What is Crypto Mining?

Bitcoin’s launch in 2009 changed the 21st century’s image of a “miner.” Instead of using pickaxes and pans to sift shiny metals, today’s crypto miners use massive computers to “dig” precious chunks of digital gold.

As virtual coins like Bitcoin (BTC) work their way into mainstream finance, the number of people and corporations involved with crypto mining continues to rise. In fact, many of the world’s largest crypto mining companies have a combined valuation of more than $9 billion (at the time of writing).

There’s clear value in crypto mining, but is this process really as profitable as some claim? Let’s dig deeper and extract answers to what crypto mining is, and why it matters in the cryptocurrency industry.

What is Crypto Mining, and What are Crypto Miners?

Cryptocurrency mining is an incentive system to secure many peer-to-peer (P2P) digital currencies, particularly the Bitcoin network. And crypto miners are the people “digging” for these digital assets.

It began with cryptographer Satoshi Nakamoto introducing the concept in the 2008 Bitcoin Whitepaper before putting this procedure into practice after releasing Bitcoin in early 2009. In Nakamoto’s Bitcoin mining system, computers (aka nodes) on BTC’s decentralized network compete to solve a difficult algorithmic problem every 10 minutes to get a chance to verify the latest batch of Bitcoin transactions. Whichever computer solves this math problem first gets to claim free BTC called a block reward.

These BTC block rewards aren’t just an attractive payday for BTC miners—they’re also how new Bitcoins enter the crypto economy. Nakamoto deliberately used mining imagery to show how Bitcoin’s circulation mimics mining for precious metals. Someone must mine every BTC into existence, just as prospectors need to dig for gold before bringing it to the market.

Although Bitcoin is the dominant cryptocurrency using crypto mining, many other prominent crypto projects drew inspiration from BTC’s model. Cryptocurrencies with mining software include Litecoin (LTC), Dogecoin (DOGE), and Bitcoin Cash (BCH).

How Does Crypto Mining Work?

Crypto mining uses an algorithm called proof-of-work (PoW) to power P2P payment networks (aka blockchains). The “work” in PoW refers to the intense electrical power miners need to use to solve mathematical problems and contribute to the mining process. The first miner who successfully solves an algorithm on a PoW blockchain receives the block rewards in their associated crypto wallet.

In cryptocurrency’s early history, it was possible to use any computer’s central processing unit (CPU) to successfully mine dozens or even hundreds of Bitcoins as a solo miner. However, as crypto mining became more profitable, companies like Bitmain Technologies introduced computers specifically designed for crypto mining called application-specific integrated circuits (ASICs). Professional miners nowadays use hundreds or thousands of ASIC mining rigs in climate-controlled facilities called mining farms to compete for BTC block rewards.

What are Crypto Mining Pools?

As the competition for block rewards increased, more solo miners decided to “pool” their computing power to increase the odds of claiming free crypto.

People who join a crypto mining pool contribute their hardware to a group of individual miners and receive a percentage of any block rewards the community collects. For instance, if a crypto miner sends enough ASIC rigs to make up 5% of the pool’s Bitcoin mining power, the miner receives 5% of the total BTC rewards (excluding administration fees and electricity costs).

Besides professional crypto mining companies, mining pools are one of the most popular ways crypto miners organize to compete on blockchains like Bitcoin.

Pros and Cons of Crypto Mining

As the primary process behind the Bitcoin blockchain, crypto mining plays a vital role in the crypto economy. However, some critics have concerns over the long-term security and sustainability of PoW mining. Developers in the cryptocurrency community have diverse—and sometimes divisive—opinions on the value of continuing this consensus model.

Pros of Crypto Mining

Long track record for success: PoW mining is the longest-running verification system in cryptocurrency and continues to power the world’s oldest and largest digital asset, Bitcoin. Since Bitcoin’s inception, it has yet to suffer a cyberattack, and some people credit Bitcoin’s exceptional security to the PoW design. The high energy requirements needed to participate in PoW mining make it cost-prohibitive for hackers to exploit the network.
Better security as the network grows: Speaking of security, crypto mining benefits as more miners contribute to a blockchain and further decentralize it. The more crypto mining pools and farms open in different regions of the world, the less concentration of power there is at any single point on the network.
Attractive incentive structure: The allure of crypto prizes helps attract individuals and companies to contribute to PoW cryptocurrency blockchains. These block rewards also deter bad behavior by incentivizing miners to play by the rules and constantly scan the blockchain for false data.

