Step Guide to Crypto Mining

Now it’s time to go deeper into the bitcoin mining process and learn how it works.

1. Nodes authenticate transactions

Consider the following example to see how it all fits together:

Assume you’re a crypto miner and your friend Kumar borrows $5,000 from another friend Hamish to buy a new high-end gaming setup. It’s a top-of-the-line PC with the newest gaming accessories. Kumar repays him with a fraction of a Bitcoin. To finalize the transaction, it must be verified.

2. Separate transactions are grouped to form a block

The next stage in crypto mining is to add all transactions to a new, unconfirmed block of data. Continuing the gaming system transaction scenario, Kumar’s Bitcoin payment to Hamish would be deemed one.

Adding their transaction to the blockchain (after verification) avoids “double spending” by preserving a permanent public record. The record is immutable, meaning it cannot be changed.

3. The unconfirmed block gets a hash and other data

Once the block contains enough transactions, it adds the previous block’s header data and hash and a new hash for the current block. Therefore, a new hash is created and confirmed by a miner node by verifying the hash.

Let’s assume you’re the lucky one who solves it. You notify all other miners on the network to confirm your achievement.

4. Miners check the block’s hash to ensure it’s valid

During this stage, additional network miners verify the unconfirmed block’s hash. But how hard is it to hash? 

Suppose I say, “I love crypto mining,” for instance.

That is, “6a0aa6e5058089f590f9562b3a299326ea54dfad1add8f0a141b731580f558a7.” in hash form. Hence, the process of hashing is comlex and time consuming. 

5. After confirmation, the block is published in the blockchain

Crypto miners may rejoice now that the Proof of Work (PoW) is complete. The PoW is the time-consuming process of solving the hash and showing others that you did it lawfully.

From the user’s perspective, it implies Kumar’s partial Bitcoin transfer to Hamish is now confirmed and will be included in the block. Naturally, being the most recent verified block, it is added to the end of the blockchain. This is because blockchain ledgers are chronological; they build on prior entries.

Yes, the processes are super time-consuming. But is it worth it? Let’s understand!

Is Cryptocurrency Mining Profitable?

Mining was a highly rewarding activity in the early days of bitcoin. In the case of Bitcoin, the first bitcoin mined in 2009 came with a reward of 50 bitcoins (BTC), which was worth approximately 6,000 USD at the time. The computing power and energy required to mine bitcoin were also far cheaper, allowing miners to keep a larger share of the cryptocurrency mining profit.

Currently, crypto mining has become quite expensive. Huge hardware expenditures and electrical costs are the reasons. The total cost of cryptocurrency mining varies depending on the miner’s location and technology. This implies that mining bitcoin and other cryptocurrencies can be profitable, although not always.

So, now let’s understand the legality of crypto mining.

So, Is Crypto Mining Legal?

Accordingly, Crypto mining is governed by the laws of the country in which it is conducted. For example, in Israel, cryptocurrency mining is a business and is taxable accordingly. Even while Canada and the US look to favor crypto mining, there remains regulatory uncertainty in India.

How Can You Start Cryptocurrency Mining?

The first step is to get the finest computer available. The next step is to create a wallet for all your mined coins. Lastly, to optimize your income, join a mining pool. Mining pools consist of groups of miners pooling their resources. The mining reward is then distributed evenly among all pool members.

Mining pools make it easier to collaborate and compete and, of course, earn money.

FAQs Cryptocurrency Mining: 

Is cryptocurrency mining legal? 

Most countries allow cryptocurrency mining, except Algeria, Egypt, Morocco, Bolivia, Ecuador, Nepal, and Pakistan. Overall, it is legal in most parts of the world.

Which cryptocurrency mining is most profitable?

Ethereum, Monaco, Monero, Vertcoin, Grin, Monero, ZCash, Bitcoin Gold, Haven,  Ravencoin, Litecoin, and Aeternity are among the best. It is advisable to use a mining calculator to confirm profitability because of fluctuations in the market.

How to mine cryptocurrency in 2021?

Set up a mining rig, obtain a bitcoin or crypto wallet, join a mining pool, and then download a mining application to your computer. After that, the program will mine for you as you go about your routine.

Which cryptocurrency mining is profitable?

Ethereum, Monaco, Monero, Vertcoin, Grin, Monero, ZCash, Bitcoin Gold, Haven,  Ravencoin, Litecoin, and Aeternity are among the best.

How to start cryptocurrency mining in India?

The first step would be getting the best computer in the market. Then, next would be creating a wallet to store all your mined cryptocurrencies. After that, join a mining pool to maximize your profits. 

Is cryptocurrency mining safe?

The risks of crypto mining are often that of financial risk and a regulatory one. So, make sure to check your country’s stand on cryptocurrency mining before you start trading. 

Think mining is too complicated? Well, trading in crypto isn’t. Start your journey with CoinSwitch Kuber.


Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Akumbenla Jamir

Content Writer

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