What is a Cryptocurrency Mining and How it Works?


Cryptocurrency Mining is the process of creating coins and verifying transactions and also a way for crypto investors to earn rewards.

What is Cryptocurrency Mining?

Cryptocurrency mining: in simple terms, it’s the process of creating new crypto coins and verifying new transactions. Mining is essential to keeping cryptocurrencies secure since it verifies the blockchain, allows cryptocurrencies to function on decentralized networks, and adds each new coin to a distributed ledger. Mining is most important because it’s how the crypto industry operates without central oversight and prevents digital currencies from being double-spent on a distributed network.

Most people think of crypto mining simply as a way of creating new coins. Crypto mining, however, also involves validating cryptocurrency transactions on a blockchain network and adding them to a distributed ledger.  Most importantly, crypto mining prevents the double-spending of digital currency on a distributed network.

Like physical currencies, when one member spends cryptocurrency, the digital book needs to be updated by debiting one account and crediting the other. However, the challenge of a digital currency is that digital platforms are easily manipulated. The distributed Bitcoin book, therefore, allows only verified miners to update transactions in the digital book. This gives miners the extra responsibility of securing the network at double the cost.

Meanwhile, new coins are being generated to reward miners for their work in securing the grid. Since distributed books do not have a centralized authority, the mining process is crucial to certifying transactions. Therefore, miners are encouraged to secure the network by participating in the transaction validity process that increases their chances of earning new coins.

To ensure that only verified crypto miners can undermine and verify transactions, a consensus working protocol has been established.

How Cryptocurrency Mining Works ?

In a nutshell, crypto miners verify the legitimacy of transactions in order to reap the rewards of their work in the form of cryptocurrencies. To understand how most cryptocurrency mining works in a more technical sense, you first need to understand the technologies and processes behind it. This includes understanding what blockchain is and how it works.

The first thing to know is that two things are central to the concept of blockchain: public key encryption and math. While I’m definitely a fan of the first, I’ll admit that the latter isn’t my strong suit. However, public key cryptography (aka public key encryption or asymmetric encryption) and math go together in blockchains like burgers and beer. 

Traditional cryptocurrencies such as Bitcoin use a decentralized ledger known as blockchain. A blockchain is a series of chained data blocks that contain key pieces of data, including cryptographic hashes. These blocks, which are integral to a blockchain, are groups of data transactions that get added to the end of the ledger. Not only does this add a layer of transparency, but it also serves as an ego inflator when people get to see their transactions being added (chained) to the blockchain. Even though it doesn’t have their names listed on it, it often still evokes a sense of pride and excitement.

What do you need to Start Cryptocurrency Mining ?

Here are the basics you’ll need to start mining coin:

  • Wallet: This is where any coin you earn as a result of your mining efforts will be stored. A wallet is an encrypted online account that allows you to store, transfer and accept coin or other cryptocurrencies. Companies such as Coinbase, Binance offer wallet options for cryptocurrency.
  • Mining software: There are a number of different providers of mining software, many of which are free to download and can run on Windows and Mac computers. Once the software is connected to the necessary hardware, you’ll be able to mine coin.
  • Computer equipment: The most cost-prohibitive aspect of coin mining involves the hardware. You’ll need a powerful computer that uses an enormous amount of electricity in order to successfully mine coin.

A Step-by-Step Look at the Cryptocurrency Mining Process

Nodes Verify Transactions Are Legitimate

Transactions are the basis that a cryptocurrency blockchain is built upon. So, let’s consider the following example to understand how this all comes together:

Let’s say you’re a crypto miner and your friend Andy borrows $5,000 from your other friend Jake to buy a swanky new high-end gaming setup. It’s a top-of-the-line computer that’s decked out with the latest gaming setup accoutrements. (You know, everything from the LED keyboard and gaming mouse to the wide multi-screen display and killer combo headset with mic.) To pay him back, Andy sends him a partial Bitcoin unit. However, for the transaction to complete, it needs to undergo a verification process (more on that shortly).

Separate Transactions Are Added to a List of Other Transactions to Form a Block

The next step in the crypto mining process is to bundle all transactions into a list that’s then added to a new, unconfirmed block of data. Continuing with the example of the gaming system transaction, Andy’s Bitcoin payment to Jake would be considered one such transaction.