Cons of Crypto Mining

Environmental concerns: There’s no way to sugarcoat crypto mining’s significant environmental impact. Since this system is inherently energy-intensive, it uses a lot of electricity and contributes to pollution and global warming. Some environmentalists argue the Bitcoin blockchain consumes the same amount of electricity as countries like Argentina and pollutes as much CO2 as Greece every year.
51% attacks: Although Bitcoin hasn’t suffered a significant cyberattack, hackers successfully broke into smaller PoW blockchains like Ethereum Classic (ETC) using a 51% attack. In these exploits, bad actors take control of 51% of the network’s mining power to rewrite transactions and reward themselves with cryptocurrency. Although 51% attacks aren’t likely on large and decentralized PoW chains like Bitcoin, they’re possible.
Cryptojacking threat: A new cybercrime called cryptojacking relies on the unique PoW mining model. In this exploit, hackers send malware to a victim’s PC and siphon off energy to mine crypto assets like Bitcoin or Monero (XMR). Cryptojacked computers have a lower life expectancy, and victims end up footing the bill for electricity while criminals reap crypto rewards.

Is Crypto Mining Profitable?

Although there are a few oddball cases where solo miners successfully claim BTC block rewards, the likelihood of one person winning this algorithmic game is incredibly small. Some blockchain experts suggest it would take 450 years for a solo Bitcoin miner with an ASIC rig to claim one BTC block reward. In other words, solo Bitcoin miners have a one in 1.3 million shot of getting free BTC. Although that’s not as improbable as winning the lottery, it’s statistically unlikely solo miners will profit from mining Bitcoin.

However, mining cryptocurrencies is profitable for professional companies or pools if the price of their crypto rewards exceeds their energy, hardware, and administrative expenses. Crypto mining’s worth depends on how well mining operations manage their cash flows and the price of the cryptocurrencies they collect when trading for fiat money.

Learn More Blockchain Basics on dYdX Academy

Whether you want to know more about crypto mining or altcoins, head to the dYdX Academy, where we have dozens of educational articles on essential topics in the cryptocurrency industry. Don’t forget dYdX offers eligible traders convenient low-fee perpetual swaps on our decentralized exchange. For the latest details on dYdX’s trading services and features, visit our official blog, and eligible traders can start trading on dYdX today.

Legitimacy and Disclaimer

Crypto-assets can be highly volatile and trading crypto-assets involves risk of loss, particularly when using leverage. Investment into crypto-assets may not be regulated and may not be adequate for retail investors. Do your own research and due diligence before engaging in any activity involving crypto-assets.

dYdX is a decentralised, disintermediated and permissionless protocol, and is not available in the U.S. or to U.S. persons as well as in other restricted jurisdictions. The dYdX Foundation does not operate or participate in the operation of any component of the dYdX Chain’s infrastructure.

The dYdX Foundation’s purpose is to support the current implementation and any future implementations of the dYdX protocol and to foster community-driven growth in the dYdX ecosystem.

The dYdX Chain software is open-source software to be used or implemented by any party in accordance with the applicable license. At no time should the dYdX Chain and/or its software or related components be deemed to be a product or service provided or made available in any way by the dYdX Foundation. Interactions with the dYdX Chain software or any implementation thereof are permissionless and disintermediated, subject to the terms of the applicable licenses and code. Users who interact with the dYdX Chain software (or any implementations thereof) will not be interacting with the dYdX Foundation in any way whatsoever. The dYdX Foundation does not make any representations, warranties or covenants in connection with the dYdX Chain software (or any implementations and/or components thereof), including (without limitation) with regard to their technical properties or performance, as well as their actual or potential usefulness or suitability for any particular purpose, and users agree to rely on the dYdX Chain software (or any implementations and/or components thereof) “AS IS, WHERE IS”.

Nothing in this post should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act by anyone. Users should conduct their own research and due diligence before making any decisions. The dYdX Foundation may alter or update any information in this post in the future at its sole discretion and assumes no obligation to publicly disclose any such change. This post is solely based on the information available to the dYdX Foundation at the time it was published and should only be read and taken into consideration at the time it was published and on the basis of the circumstances that surrounded it. The dYdX Foundation makes no guarantees of future performance and is under no obligation to undertake any of the activities contemplated herein.