how does cryptocurrency mining work

How Does Cryptocurrency Mining Work? (Dummies Guide)

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When it comes to how crypto mining works there is much to discuss so let’s get started. 

One thing is for sure you won’t need any dump trucks or shovels to bring any of these precious gems into your crypto wallet. You think I’m joking, but I’ve had a few friends ask me this a few years back when I told them what I was doing, but it’s not that irrational considering it’s still this new age thing to get in early on.

You see mining cryptocurrencies require you to learn certain aspects of computer hardware and software that can be confusing for any first-timer. Not to mention there are some basic checklist requirements that you should go over before every attempting to run multiple miners.

Our main goal with this guide is to go further in-depth on what crypto mining is, how it works, and where to get more info on some of the specifics I’ll be mentioning later. Moreover, I want to clarify that the term “Bitcoin Mining” is a blanket term towards all forms of mining in which I will go into more detail as well.

How A Crypto Miner Works In Depth

Cryptocurrency Mining is a process in which digital currencies like Bitcoin, Ethereum, and Ravencoin, utilize computing power from miners to verify transactions across their respective networks.

Without computing power voluntarily offered by miners to validate transactions, these networks would run slow and inevitably fail.

But why would anyone offer up their computing power for mining while spending money on electricity unless they were incentivized by the network to do so?

You see there are no banks to trust so mining aids the network in verifying who’s paid whom and how much to add or subtract from each wallet address, mining is also responsible for creating and distributing new tokens as well.

New tokens, or coins as they’re commonly called, get created when a miner or group of miners called pools use a mathematical algorithm to collectively find and agree upon a solution, referred to as blocks. The rate at which these tokens get created is regulated by dynamically changing mining difficulty to prevent inflation.

Furthermore, these digital blocks contain the new tokens and are distributed evenly over time to incentivize miners to continue verifying transactions on the token’s network.  

Anyone with an internet connection and computer hardware capable of efficiently computing the complex mathematical equations can participate in mining these blocks.

Each time a new block of coins gets mined, the computational power used in solving the block also needs verifying, this is done through a protocol commonly known as proof-of-work or PoW.

SIDENOTE: I relate to this method from my high school algebra days when my teacher would discredit my homework for never providing any work as to how I came up with the solution.  

Once the network confirms the work of the new block, the miners then store the block’s data in a chain-like chronological sequence on the network’s ledger.

This ledger is also known as the blockchain.

After each block is confirmed, the miner or mining pool lucky enough in solving it first gets paid what is called a “block reward.”

The number of tokens rewarded for each block reward can vary from token to token and consist of new coins plus a percentage of the fees accrued from any transactions processed during the block’s creation timestamped period.

To sum this up, mining does two things for cryptocurrencies.

  1. Securely Verify Network Transactions
  2. Evenly Distribute New Tokens Over Time

Miners who help support a token’s network with transactions are also trying to solve blocks to find new tokens. Mining difficulty controls the rate of coin creation. The miner or mining pool who finds a block first gets the reward as long as their work is confirmed as valid across the rest of the network. This block of data then gets stored on the blockchain, and a new block is ready to be solved.

In a nutshell, this is crypto mining.

By now I hope you have a little better understanding of what crypto mining is and how it can benefit you and the blockchains as well.  

As far as the technical aspects go for people just getting started in mining, this is about all you need to know to understand its inner workings. There are however other aspects equally important such as mining hardware.

How Crypto Mining Hardware Works

When it comes to mining hardware, the chipset you select to start mining with will ultimately determine which coins you’re able to mine. So to avoid putting the cart before the horse, you’ll want to know what you want to mine first, and then you can choose the appropriate equipment you’ll need.

Currently, there are four classes of mining hardware chipsets in which you can mine cryptocurrencies with, and each comes with its own set of pros and cons. These are the most important component when it comes to mining as these chips are responsible for solving the blocks, also known as hashing.