By adding their transaction to the blockchain (once the verification process is complete), it prevents “double spending” of any cryptocurrencies by keeping a permanent, public record. The record is immutable, meaning it can never be manipulated or altered.

A Hash and Other Types of Data Are Added to the Unconfirmed Block

Once enough transactions are added to the block, additional info is added as well, including the header data and hash from the previous block in the chain and a new hash for the new block. What happens here is that the header of the most recent block and a nonce are combined to generate the new hash. This hash gets added to the unconfirmed block and will then need to be verified by a miner node.

In this case, let’s say you’re just lucky enough to be the one to solve it. You send a shout-out to all of the other miners on the network to say that you’ve done it and to have them verify as much.

Miners Verify the Block’s Hash to Ensure the Block Is Legitimate.

In this step of the process, other miners in the network check the veracity of the unconfirmed block by checking the hash.

Once the Block is Confirmed and the Block Gets Published in the Blockchain

On the crypto miner’s side of things, this is the time for celebration because the proof of work (PoW) is now complete. The PoW is the time-consuming process of solving the hash and proving to others that you’ve legitimately done so in a way that they can verify.

From the user’s side of things, it basically means that Andy’s transfer of a partial Bitcoin to Jake is now confirmed and will be added to the blockchain as part of the block. Of course, as the most recently confirmed block, the new block gets inserted at the end of the blockchain. This is because blockchain ledgers are chronological in nature and build upon previously published entries.  

Roles and Processes Within the Blockchain

There are several key components and processes involved in the creation of a blockchain. For this explanation, we’re going to use Bitcoin as our example:

  1. Nodes. These are the individuals and devices that exist within the blockchain (such as your computer and the computers of other cryptocurrency miners).
  2. Miners are the specific nodes whose jobs are to verify (“solve”) unconfirmed blocks in the blockchain by verifying the hashes. Once a miner verifies a block, the confirmed block then gets added to the blockchain. The first miner who announces to the rest of the nodes that they’ve solved the hash is rewarded with a cryptocurrency.
  3. Transactions. A transaction is the thing that gets this party started — I mean, the cryptocurrency mining process rolling. To put it simply, a transaction is an exchange of cryptocurrencies between two parties. Each separate transaction gets bundled with others to form a list that gets added to an unconfirmed block. Each data block must then be verified by the miner nodes.
  4. Hashes. These one-way cryptographic functions are what make it possible for nodes to verify the legitimacy of cryptocurrency mining transactions. A hash is an integral component of every block in the blockchain. A hash is generated by combining the header data from the previous blockchain block with a nonce.
  5. Nonces. A nonce is crypto-speak to describe a number that’s used only once. Basically, NIST describes a nonce as “a random or non-repeating value.” In crypto mining, the nonce gets added to the hash in each block of the blockchain and is the number that the miners are solving for.
  6. Consensus algorithm. This is a protocol within blockchain that helps different notes within a distributed network come to an agreement to verify data. The first type of consensus algorithm is thought to be “proof of work,” or PoW.
  7. Blocks. These are the individual sections that compromise each overall blockchain. Each block contains a list of completed transactions. Blocks, once confirmed, can’t be modified. Making changes to old blocks means that the modified block’s hash — and those of every block that’s been added to the blockchain since that original block was published — would then have to be recognized by all of the other nodes in the peer-to-peer network. Simply put, it’s virtually impossible to modify old blocks.  
  8. Blockchain. The blockchain itself is a series of blocks that are listed in chronological order. Because previously published blocks can’t be modified or altered after they’ve been added to the blockchain, this provides a level of transparency. After all, everyone can see the transactions.

Different Methods of Mining Cryptocurrencies

Different methods of mining cryptocurrencies require different amounts of time.

