What Is Crypto Mining and How Does It Work?

Unless you invest in cryptocurrency yourself, you might not realize that there’s more than one way to acquire crypto coins such as bitcoin, ethereum and dogecoin. The most popular way is to buy them on exchanges. But you can also “mine” coins on your computer.

Whether you want to mine crypto for profit or just have an interest in the technology, you’ll need to understand some of the basics. Keep reading to find out more about cryptocurrency mining.

What Is Crypto Mining?

The simple way to think of cryptocurrency mining is that it’s a way to create new digital “coins.” But the simplicity ends there. To dig those coins up, you’ll need to solve complicated puzzles, validate cryptocurrency transactions on a blockchain network and add them to a distributed ledger.

Because digital platforms can be easily manipulated, additional security measures are put into place. For example, only verified miners can update transactions on Bitcoin’s ledger, which helps prevent double-spending.

Because distributed ledgers lack a central authority, mining is a key part of validating transactions. Miners are incentivized to secure the network by participating in the validation process and are then rewarded with newly minted coins.

How Does Crypto Mining Work?

Crypto miners use their computers to solve complex mathematical equations, which basically means cracking codes. After you crack a code, you can authorize the transaction. In return, you earn cryptocurrency.

When a miner successfully solves the math equation and verifies the transaction, they add the data to the public ledger, called the blockchain, which is secured by these many encryptions.

Proof of Work

To ensure that only verified crypto miners can mine and validate transactions, a proof-of-work consensus protocol is established. This protocol also ensures that the network is safe from any outside attacks.

A proof of work is one way to publish the latest block in the chain. The work itself is done by miners whose computers perform millions of computations to change a given input into a required output.

The first miner to produce the required output shares it with the network, which then double-checks to see if it’s functioning and performing correctly. If it does, the miner is rewarded with crypto.

Proof of Stake

Another way to validate blockchain transactions is proof-of-stake, though this is not technically mining. This allows current holders of the cryptocurrency to put up their existing coins as collateral for the chance to be the one to validate the block. Multiple validators are needed for each block, and they are randomly selected from the pool of candidates who have put up collateral.

As far as energy expenditures go, proof-of-stake is more environmentally friendly than proof-of-work, because fewer people are using the energy required to validate the blockchain, and they are all rewarded with coins, rather than more people racing to be the first and ultimately wasting a great deal of computing power.

The Society for Computers and Law reported that proof-of-stake uses 99% less energy than proof-of-work.

How To Begin

The first thing you’ll need is a very powerful computer to handle all the bandwidth it takes to mine for crypto. After that, you’ll need to create a crypto “wallet.” Crypto wallets store your private keys – the passwords that give you access to cryptocurrencies – and keep them safe and accessible.

The next step, which isn’t required but will likely lead to more frequent success, is to join a mining pool to maximize profit potential. A mining pool is basically a group of miners who combine their resources to maximize their mining power. Any mining profits are distributed equally to pool members.

Different Mining Methods

Most cryptocurrency mining is done one of two ways: either with a specialized graphics processing unit, or GPU, or with an application-specific integrated circuit, or ASIC. Here’s a quick look at both.

GPU

In this method, computational power is maximized by bringing together a set of GPUs under a rig dedicated to mining. This requires a motherboard and cooling system, and GPUs in the rig must be connected to a stable internet connection at all times. In addition, each crypto miner is required to be a member of an online crypto mining pool.

GPUs can be expensive, with a typical good quality rig costing around $3,000.

ASIC

ASIC chips are designed with a specific purpose, such as audio processing or managing a cellphone call. In this case, ASIC is designed to mine a specific cryptocurrency. This method can produce more cryptocurrency units than GPUs, but it’s also more costly.

There is also some controversy regarding the use of ASIC chips in the cryptocurrency mining community — they’re cost-prohibitive and much faster than GPUs, meaning it’s hard for miners with lower starting budgets to keep up, and they can completely alter the economy of certain cryptocurrencies.

ASIC vs. GPU

As with any financial endeavor, the goal of crypto mining is to ensure that the cryptocurrency you mine is worth more than what you spend on mining it. Because mining crypto is expensive, those margins can get pretty tight.

ASIC computers are designed specifically for mining cryptocurrency, and therefore have an edge over GPUs in terms of cost efficiency and potential profits. That’s why ASIC computers comprise the majority of mining power on most blockchains, including Bitcoin.

ASIC mining is made to mine using a particular algorithm, for a specific type of cryptocurrency. For example, there are those who might buy ASIC hardware that can mine coins that use the same algorithm as Bitcoin, but it is more likely that it will be used for mining Bitcoin.

Cloud Mining

Cloud mining has become an increasingly popular alternative to GPU and ASIC because it’s less expensive. With cloud mining, miners can leverage the power of large corporations and dedicated crypto mining facilities. You can identify both free and paid cloud mining hosts online, making it a way to mine cryptocurrencies as hands-off as possible.

However, cloud mining does often require paying for someone else to mine for you, basically renting their rig for a predetermined period. You won’t make as much as you would if you mined the same amount yourself, but you won’t have to front the cost of a rig.

While free versions are available, they are slower and often have more conditions.

CPU Mining

The slowest and least efficient way to mine cryptocurrency is CPU mining — that is, using your personal computer. Most CPUs don’t have the processing power to mine cryptocurrency with any speed, and mining takes so much power that there’s a real danger of your computer overheating, especially with a laptop.

Who Mines Cryptocurrency?

Miners are the folks who solve computational puzzles to add new blocks to the blockchain. Those who don’t have a lot of computing power often join mining pools to earn a solid source of income.

You can mine independently, but you’ll have a much smaller chance of solving a block on the chain. The potential upside is, you get the full crypto reward without having to split it with anyone else.

Benefits and Drawbacks of Crypto Mining

The obvious benefit of mining for cryptocurrency is that you can make money off it. In some cases, the financial haul is substantial. Look no further than a pair of young Texas siblings — 14-year-old Ishaan Thakur and his 9-year-old sister Aanya — who have earned more than $30,000 a month mining bitcoin, ether and ravencoin.

The main drawback is that it also costs a lot of money to mine crypto, both in terms of the hardware you need to purchase and the amount of electricity required to mine for it. This makes it difficult to get started and to turn a profit unless you are very good at it, and you may find that in the time it took you to do the mining, the cryptocurrency lost value in its volatile market.

Another drawback is the environmental impact. As The New York Times reported, the process of creating Bitcoin consumes about 91 terawatt-hours of electricity a year — more than is used by Finland, a nation of about 5.5 million people.

However, proof-of-stake mining aims to decrease the environmental impact and may help decrease that drawback in the long-term.

Amber Barkley contributed to the reporting for this article.

This article originally appeared on GOBankingRates.com: What Is Crypto Mining and How Does It Work?