CPU MINING

A CPU, or central processing unit, is probably one of the most common chipsets available today as they’re in every computer from laptops to gaming PCs.

It was this chipset that initially mined the first block of Bitcoins back in 2009.

One of the main advantages of using a CPU in mining is it’s reasonably easy to obtain since most users already have a laptop or desktop computer to spare.

However, it’s not efficient to mine Bitcoins with CPUs anymore. Nowadays they’re primarily utilized in mining Bitcoin alternatives called Altcoins, like Verus, BiblePay, and Koto, which you can learn more about in my CPU mining guide.

GPU MINING

GPUs, or graphical processing units (video cards), are the next big step up from CPUs and yet still primarily used in gaming computers today.

These chipsets made their debut upon the crypto scene in 2010 when they were rediscovered as useful for mining Bitcoin. However, just like its predecessor the CPU, it’s no longer feasible in mining Bitcoin either.

Right now crypto coins like Ravencoin, Ethereum, along with Grin and Beam are a few of the more popular altcoins you can currently GPU mine.

GPUs can also be configured to run together on the same motherboard which creates a more compact and efficient mining rig. The drawback to running more cards is your costs and time investment can start to go up.

For starters, you’ll be spending more on electricity since more GPUs mean more wattage, but the increased potential in block rewards combats this argument.

You’ll also have added heat to deal with, especially if you’re running more than just a few GPUs. Running indoors in the winter is fine, but summertime in warmer areas may not be so pleasant. So now the added cost of running more AC or adding in ventilation becomes another consideration when trying to budget.

Let’s not also forget the fact that GPUs can cost between $150 to $1400 each, depending on the model, especially at times when the hardware is scarce. This is mostly due to both gamers and miners competing for the same hardware in a market where supply is limited.

GPUs can also require more troubleshooting at times when trying to set up and overclock new mining software.

So yeah, GPU mining can cost more and require a bit more computer skills, but to most of the mining community, it’s the go-to chipset to use right now.

In my humble, honest opinion, GPU mining offers the most flexibility when it comes to the different coins you can you mine vs. any other chipset.

Combined with the fact that GPUs can resell quicker than any other chipset since they are also used and sought after by gamers, most of the mining community agrees that this fact alone makes GPU mining the safest way to go if you’re going to invest any money into mining.

On a final note, there is much debate about ASIC chipsets invading GPU coins like Monero and Ethereum which has caused some coins to fork and adapt ASIC resistant algorithms. These protocols are said to ensure long term stability for GPU mining and ward off any future higher chipset invasions.  

If you want to learn more about what GPU mining is and how to build your very own mining rig be sure to check out one of my guides.

ASIC MINING

ASIC, or application-specific integrated chips, are considered some of the most efficient chipsets and currently get utilized in today’s Bitcoin mining.  

These styles of chipsets are specially engineered for mining and were introduced to the public for purchase in early 2013.

ASIC miners are typically very easy to configure as they come pre-built and plug-n-play straight from the manufacturer.

However, they’re not top on my list as they come with their own set of issues as well.

The main issue right off the bat with ASICs for me is that the heat and sound they create can be more than enough to stop anyone from wanting to run one in or around a home.  

Another thing you have to keep in mind is the electrical requirements for ASICs typically involve having a dedicated 220v outlet for each miner you install.  

If your home isn’t equipped with a spare 220v outlet, this upgrade alone could set you back more than you might be comfortable investing.  

The other main issue, as I mentioned earlier, some versions of ASIC miners have been rejected by some crypto projects adopting ASIC resistant algorithms. This is also an issue for some of the Altcoin ASIC miners as these styles of miners are designed to only mine one algorithm. Hence the term ASIC, which stands for an application-specific integrated circuit, as it’s programmed to only do one thing but do it very efficiently.

So if a crypto coin hard forks their algorithms to adopt ASIC resistance, then the miner can no longer mine that coin and has to hope there’s another coin within the same algorithm worth value to mine. To me, that makes the Altcoin ASIC miner’s future very questionable.

