How Does Crypto Mining Work?

Mining is the business of turning electricity into the right to add a block, and whole chains can walk away from it, because when Ethereum's Merge swapped its miners for validators in a single block on 15 September 2022, GPU mining lost its biggest market on the spot, warehouses of graphics cards were left with nothing worth hashing, and bitcoin's machines carried on as if nothing had happened.

Mining is not one activity spread across the whole of crypto, it belongs to specific chains and specific hardware, and it obeys an economic schedule that tightens every four years. None of what follows is financial advice.

The job: guess numbers until one wins

A miner's work has two parts: gathering waiting transactions into a candidate block is the trivial part, and the hard part is winning the right to add that block to the chain.

The machine runs the block through a hash function (bitcoin uses SHA-256) and checks whether the output lands below a target the network sets. It almost never does. So the machine changes a spare field called the nonce and tries again, and a modern rig repeats this trillions of times a second. There is no clever mathematics available and no way to sneak up on the answer, brute force is the entire method.

The first machine anywhere to land a winning hash broadcasts its block, the rest of the network verifies it in moments, and the race restarts on top of the new block. The winner collects the block subsidy, newly created bitcoin worth 3.125 BTC since 20 April 2024, plus the fees attached to the transactions inside. All the guessing serves one purpose, which is to make the ledger expensive to rewrite. Why chains want that is covered in the proof of work versus proof of stake explainer, this piece stays with the machines.

Difficulty keeps blocks on schedule

Bitcoin aims for a new block roughly every ten minutes, but hashpower swings constantly as machines join and quit, so every 2,016 blocks, about two weeks, the network retunes the target, a setting called difficulty, and blocks keep arriving on time however much hardware is guessing.

The system got its big test in mid-2021, when China, until then home to more hashpower than any other country, banned mining in May and June and a large slice of the global fleet went dark within weeks. Blocks slowed noticeably, so in July 2021 the network responded with the largest downward difficulty adjustment in its history, roughly 28 per cent, and ten-minute blocks resumed while the exiled machines re-plugged in the United States and Central Asia.

The arms race: CPU, GPU, ASIC

In 2009 you could mine bitcoin on an ordinary laptop, within about a year graphics cards had taken over because they guess in parallel, and in 2013 the first bitcoin ASICs arrived, chips designed to do SHA-256 guessing and nothing else, which made general-purpose hardware obsolete for bitcoin for good.

An ASIC cannot browse the web or render a game or mine a different algorithm, it just produces hashes until a newer model turns it into scrap, and that settles the question of whether your laptop can compete, because against racks of purpose-built silicon its odds of winning a block round to zero while its electricity use stays entirely real. GPUs kept a living on other chains, above all Ethereum, right up until the Merge retired that market in September 2022.

Why miners pool up

One machine on its own faces lottery odds, and even a top-end rig could wait years for a win while the power bill arrives monthly, so thousands of machines point their hashpower at one coordinator, a mining pool, and split every reward pro-rata by work contributed, minus a small fee, which barely changes average earnings and collapses the variance into the steady drip an operator paying bills actually needs.

The economics, and the halving squeeze

A miner's revenue is the subsidy plus fees, and the costs are electricity plus hardware that loses value from the day it ships, so cheap power decides who survives in the gap, and mining concentrates wherever electricity runs cheapest.

The subsidy is also on a countdown, because it started at 50 BTC per block in 2009 and gets cut in half roughly every four years. The fourth halving, on 20 April 2024, took it from 6.25 to 3.125 BTC between one block and the next, so revenue halved overnight while costs stayed put, and every halving squeezes the least efficient operators out the same way. The bitcoin halving guide has the full schedule.

The electricity question, honestly

In February 2021 the Cambridge Centre for Alternative Finance put bitcoin's annual consumption above Argentina's on its index, and the comparison has stuck to the industry since, because the centre has tracked bitcoin's power draw for years and the network keeps using electricity at the scale of a mid-sized country.

There are genuine counter-moves: some miners run on flared gas at remote oil wells, burning methane that would otherwise have been torched. Some sell their waste heat into greenhouses and district-heating schemes. Miners hunting the world's cheapest power do sometimes soak up surplus hydro with no other buyer. But these tidy examples cover a slice of the fleet, not the bulk, and most of the network still plugs into whatever is cheapest locally, green or otherwise. An honest account of mining's footprint has to hold both facts at once.

Can you mine at home?

You can, and most people who try it lose money. Industrial farms negotiate electricity rates a household never sees, and since power is most of the cost, a domestic bitcoin rig usually fails on the meter alone. The domestic reality also includes an ASIC that sounds like a vacuum cleaner that never switches off, a room that needs cooling all summer, and hardware depreciating whether or not it ever wins anything.

Hobby mining continues all the same, mostly on smaller proof-of-work chains where a graphics card still has a chance, and plenty of people run rigs for the tinkering rather than the return, which since the Merge is largely what GPU mining is for.

If what you actually wanted was the coin rather than the machine room, that is a different transaction, because buying bitcoin through an on-ramp takes about ten minutes, and Banxa has run that plumbing since 2014 in the markets it serves. Mining is how bitcoin gets made, and for more than a decade it has not been how ordinary people get it.