  • ASIC mining: Mining using an application-specific integrated circuit (ASIC). This type of device is made to mine a specific cryptocurrency. It’s expensive, but it also typically provides the highest hash rate, meaning it offers more mining power.
  • GPU mining: Mining using one or more advanced graphics processing units (GPUs), commonly known as graphics cards. These also provide considerable mining power but at a somewhat high up-front cost.
  • CPU mining: Mining using a computer’s central processing unit (CPU). Although this is the most accessible way to mine crypto, CPUs don’t have nearly as much mining power as ASICs and GPUs. For that reason, profits from CPU mining are minimal.
  • Mining pools: Groups of miners who work together to mine crypto and share block rewards. Miners pay a small percentage of those block rewards as a pool fee.
  • Solo mining: Mining on your own. It’s much harder to earn block rewards this way, so mining pools are often the better choice.
  • Cloud mining: Paying a company to mine crypto on your behalf with its own mining devices. Cloud mining requires a contract, and the terms almost always favor the company and not the miner.

Most jurisdictions and authorities have not yet enacted laws governing cryptocurrencies, which means that, for most countries, the legality of cryptocurrency mining remains unclear.

According to the Financial Crimes Enforcement Network (FinCEN), crypto miners are considered money transmitters, so they may be subject to the laws governing that activity.
However, with the exception of jurisdictions that have specifically banned cryptocurrency-related activities, very few countries have banned cryptocurrency mining.

Legality of cryptocurrency by country or territory

Legal status of bitcoin.svg
By <a href=”//commons.wikimedia.org/wiki/User:Manabimasu” title=”User:Manabimasu”>Manabimasu</a> – This file was derived from: <a href=”//commons.wikimedia.org/wiki/File:World_map_configurable.svg” title=”File:World map configurable.svg”>World map configurable.svg</a>&nbsp;by <a href=”//commons.wikimedia.org/wiki/User:Heitordp” title=”User:Heitordp”>Heitordp</a>, CC0, Link

Legal Status of Bitcoin:


Is Cryptocurrency Mining Safe ?

There’s nothing unsafe about using your computer to mine for cryptocurrencies. However, since it takes a high-speed internet connection and a really powerful computer to mine effectively, you may find that the costs of mining for cryptocurrencies are higher than whatever digital cash you may earn. In fact, one way you may notice unprompted crypto mining is that your computer is overworking its CPU (central processing unit), which can cause your computer to slow down.

Beyond safety, you should also consider other factors, from the cost of electricity to the cost of bandwidth, when trying to figure out if it mining will be profitable for you.

How can you Protect Yourself Against Cryptojacking?

Cryptojacking malware is not that much different from any other type of malware. The Cybersecurity and Infrastructure Security Agency (CISA) published a long list of tips to protect your devices with technical details, but here are the basics to avoid getting infected by a cryptojacking cyberattack.

  • Install antivirus and malware protection software and keep them up to date.
  • Use ad blockers in your browser.
  • Avoid websites that are notorious for running cryptojacking scripts.
  • Disable JavaScript in your browser.
  • Protect server parks with cybersecurity systems.

Crypto Mining is an extremely complex, resource-intensive – and therefore expensive – process. While in the early days of Bitcoin and Co. it was sufficient to use your own PC to mine the coveted online money, the situation today is different. Since the value of the cryptocurrency decreases with the increasing amount of units generated, a so-called “halving” takes place at regular intervals. This ensures that from a certain point in time it is twice as time-consuming to generate a unit of a crypto currency. 

This measure is necessary because otherwise inflation would occur. Conversely, this means that more and more computing power is required to generate the unit of a cryptocurrency. The power consumption and the wear and tear on the hardware are increasing rapidly. Digging with one’s own computer simply becomes unprofitable. Resourceful Crypto Miners soon began looking for new ways to mine crypto currencies more profitably. 

Entire industries have already developed in these countries, some of which are now a problem for the stability of the national power supply. Iceland has already experienced an energy shortage due to the rapid increase in crypto mining activities. 

The consequences: A significant shortage of the sought after commodity and increasingly expensive production An almost free, but also illegal method is the generation of cryptocurrencies with the help of a botnet. The aim here is to make as many computers as possible part of such a network and have them mine crypto currencies in a network. The generated units are then credited to the cybercriminals wallet. 

How useful was this post?

Click on a star to rate it!

Average rating 5 / 5. Vote count: 3

No votes so far! Be the first to rate this post.

As you found this post useful...

Follow us on social media!

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.