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What is cryptocurrency mining?

by | Dec 17, 2017

To put it simply, mining is the process of adding new blocks to the blockchain by solving very complex mathematical problems — the encryption part of crytpo. Remember that blocks are groups of transactions which have been validated and are now trusted by the network. The mining process creates a way for miners to check each other’s work, essentially crowd-sourced validation. This is what is known as a consensus mechanism: a way for the nodes to come to an agreement about changes in the system without really having to trust anyone.

Proof of Work System

The most widely known consensus mechanism, used by both Bitcoin and Ethereum, is called Proof of Work (PoW). This is a resource-intensive process where miners guess random numbers (really, really big strings of numbers) until they find one that fits a very specific rule. The miner that finds the right string then broadcasts it to the whole network along with the next block of transactions to be added to the blockchain. Other nodes check their work, and if is correct it is added to the end of the blockchain, and the guessing process begins again for the next block.

Proof of work mining is designed to be prohibitively difficult so that individual miners cannot solve multiple blocks in a row. This is important for the security of the entire network because if someone could feasibly add multiple concurrent blocks, the system would be susceptible to a double-spend attack. This is when a user tries to re-spend coins by sending out a transaction which negates a prior one, followed by a new transaction using those coins previously spent. One of the defining characteristics of the blockchain is that transactions are unchangeable, so this would undermine the trust in the system. If it were possible to double spend, a user could trick two recipients into thinking that had been paid, while only one would end up with coins in their wallet. Basically, there are no refunds on the blockchain, and double spending would change that.

Even though solving and adding a single block for a single miner is incredibly difficult, the whole network of miners can collectively add blocks at a predictable rate. Recall that there is a specific rule which determines whether a random number guess is valid or not; adjusting this rule affects the difficulty and average time required for a new block to be found. Many coins also have something called a difficulty adjustment algorithm, which maintains an average block time by increasing the difficulty of the algorithm as more miners join the network.

The Purpose of Mining

The primary purpose of mining is to help the network reach consensus about the blockchain, but it is also a way to introduce new coins into the system. Miner nodes who correctly solve the proof of work puzzle earn coins for their work from two sources:

  1. Transaction fees included within each transaction in their new block.
  2. A predefined amount of coins that the system generates as a reward to miners who solve blocks – “block rewards”.

These rewards, or payments, provide the incentive for miners to participate and ensure the continued security of the network

As mentioned earlier, the mining process is resource intensive and usually requires specific hardware to participate in an economically profitable way. The three main classes of mining hardware are CPU, GPU, and ASIC. The more collective hashpower (speed of guesses) in a coin’s network, the more powerful of mining hardware you need to participate. That’s why for most coins, mining with your laptop or desktop CPU is no longer feasible. Some coins, such as Ethereum, require graphics processing units (GPUs) in order to mine enough for the reward to make up your costs, and personal computers generally do not have GPUs. For some coins, like Bitcoin, application specific integrated circuits (ASICs) are required to participate. ASICs are by far the most powerful and costly units, and infeasible for the average person to own and operate.

Mining Pools

Even if you did get your hands on some of that hardware, your chance of solving blocks and earning coins would still be very small. If by some chance you were able to solve a block by yourself, you would, of course, get to keep all of the transaction fees and rewards. But because of the difficulty of solving these problems, individual success comes infrequently. Therefore, miners will often team up with others in what is known as a mining pool. When one member of the pool succeeds in guessing the solution to the algorithm, the reward is shared among all of the pool participants proportionally to each individuals’ processing power. These miners sacrifice the size of the reward for increased frequency of success.

Other Mining Mechanisms

There are consensus mechanisms other than mining, and each comes with its own advantages and disadvantages. In a Proof of Stake system, those who have existing coins “locked up” are given the opportunity to create new blocks and receive the ensuing rewards. This method requires far less processing power than Proof of Work, and is, therefore, cheaper and less energy intensive, but it also shifts control of the network to those who already own coins and a large part of the crypto community are skeptical of the economic incentives in this sort of system.

Is Mining a Waste of Energy?

One of the most important debates with respect to cryptocurrency mining is whether mining is a waste of energy.  Does the reward outweight the cost to our resources and our environment? Over the years, the popularity of cryptocurrency has increased leading to the construction of hundreds of thousands of specialized computers for mining bitcoins around the world. And behind it all is the process of validating transactions and protecting the system.

How Much Electricity Does Mining Require?

ASIC mining platforms currently operating in the mining process consume 35 TWh per year. The systems involved in the mining process that generate Bitcoin as circulating currency require large investments. Currently, in nations such as Ireland, consumption exceeds 42 TW per year.  This has led to numerous debates on the environment and the energy consumption caused by the mining of cryptocurrencies in recent years has intensified.

Bitcoin mining imposes an increasing energy cost: the increase in the difficulty and nodes verifying transactions in the blockchain has made this cost difficult to calculate, but some have ventured to estimate a unique equivalence.

One study showed that mining a bitcoin in blockchain imposes an energy cost of around 200 kWh, which could be used to maintain an average household for a whole month, according to the ING Group Bank, which is in charge of this research.

How Does Mining Consumption Compare To Other Uses?

According to a 2012 Electric Power Research Institute study, an iPad used about 9 kWh per year, by which time Apple had sold 170 million iPads, which together would use 1.53 TWh per year. This makes the current estimated consumption of the bitcoin platform not look bad after all.

In fact, compared to other equally remarkable examples, in the first quarter of 2012, around 43 million LCD TVs were sold, with a combined annual consumption of 8.8 TWh, and we are talking about a single quarter of sales.

In addition, it is estimated that in the United States alone there are more than 65 million washing machines, which consume an average of 300 kWh per year. If we count the combined consumption of all of them would be 19.5 TWh per year and we are only talking about washing machines in the US.

Looking at the comparison of the energy consumption of other products that are common in our daily lives, we could say that cryptocurrencies mining is not a waste of energy. Everything can be put into perspective, if we take into account that mining does not consume as much energy as other household appliances that are also in the vast majority of homes worldwide, causing greater impact on the environment than the platform bitcoin.

Another significant argument that can be made from another perspective: how much energy is used on all kinds of mindless entertainment as tv shows, pop concerts (broadcasts) and the vast amount of low quality content videos that is uploaded daily by a majority of amateur video creators, which is stored on enormous server centers of Google (Youtube) and Amazon. As long as Bitcoin serves a meaningful purpose in the eyes of many users, it can’t be said the energy consumed by the network is “wasted” if the other forms of energy use aren’t considered waste of energy either.

Although this issue has generated a great deal of debate among cryptocurrency skeptics and loyal followers, the truth is that there are those who are dedicated to mining cryptocurrency and claim that the reward is worth it when it comes to the cost of electricity. Of course, all this varies depending on the investment, power and even geographical location of the miner, as there are places where energy is cheaper and even subsidized.


Now that you are a little more familiar with cryptocurrency mining, you might want to try it out. This article is merely a starting point you will need to put in a lot more legwork into understanding what you are getting yourself into before you take that step. Just for starters, you should look into which coin(s) you want to mine, available hardware units, electricity consumption, estimated profitability, and so much more. Having said that, setting up your own mining rig can be a fun project to undertake, so if you decide to do so we wish you the best on your journey!


This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.

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