Despite all the issues with ASIC miners, the one crypto coin I do recommend buying an ASIC miner for, if you have the means to do so, is Bitcoin.

So if you’re serious about learning how to mine Bitcoin, be sure to check my guide that goes more in-depth on what Bitcoin Mining is.

FPGA MINING

FPGA, or field-programmable gate array, was brought to the Bitcoin Mining scene back in late 2011-early 2012 but was considered inefficient to use at the time.

It was thought that this technology’s use in mining had died off for years mostly due to ASIC miners taking over the scene.

However, recently it appears some headway was made, as this chipset has made its way back into some of the Altcoins like 0xBTC for example.

These cards can mine at tremendous speeds with extreme efficiency, but it comes at a higher price than all the other chipsets combined. One FPGA card alone can set you back the average price of an eight card GPU mining rig of around $4000.

What makes these machines so different from ASICs is the fact that once an ASIC chip is manufactured and sent to the field, you can no longer reprogram it for any other use as mentioned earlier. Whereas FPGA, just as the name states, is field programmable.

This means that if you want to mine OxBTC one day and decide you want to reprogram your mining rig to mine Verge the next, you can do that just about as fast as you can in GPU mining.

With an ASIC miner, this is not the case so you’re stuck, which is why again I only recommend ASIC Bitcoin Miners.

However, that’s where another issue comes into play especially if you’re not a developer. You see you’re going to need an extensive level of knowledge behind the code language these chips use for mining and from what I read it’s not easy to learn.

I’ll be the first to admit this form of mining is quite a bit over my level of skill.

I did notice some sites are starting to post guides about how to set up an FPGA miner and how a few developers have created miners that you can download to make set up easier. The catch is, it too comes at a price as the devs charge a fee to use the software, which is fair as they should get paid for their hard work.

The huge turn off for me is the heat these chips radiate, in most cases these require water cooling which again is expensive.

Even though the cost of these machines cost is the highest of them all, it appears profits are highest with these types of chipsets.

In the end, FPGA may be the elite chipset, but I would like to see a little better pricing on hardware and better guides for support before I would feel comfortable taking on this level of mining.

FPGA LINK GUIDES

How Crypto Mining Software Works

As I briefly mentioned earlier, ASICs miner comes with integrated operating systems(OS) that only require a wallet and mining pool address to set up and start mining. GPU mining has several you can choose from but I’m going to spoil the fun for you and tell you Win10 is the best one.

GPU Mining OS:

  • Win10
  • Linux
  • Ethos
  • SimpleMiner
  • HiveOS
  • Cudo Miner

Linux is another excellent operating system, but you will have to know and understand Linux to use it. As for me, I have yet to learn Linux to a level I feel comfortable with so again I admit it’s a bit outside my comfort zone.

I blame most of this to Win10 performing well for me, easy to use, and miner support for the OS seems to be the best of them all.

However SimpleMiner, Ethos, and HiveOS are all Linux based operating systems but have user interfaces and were designed specifically for mining crypto. These can be great for beginner miners as well as they typically come with clear cut step by step instructions for setup.

The last two things I would like to mention about mining OS’s is the fact that windows always seems to have better drivers for GPUs overall. The other fact is that if you are speculative mining or chasing newer coins a lot of times, Windows will have working miner software available before all other OSs.

While we’re on the subject of miner software, let’s talk about them as well.

By the way, when I mention miner software I’m referring to the miner clients you will need to download once you’re ready to start mining.

Each mineable coin will have a miner available for download either linked on the token main site or listed under BitcoinTalk ANN. These clients are the program, once configured with your wallet and pool address, that makes your chipset start mining on the given token’s network.

List of GPU Miner Software

  • Ethereum Miner: Claymore
  • Ravencoin Miner: Trex, CryptoDredge
  • Monero Miner: XMR Stak
  • Grin Miner: Gminer

Multi Algorithm MIner

  • Hash Auger
  • NiceHash
  • Awesome Miner

Please take note as this list isn’t complete but is an excellent place for anyone to start. Just so you’re aware, because to some newcomers this is mind-blowing, there are lots of different coins you can GPU mine.

