All of us have heard the tales. “Bitcoin-mining teenager makes $100 million in mom’s basement!”
It’s possible that the headline was fabricated. However, since Bitcoin’s inception in 2009, cryptocurrency mining has grown in popularity, especially considering that the price of a single Bitcoin has increased from around $0.01 to over $35,000 in the past decade.
The question is, what is crypto mining exactly? Can you carry it out in the comfort of your own home?
This article will explain the ins and outs of cryptocurrency mining, including what hardware is required, how much money can be made mining Bitcoin and other cryptocurrencies, and whether or not you should go into cryptocurrency mining right now.
What Is Cryptocurrency Mining?
To “mine” a cryptocurrency means to verify and add new transactions to the blockchain in the hopes of earning a reward in the form of that cryptocurrency. In this race against the clock, the miner who decrypts a “hash” (a 64-digit hexadecimal value) first wins a prize.
Those miners that have access to more processing power will have a leg up on the competition.
Greater miners in a crypto network means more competition to get the answer first and more difficulty in earning mining rewards. We call this type of consensus technique “proof-of-work” (PoW).
By encouraging healthy competition between miners, a decentralized network of independent miners is formed, bolstering the security of the blockchain network.
Satoshi Nakamoto invented crypto mining shortly after the introduction of Bitcoin, and it is still in use today for Bitcoin and other proof-of-work cryptocurrencies. Due to the increased difficulty in solving the hash and the resulting increase in competition, Bitcoin mining has become a very energy-intensive activity.
How Does Bitcoin Mining Work?
Coins are “mined” through a computer process called “mining,” which includes solving complicated arithmetic problems to determine a 64-digit hexadecimal number (“hash”) used to validate a block of network transactions.
Without going into too much detail (I know, it’s too late for that), a miner utilizes computing power to guess through billions of different permutations of the number, ultimately stopping when the value is either equal to or fewer than the “target hash.”
The “block” that includes the most recent bitcoin network transactions is added to the blockchain by the miner who has the most hash power. The blockchain is an ever-growing log of transactions, and each new block that is added to the chain contains all the data from prior blocks.
When a miner successfully solves a hash, they have access to a reward in bitcoin in addition to adding the next block to the blockchain.
About once every 4 years, or every 210,000 blocks in Bitcoin’s instance, the amount of cryptocurrency received for each mined block is halved. Which indicates that Bitcoin mining is going to become twice as difficult (and half as worthless) over time. The value of Bitcoin might rise as a result of the falling rewards for mining and the increasing demand for Bitcoin.
Do You Want to Mine Cryptocurrency?
Individuals find it tough to mine Bitcoin due to the competitive nature of the process. Mining smaller proof-of-work crypto projects, on the other hand, may still be a profitable activity for individuals, although with pricey, powerful technology to help “earn” more blocks.
Crypto mining pools allow users to join a group of other miners and “pool” their processing power, boosting their chances of mining a block and getting the rewards. Individuals mining for prominent proof-of-work crypto projects like Bitcoin and Ethereum should definitely use pools.
However, crypto mining is extremely competitive, and you may wind up investing thousands of dollars on hardware and never recouping your investment. It may also come with a higher utility bill and the hassle of maintaining your own gear.
Crypto mining is necessary for the security and health of PoW crypto blockchains, but it may cost you money in the long term.
Pros of Crypto Mining
Blockchain networks rely on crypto mining to function and retain a permanent record of all transactions, which is essential to the network’s security. When the value of the cryptocurrency you mine increases over time, mining it might be beneficial for you. A few benefits of cryptocurrency mining are as follows.
- Profit Sharing in Cryptocurrency. Motivating miners by rewarding them with a fixed amount of bitcoin for each block they successfully mine is a common practice in cryptocurrencies. If a project takes off and gains widespread interest and support, these incentives can skyrocket in value.
- Network Safety Measures. By verifying the transactions on a blockchain, miners contribute to the security of the network and make it very hard to manipulate by malicious parties. It would be more difficult for an attacker to seize control of a blockchain network with more miners on it.
- Create a Brand New Cryptocurrency. The only way for proof-of-work (PoW) crypto projects to issue new currencies is through the efforts of miners. In most cryptocurrency projects, the total number of coins that can ever exist is set in stone, and the only way new coins may be generated is through mining. Because of mining, there is a growing quantity of coins for buying and selling.
- The ability to cast a vote. Typically, miners have some say in how the bitcoin network they are mining on evolves. Mining power is equivalent to voting weight. This aids in providing minors with a voice in shaping the direction of the crypto technology and issues like network forks.
Cons of Crypto Mining
Although profitable, crypto mining is also quite energy intensive. If a network is excessively competitive, smaller miners without a lot of computing power may never solve for the hash and so never win crypto rewards. Coin mining has many benefits, but it may not be a good fit for everyone. The following are some drawbacks of crypto mining:
- What it takes in terms of energy. Due to the computational difficulty of solving the hash in proof-of-work (PoW) projects, the number of miners on a network increases the processing power required to succeed in PoW mining by an exponential factor.
