Crypto Mining Guide 2024
Crypto mining is a popular way for investors to earn rewards, but it's complicated for beginners. We're looking at all you need to know about crypto mining.
Bitcoin and crypto mining refers to Proof of Work consensus mechanisms for blockchains.
Miners use dedicated machines to solve complex mathematical puzzles.
Once the puzzle is solved, transaction information is verified and a new block is added.
Miners are rewarded for their efforts with new coins.
What is crypto mining?
Bitcoin mining or crypto mining is what makes the blockchains that host Bitcoin and some other cryptocurrencies work. It’s how new Bitcoins are created and it’s how transactions on the network are processed and confirmed. It’s a critical part of the blockchain infrastructure as it maintains and develops the blockchain ledger.
There’s a lot of confusing terminology around Bitcoin mining - so let’s break down what you need to know.
Bitcoin mining terminology
Block: Blocks are individual units of the blockchain. Each block will have a record of the previous block, the confirmed transactions, and a nonce.
Block reward: this is the reward miners get for successfully mining a block.
Hash: A hash is a function that transforms any data into a fixed size.
Nonce: A nonce is a 32-bit field in a Bitcoin block - miners adjust the value of this to achieve a hash equal to or less than the current target hash value.
Proof of work: This is the actual process of mining - computers solve a complicated mathematical puzzle known as proof of work
SHA-256: This is a hash function that ensures all the various blocks are secure and they cannot be altered.
Now let’s put it all together.
How is Bitcoin mined?
Bitcoin miners are validating and confirming new blocks for the Bitcoin network. To do this, they’re solving the puzzle known as proof of work. The computers, or nodes, are trying to generate a 64-digit hexadecimal hash that is equal to or less than a target hash in SHA-256. Once this has been done successfully, the new block is verified by a master node and added to the public distributed ledger. The miner is then given a block reward. Miners use both crypto mining hardware and mining software to manage the work.
Why does Bitcoin need mining?
Bitcoin mining maintains the integrity of the blockchain. As Bitcoin is decentralized, it relies on a network of users to both maintain a ledger of transactions and validate new transactions. Mining is the process by which this is done, as users come to a consensus over the accuracy of records and new transactions.
How to mine Bitcoin
To mine Bitcoin you'll need:
A computer - and a good one at that. You'll need a PC with a powerful GPU as a minimum, but the reality is to be competitive you'll likely need a dedicated Bitcoin mining rig, also known as an ASIC miner (Application-Specific Integrated Circuit). Learn about the best Bitcoin and crypto mining machines.
Power supply - preferably low cost, Bitcoin mining uses up a lot of electricity!
Mining software - there are lots of options around for Bitcoin mining software. The one you'll pick will depend on your experience, technical knowledge, and whether you're joining a mining pool. Common options include CGMiner, MultiMiner, BFGMiner, and Awesome Miner. Learn more about the best Bitcoin mining software.
Of course, there are other ways to mine Bitcoin at home, which you can learn about in our how to mine crypto at home guide.
Is Bitcoin mining environmentally friendly?
No. Bitcoin mining has been criticized for its energy usage. The electric consumption during the mining process is high. In fact, a study showed that in one year of mining, Bitcoin consumed 173.42 terawatt hours of electricity. This means Bitcoin mining uses more electricity per year than many countries. It would rank 27th among nations for electricity usage in a year and the resulting carbon footprint is the equivalent of burning 84 billion pounds of coal! As the world moves towards more sustainable energies, Bitcoin will need to find a way to become more environmentally friendly.
Pros and cons of mining Bitcoin
|Profit Potential: Miners can potentially earn Bitcoin rewards and transaction fees, which can be profitable if the price of Bitcoin increases.
|High Energy Consumption: The environmental impact of Bitcoin mining has raised concerns about sustainability and climate change.
|Decentralization: Mining helps maintain the decentralized nature of Bitcoin by distributing power among many miners worldwide.
|Hardware Costs: Acquiring and maintaining specialized mining hardware can be expensive, making it inaccessible to many individuals.
|Transaction Verification: Miners verify and validate Bitcoin transactions, ensuring the security and integrity of the network.
|Regulatory and Legal Risks: Bitcoin mining may face regulatory challenges and potential legal issues in various jurisdictions, leading to uncertainty for miners.
|Innovation: Mining technology and hardware innovations can benefit the broader tech industry, driving advancements in computer hardware and energy efficiency.
|Competition: The competitive nature of mining means that only a limited number of miners will successfully validate transactions and earn rewards, making it difficult for new entrants to succeed.
|Financial Inclusion: Mining can provide opportunities for individuals in underserved or unbanked regions to participate in the global financial system.
|Risk and Volatility: Bitcoin's price volatility can significantly affect mining profitability, leading to uncertain income for miners.