If you notice I also listed some multi-algorithm miners as well. Hash Auger connects to multiple mining pools, and exchanges and calculates which coin your hardware is the most profitable at mining. However, instead of being paid in whatever coin it is your mining, the software pays you the equivalent in Bitcoin.

Nicehash is very similar to HashAuger as far as being paid in Bitcoin, but its platform runs a little different. Nicehash uses a marketplace to sell hash power provided by miners to buyers who bid on it to mine other coins.

Out of all the types of miner software I just mentioned I’d say that Nicehash is the easiest, no-brainer set up one of them all. Once you download Nicehashe’s client, the only other thing you need is a Bitcoin wallet. Although this miner may be the easiest to configure it’s not always the most profitable route to go.

Wallets and Mining Pool Address:

Even though Wallets and Mining Pool addresses aren’t actually software you will need them in order to be able to configure your miner correctly.

EXAMPLE: If I want to mine Ethereum then I will need to find an Ethereum mining pool and create an Ethereum wallet to get started. However, I want to further mention that the reason a pool is needed to mine ETH is that it would be unwise to try and solo mine it. Mining Pools allow for a group of miners to join forces so they can increase their chances of finding these blocks.

GPU Mining Overclocking Software:

Overclocking software allows you to fine-tune your GPUs to improve mining performance.

Enhancements like lowering power consumption while increasing the speed that the GPUs can mine can all be achieved through overclocking.

However, the technical skills needed to do so can vary depending on which chipset (AMD or NVIDIA) you decide to purchase.

With NVIDIA GPUs the process is easy with software like MSI Afterburner that allows you to adjust the GPUs clock speeds with ease. AMD, on the other hand, is a bit more complex as you will need to learn how to flash and mod bios which require several tools like wattman and HWINFO to name a few.

How To Calculate Mining Profits

When it comes to calculating mining profits there are many factors that can go into this.

Mining Profitability Factors:

  • Mining Difficulty
  • Hardware Hashrate
  • Power Consumption
  • Utility Rate
  • Pool Fees
  • Hardware Costs

Additionally, with the use of mining profit calculators, you can select the GPU or ASIC miner your using or considering using from the calculator’s mining hardware menu.

Mining Profit Calculators:

  • Whattomine
  • CoinToMine

Once you select your mining hardware from the menu and hit calculate the calculator will then provide a list of the most profitable coins to mine for the selected hardware. Please keep in mind the profits calculated are only estimates of what the current mining hardware profits are.

Even though these calculators can’t technically project what a coin’s mining profits will be in the future, it can still give you a basis to go off of. Not to mention their resourcefulness in narrowing down what coins are most profitable for your hardware to start mining.

Once you’re up and mining you can run 24-hour tests and compare your payouts that way for more accuracy, but still, use the calculators to save you some time in coin selection. If you’re looking to purchase GPUs or ASIC these can also be great tools for deciding what hardware makes the most sense for your budget and location.

Crypto Mining Related Questions

What Is The Future Of Mining Cryptocurrency? It’s said that cryptocurrency is yet still in infancy stages and with it so are its future possibilities including mining. As more manufacturers like Samsung and Intel are now looking into making their own mining hardware, one could speculate that mining is here to stay.

Where To Buy Cryptocurrency Mining Hardware? If you’re going the Bitcoin ASIC Miner route then EBANG is your best source listed here in our guide. However, if you’re looking to GPU mine then I would suggest Amazon or Newegg which is linked in our recommended parts section.

Can I Mine Bitcoin Without Hardware? Cloud mining is a way for investors to invest in mining hardware that is hosted in large data centers. An investor can then buy a certain amount of shares or hash-power through a cloud mining contract which entitles investors to a percentage of mining payouts over a set period of time. To learn more about cloud mining be sure to check our guide.


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