One of the most confusing aspects of cryptocurrencies is the process of ‘mining’ by which coins like Bitcoin can be conjured out of seemingly thin air. It’s not magic, though, but mathematical science that underpins the technology.
What is Mining?
‘Mining’ is the term given to performing hard labour – though using computer processing power rather than a pick and shovel – to secure a cryptocurrency’s blockchain. Not all cryptocurrencies support mining: only those which use a so-called ‘proof-of-work’ algorithm, such as Bitcoin and Ethereum.
A key feature of ‘mining’ is that you’re not actually uncovering the coins themselves; rather, you’re performing computational work which, when validated, verifies transactions on the blockchain. The more computational power that miners put into the blockchain, the more difficult it becomes to rewrite historical entries – making cryptocurrencies with considerable numbers of miners, such as Bitcoin, highly secure. The miners, meanwhile, are given a ‘block reward’ for their efforts, plus the transaction fees from the block they have mined.
The Mining Arms Race
In the early days of Bitcoin, mining was simple: download a piece of software, run it on any standard desktop or laptop computer, and within a weekend you could expect to have solved a handful of blocks and received a few hundred Bitcoins by way of reward.
Sadly, those days are over – for Bitcoin mining, at least. The simplistic nature of the algorithm used in Bitcoin – SHA256 – made it well-suited for translation from a computer’s central processing unit (CPU) to its highly-parallel graphics processing unit (GPU), then to customised hardware known as field-programmable gate arrays (FPGAs). With each jump, the computational power available increased exponentially.
Today, Bitcoin mining is the sole preserve of those with access to expensive, specialised devices with application-specific integrated circuits (ASICs) on board – chips whose sole purpose is to mine Bitcoin. Without these, it’s impossible to contribute enough power to ever see a block reward.
Can I Mine?
That’s not to say it’s impossible to mine at home. As professional miners upgrade to the latest hardware, it’s possible to buy older models at steep discounts. Whether they are profitable to use, however, depends heavily on the cost of your electricity: those with microgeneration or subsidised electricity will find older hardware still turns a profit, while those on standard tariffs will find they spend more in electricity than they earn in Bitcoin.
There are cryptocurrencies which have so-called “ASIC-resistant” algorithms, too, which tips the balance away from the professionals. Ethereum, as one of the most popular examples, uses a computer’s graphics card to mine – meaning anyone with a gaming computer or graphics workstation can expect to turn a small profit without the need to buy any additional hardware.
The days of the solo miner – a single individual who solves a block and keeps the entire reward – are truly over, though. For those without access to racks filled with specialised hardware, a mining pool is a necessity.
In a pool – such as Slushpool, the oldest Bitcoin mining pool still in operation – users share computational power and, when a block is solved, the reward is shared equally among the users according to the amount of computing power contributed.
An alternative to home mining, and one which seems at first glance a temptation, is cloud mining. Much like businesses can hire cloud computing resources instead of having servers in-house, cryptocurrency enthusiasts can pay for “mining contracts” in which hardware owned by others is used to mine on your behalf.
Many of these cloud mining operations promise vast returns on your initial investment, but rarely deliver. The worst are outright pyramid schemes, with no hardware in existence; even the best, which have actual hardware, will typically terminate a contract under their terms and conditions before it has returned a profit to the user.