What other cryptocurrencies can you mine?
Bitcoin isn’t the only cryptocurrency that can be mined. Any blockchain network using proof of work will need miners. Other cryptocurrencies to mine include:
Up until September 15, 2022, Ethereum was also proof of work but has now merged with the beacon chain to become a proof of stake blockchain. However, investors can still mine Ethereum Classic.
How to mine cryptocurrency
BCH, DOGE, LTC, and more all work in a similar way when it comes to mining. They all use the proof-of-work process, so you'll need similar equipment including:
A GPU or ASIC rig in most instances. This isn't always the case as you can mine less intensive coins like DOGE with less powerful PCs.
Power supply - whatever you mine you'll use up a lot of electricity. In some instances like with lower value coins, it's definitely worth using a crypto mining calculator to ensure it's worth your while to mine if you have high electricity costs.
Dedicated mining software - each different coin uses a slightly different proof-of-work process, so each coin will have different software for mining. Like with Bitcoin mining software, there are a lot of options out there - so do your research to find the best suited to your experience and technical capabilities.
Crypto mining vs liquidity mining
You might have heard the phrase liquidity mining thrown around, but this shouldn't be confused with crypto mining. We've got a great guide on liquidity mining and how it's taxed - but in short, liquidity mining is a means of making passive income from your crypto assets. It's where crypto investors add funds to various DeFi protocol liquidity pools in order to earn liquidity pool tokens. They're not minting new tokens or processing transactions - they're being rewarded for providing liquidity to a given DeFi protocol.
How much do crypto miners make?
For Bitcoin miners - anytime a miner successfully adds a new block to the blockchain, they’re rewarded with 6.25 Bitcoins. This will halve to 3.125 Bitcoins in 2024. Learn more about Bitcoin halving.
However, it’s not easy to mine Bitcoin anymore. Proof-of-Work difficulty is increasing to compensate for increasing hardware speed. On top of this, the crypto mining space is more competitive than ever with huge mining farms to contend with.
The equipment to mine is more expensive too - making it an inaccessible investment for many. While other crypto networks like Dogecoin offer more accessibility as the entry costs and computational power needed aren’t as high - miners make less, especially when you subtract running costs. Starts to sound a lot less appealing, doesn’t it?
This is why many miners have joined mining pools. A crypto mining pool is a group of miners who combine all their computational power to increase the likelihood of them successfully mining a block before someone else. Bitcoin mining pools remain the most popular option, offering more accessibility and better rewards. Learn more about the best Bitcoin mining pools.
The amount you’re making in mining and indeed the way you go about your mining activities all matter - because the taxman wants to know about both.
Read next: How to earn free crypto in 2024
Is crypto mining taxed?
Yes. You may pay both Income Tax and Capital Gains Tax on your crypto mining rewards depending on where you live and your transactions. Find out more in our guide to crypto mining taxes or find out how Koinly deals with mining with our help guide on how to import mining income.
Your frequently asked questions about Bitcoin mining...
Can you still mine Bitcoin?
Yes. You can still mine Bitcoin, but you'll need top-of-the-line equipment for it to be profitable. There are around 1.7 million Bitcoin left to mine and the last Bitcoin is forecast to be mined in 2140.
How much does it cost to mine Bitcoin?
It all depends on the equipment you buy and how much it costs to run. You'll likely need a dedicated ASIC to mine Bitcoin profitably and these can set you back thousands.
Is mining cryptocurrency legal?
For the most part, yes - although it depends on where you live. A few countries have banned crypto including Algeria, Bangladesh, China, Egypt, Iraq, Morocco, Nepal, Qatar, and Tunisia.
How hard is it to mine Bitcoin?
Pretty difficult! Bitcoin has a difficulty curve which means it gets harder and harder to mine - so you need a very powerful rig to mine Bitcoin successfully nowadays. Most miners join Bitcoin mining pools to help them increase their chances of a reward.
Can anyone mine Bitcoin?
Yes. Anyone can mine Bitcoin. However, as the difficulty of mining Bitcoin is high due to competition, you’ll need dedicated equipment, including a high-performance mining rig. These cost several thousand dollars, and this cost is often a barrier to entry for those interested in mining Bitcoin.