- The process becomes quite demanding on energy resources. The most prominent example of this is Bitcoin, whose worldwide mining consumes as much energy as a small nation, according to some assessments.
- Perhaps Never To See a Profit It’s possible that miners on highly competitive networks like Ethereum and Bitcoin won’t ever be able to solve for the hash and, as a result, won’t receive any of the block rewards. It may still be too expensive to mine cryptocurrencies, even with the help of a mining pool.
- Restrictions imposed by the government. Some countries, like China and Kosovo, have explicitly outlawed Bitcoin mining. The initial investment in a Bitcoin mining setup is high risk if such activities are illegal in your nation or state. This is a risk that miners take on regardless of whether a cryptocurrency project has the same level of difficulty as Bitcoin.
What Do Bitcoin Miners Make?
Crypto miners are rewarded in a predetermined amount whenever they are the first to solve for the hash, creating a new block on the crypto network. Mining pools allow miners to combine their resources and share in the earnings generated. Over $15 billion was earned by Bitcoin miners in 2021, while over $16 billion was earned by Ethereum miners.
When Bitcoin first began in 2009, miners were rewarded with 50 bitcoins each block. Since then, the payout per block has decreased by half every 210,000 blocks. The current block reward, as of the year 2022, is 6.25 Bitcoin. Considering that one bitcoin is now worth about $30,000, the incentive for each successfully mined block is close to $200,000.
The extreme competition in Bitcoin mining means that the vast majority of the profits will go to mining pools or to large Bitcoin mining firms. Although it has happened as recently as January 2022, it is extremely unlikely that a single Bitcoin miner will solve for the hash and mine an entire block by themselves.
Currently, miners may expect to get roughly 11 ETH, or about $22,000, for each block they successfully create. Once again, the competitive nature of the network might necessitate a substantial hardware investment in order to compete for block rewards. Since the reward for creating a block of Ethereum is distributed among all miners in the pool, many people choose to pool their mining efforts.
Smaller PoW crypto projects may have lower levels of competition, but their currencies tend to have considerably lower pricing and greater volatility than Ethereum and Bitcoin.
In general, cryptocurrency miners profit from the competitive battle to solve a hash by owning and managing incredibly costly hardware, often costing tens of thousands of dollars for a single miner. How much people make depends on whether they mine alone, in a pool, or for a specialized firm that has invested in mining hardware and infrastructure.
How to Begin Mining Cryptocurrencies
The simplest approach to start mining digital currencies is to get a mining rig and install mining software.
Different kinds of hardware exist, with the most common being application-specific integrated circuit (ASIC) computers (and powerful). Depending on the specifications of the PC, these systems might cost more than $30,000. Equipment of this level is almost indispensable for cryptocurrency mining on its own.
However, nowadays most mining is done by individuals who pool their resources together. Mining hardware that costs less than $1,000 can participate in crypto mining pools and earn incentives.
After investing in a suitable hardware setup, you may begin mining your chosen cryptocurrency by installing the appropriate mining software. Within a few clicks, you may start mining using this software.
Bitcoin’s wiki article on mining software is extensive, although it might be confusing to newcomers. It appears like GCMiner is the most widely used (and one of the oldest) Bitcoin mining software, but you should still perform your own homework before installing any mining program on your PC.
After installing and running the software, you may join a mining pool and donate your computing power in exchange for a cut of the pool’s earnings. WhatToMine.com provides an extensive list of resources for anyone interested in mining bitcoin, including gear, software, and profitability.
How is cryptocurrency mining taxed?
The profits from crypto mining are taxed like any other business income. Your revenues from mining may be reported to the IRS on Form 1099-NEC by some pools and software. Cryptocurrency is subject to capital gains (or losses) taxation if and only if it is sold for more than its cost basis, which is its value on the day of receipt.
The price of mining CPUs and graphics cards has skyrocketed over the past several years as cryptocurrency mining has grown increasingly popular. The entrance hurdle for crypto mining continues to decrease as hardware can be set up and software launched with a few clicks. Individuals may still take part, and with the development of crypto mining pools, they can even compete with established mining corporations.
Even while Bitcoin and Ethereum mining were once incredibly profitable for early adopters, the market has since become increasingly competitive. Since crypto mining requires the utilization of computing power to compete with other miners in solving a complicated issue as quickly as possible, the necessary gear might be prohibitively expensive for some and unrecoupable for others.
Bitcoin mining uses more energy than some small nations, and Ethereum is moving away from mining in 2022, thus the practice of mining cryptocurrencies has been mired in controversy as well. To add insult to injury, most recent cryptocurrency initiatives do not incorporate PoW crypto mining into their distributed ledger system.
Cryptocurrency mining is still active, but it’s not nearly as lucrative (or sustainable) as it was a few years ago.