What is crypto mining?

In the crypto space, mining is often discussed, but unfortunately, many people do not fully understand what it entails. 

This can sometimes be a problem, because unfortunately there are many crypto scams that exploit the popularity of the term “mining”, and its derivatives (such as miner), to deceive the unsuspecting. 

To best protect yourself from these scams, the best thing is to thoroughly understand what it means to mine Bitcoin and cryptocurrencies. 

The Foundation: Proof-of-Work

Bitcoin was the first cryptocurrency in the world to be created, over 17 years ago. 

It was based on a simple concept: to validate transactions, they had to be inserted into a valid block and linked to the previous one, thus constructing the blockchain. 

The problem was how to validate the blocks. 

It should be noted that Bitcoin is based on a public, decentralized, and immutable protocol, therefore lacking nodes recognized as “validators”. It was necessary to find a public, decentralized, and immutable method, also publicly verifiable by everyone, to validate the blocks in which the transactions to be validated were inserted. 

The solution chosen by Satoshi Nakamoto was the so-called Proof-of-Work (PoW), a consensus algorithm based on solving a cryptographic puzzle, and based on a concept developed as early as 1992 by Cynthia Dwork and Moni Naor to combat spam. The term Proof-of-Work, however, was coined by Markus Jakobsson and Ari Juels in 1999.

In the case of Bitcoin, the Proof-of-Work requires miners to randomly search for a single specific code that validates individual blocks, and this code changes from block to block. Only when this code is discovered can the block be validated and added to the blockchain. 

Since this process requires work (code searching), the algorithm is called proof of work. 

The Miners

Miners, therefore, are those who search for such codes. The first one to find it has the right to claim the reward and add the validated block to the blockchain. 

Regarding Bitcoin, initially the reward was 50 BTC for each individual validated block, but every 210,000 validated blocks, this reward is halved.

To date, more than 930,000 blocks have been validated and chained in the Bitcoin blockchain, therefore there have already been four halvings. The first, which occurred in November 2012 at block number 210,000, reduced the reward to 25 BTC, the second, in July 2016 at block 420,000, brought it to 12.5, the third, in May 2020, to 6.25, and the last, which occurred in April 2024 at block 840,000, brought it to 3.125. 

The reward is collected by the individual miner who discovers the block’s validation code, known as the hash. Therefore, so-called mining is nothing more than a competition among miners to see who can first discover the validation hash of each new block. 

How Bitcoin Mining Works

Since hashes are drawn randomly, it is clear that this competition rewards miners with greater computational power, as this increases the chances of hitting the correct hash. 

For example, if a miner has computing power ten times greater than another, they also have ten times the probability of finding the hash code that validates a block. 

As of today, it is estimated that the computing power allocated globally for Bitcoin mining is slightly below one thousand EH/s, or exahash per second. 

Exa means 10^18, or one billion billion, therefore nowadays on average every second worldwide, slightly less than one thousand billion billion hashes are randomly generated in search of the one that validates a block. Since on average it takes just under 10 minutes to find that hash, in total, approximately 600,000 billion billion hashes are randomly generated worldwide to validate a block. 

Given that these numbers are simply astounding, it is obvious that to win the prize offered approximately every 10 minutes, one must contend with fierce competition equipped with an overwhelming computational power. 

To extract as many hashes as possible, specialized machines called ASICs (Application Specific Integrated Circuits) are used, each costing several thousand dollars. The largest miners own hundreds or even thousands of ASICs. 

That said, it is clear how a single user with a regular computer, which typically can extract less than a hundred billion hashes per second, cannot compete with the quintillions of hashes being extracted every second worldwide. With less than one billionth of the global computing power, it is practically impossible to win this competition.

How to Mine Altcoins

Mining Bitcoin, therefore, is now an activity that can realistically be successfully undertaken only by those who have a true industrial-scale hash extraction facility, consisting of dozens, hundreds, or thousands of ASICs, each costing several thousand dollars. 

It is true that there are pools where even small miners can pool their computing power with other miners, thereby significantly increasing the chances of successfully contributing to the mining of a block. However, in these cases, the remuneration is based on the percentage of computing power provided to the pool, so with less than one hundred billion hashes per second, even if you manage to contribute to the mining of a block, the portion of the reward you win is really negligible. 

For these reasons, many small miners prefer to mine altcoins. 

It should be noted that nowadays there are relatively few cryptocurrencies based on Proof-of-Work. For example, Ethereum, which was launched in 2015 with PoW, transitioned to Proof-of-Stake (PoS) in 2022, which is currently the most widely used consensus algorithm. 

Besides Bitcoin, the other well-known PoW-based cryptocurrencies are Dogecoin, Bitcoin Cash (BCH), Monero, Zcash, Litecoin, Ethereum Classic (ETC), Kaspa, and Dash. 

Mining these altcoins is much simpler than mining Bitcoin, but to be honest, it’s also much less profitable. The easiest one to mine appears to be Monero, but Ethereum Classic and Kaspa also seem promising from this perspective. 

Mining these altcoins does not require expensive ASICs, and often powerful, properly configured graphics cards are sufficient. 

Nonetheless, the fact remains that to efficiently operate a crypto mining facility, one must have a clear understanding of what they are doing, possess strong expertise in the field, and above all, have access to large amounts of low-cost electricity, as the main issue is indeed the high energy consumption. 

Cloud Mining

In theory, there is a low-cost alternative because it does not require the use of one’s own machines. 

It’s called cloud mining, but it must be said that it is often a scam. 

Essentially, it involves lending money to mining facilities with the hope that the funds will indeed be used to finance mining activities, and with the expectation of receiving a share of any potential profits in return. 

In reality, those who promise to engage in cloud mining often merely collect the money, and there is no real way to verify with certainty that what they promise is true. It’s better to steer clear of these scams. 

In the past, there were indeed legitimate cloud mining platforms, but they operated by allowing users to rent (obviously for a fee) computing power allocated on machines installed at third-party facilities, which then had to be configured and managed by the users. Ultimately, this activity still required a lot of expertise, whereas those who promise to enable mining without any effort or expertise, simply by sending money, are most likely just lying.