What Is Cryptocurrency Mining?

A crypto newbie may have heard of numerous brand new terms including ‘mining’. If cryptocurrency mining doesn’t work like gold or diamond mining, how does it actually work? Let’s find out with us in this article!

What is cryptocurrency mining?

Cryptocurrency mining is the process of producing new digital "coins," but that is as simple as it gets. To identify these currencies, the method entails solving complicated riddles, authenticating bitcoin transactions on a blockchain network, and adding them to a distributed ledger.

Bitcoin and numerous other cryptocurrencies employ the mining process to create a new currency and validate new transactions. Blockchains, the digital ledgers that record bitcoin transactions, are verified and secured by massive, decentralized networks of computers located all over the world. The network's computers receive new cryptocurrency in exchange for using their computing power. It's a positive feedback loop: the miners protect and secure the blockchain, the blockchain distributes the coins, and the coins provide the miner's motivation to protect and secure the network.

How mining works

The 3 main methods for getting bitcoin and other cryptocurrencies:

They are available for purchase on exchanges like Coinbase, as payment for products or services, or you may virtually mine them. We use Bitcoin as an example to elaborate on how you can mine cryptocurrency.

You can try mining yourself. A decade ago, anyone with a decent home computer could participate. But as the blockchain has grown, the computational power required to maintain it has increased. As a result, amateur bitcoin mining is unlikely to be profitable for hobbyists these days. Virtually all mining is now done by specialized companies or groups of people who band their resources together.

Calculations are carried out by specialized computers to protect the security of the blockchain and to validate and record each new bitcoin transaction. A significant amount of computing power is needed to verify the blockchain, which is voluntarily provided by miners.

Running a large data center is similar to bitcoin mining. Companies pay for the mining equipment as well as the power needed to keep it working. In order for this to be viable, the value of the coins obtained must be greater than the expense of mining those coins.

Every computer on the network competes to be the first to guess a 64-digit hexadecimal number known as a "hash." The faster a computer can generate guesses, the more likely the miner is to win the payout.

The winner receives a fixed quantity of newly minted bitcoin and updates the blockchain ledger with all newly validated transactions, effectively adding a newly verified "block" comprising all of those transactions to the chain. The payout was 6.25 bitcoin as of late 2020, however, it will be cut in half in 2024 and every four years after that. In reality, as the difficulty of mining rises, the payout will fall until there is no more bitcoin to mine.

Why is mining important?

Mining is critical to the security of Bitcoin (and many other cryptocurrencies) in addition to releasing new coins into circulation. It validates and protects the blockchain, allowing cryptocurrencies to operate as a peer-to-peer decentralized network without the need for third-party monitoring. It also provides an incentive for miners to provide processing power to the network.