Cryp­tomin­ing: meaning, function, and dangers

Cryp­tomin­ing refers to the “mining” and veri­fic­a­tion of digital cur­ren­cies whereby computing power is re­mu­ner­ated in cryptos. Mining manages trans­ac­tion processes to guarantee the correct set­tle­ment of cryptos. But is cryp­tomin­ing actually worth it?

Ever since bitcoin software was first released in 2009, a spectre called crypto has been haunting the financial world. In­de­pend­ent of states and banks, digital crypto­cur­ren­cies can be generated online by any user to earn real currency. In the world of crypto­cur­ren­cies, the question that quickly arises is: what is real money? Cryptos can be paid out as physical cur­ren­cies through brokers, but unlike gold, they do not represent real, physical value. So, when it comes to cryp­tomin­ing, what is being mined?

Alexis C. Madrigal, a writer for The Atlantic, drew an apt com­par­is­on in his article “Bitcoin Mining Turns Elec­tri­city Into Money” (2018) by taking the gold rush metaphor further: cryp­tomin­ing mines elec­tri­city and turns it into value. So those with access to powerful hardware, lots of pro­cessing power, and cheap elec­tri­city have the best equipment on hand much like gold miners back in the day, and are in the best position to succeed in cryp­tomin­ing. To put cryp­tomin­ing and elec­tri­city in context: cryp­tomin­ing now accounts for 0.5 percent of global elec­tri­city con­sump­tion, making it a real power guzzler.

Cryp­tomin­ing is a de­cent­ral­ised computing process to process, secure, verify, and syn­chron­ize all trans­ac­tions related to crypto­cur­ren­cies. Cryp­tom­iners can post and process crypto trans­ac­tions through solo mining as well as in mining pools by providing computing power for required complex com­pu­ta­tion­al tasks. Indeed, trans­ac­tions must first be le­git­im­ised by miners for com­ple­tion by solving number puzzles with mining computers. As a reward for the “mining process”, miners receive crypto. In a mining pool, the reward is dis­trib­uted pro­por­tion­ally according to computing ca­pa­cit­ies of each member.

Two corner­stones of cryp­tomin­ing are the miners’ eWallet, into which they receive crypto payouts, and the block­chain, which compiles trans­ac­tions into a list. Trans­ac­tions are listed in blocks (“block”), chained (“chain”) via peer-to-peer, and linearly verified via unique “hash values.” Miners thus document chained trans­ac­tion blocks in the virtual block­chain account book. The value of the mining computing power is indicated by a unit of meas­ure­ment called hashrate or hashpower, which stands for the available computing power for solving a mining task. The higher the miner’s hashrate, the higher the hash value of cryptos and the reward for cryp­tomin­ing.

In essence, mining cryptos is nothing more than lots of computers solving digital number puzzles, consuming lots of power in the process and gen­er­at­ing value in this way. Cryp­tom­iners, unlike gold miners, don’t actually get their hands dirty because they do little more than provide hardware and software while the computers do the actual work.

Con­firm­ing and posting trans­ac­tions in the block­chain works as follows:

1. Equipment: Miners require an eWallet and mining hardware and software to perform hash functions for cryp­tomin­ing. Graphic cards/pro­cessors, cloud mining farms or special mining hardware called ASIC are often used to this end. ASICs offer sig­ni­fic­antly more mining power compared to tra­di­tion­al GPUs/CPUs.
2. Po­s­i­tion­ing: Miners can either use private Bitcoin mining or cloud cryp­tomin­ing. Miners can mine alone, join a mining pool of connected mining machines, or use powerful mining farms via a cloud mining provider.
3. Mining: In mining, the computer verifies the le­git­im­acy of crypto trans­ac­tions by tracking newly created trans­ac­tion blocks and doc­u­ment­ing them as encrypted hashes in the block­chain if they match (proof of work). Tracking down new blocks can be compared to solving puzzles in which the re­spect­ive currency is cal­cu­lated. The mining process differs depending on the crypto­cur­rency.
4. Reward: Miners receive a reward in the form of a trans­ac­tion fee for hashes added to the block­chain and for gen­er­at­ing new cryptos. However, the reward is only due if miners are the first to add a hash to the block­chain.

Bitcoin inventor Satoshi Nakamoto’s idea was to create a de­cent­ral­ised, in­ter­na­tion­al, trans­par­ent currency that would be ac­cess­ible to all and not con­trolled by financial in­sti­tu­tions and nations. Cryp­tomin­ing is open to all users with Internet access given they also possess the necessary hardware and software. While mining crypto­cur­ren­cies used to be worth­while, to some extent even for in­di­vidu­al miners, those days are long gone. Crypto­cur­ren­cies are now the focus of millions of miners. Within ten years, the value of Bitcoin has grown by a factor of 60,000.

What initially sounded like a level playing field has now turned into an arms race of computing power and elec­tri­city. Anyone looking to earn money through cryp­tomin­ing requires powerful equipment, as mining is becoming in­creas­ingly difficult and time-consuming. Mining is thus only lucrative when done in large in­ter­con­nec­ted computing networks or mining farms. Solo miners will need to invest con­sid­er­able sums to purchase high-quality equipment.

One reason why mining requires ever more resources is the number of crypto­cur­ren­cies in cir­cu­la­tion. Since the value of the currency decreases with the number of currency units, the currency value is regularly halved. As a result, twice the mining effort is required. Thus, miners can only keep up mining for sought-after crypto­cur­ren­cies through fa­vour­able power con­sump­tion and high computing power.

In addition to the mandatory eWallet or an account for receiving crypto payments, cryp­tom­iners usually require mining hardware in the form of ASIC mining chips or mining pools or mining farms.

If you want to mine without spe­cial­ist mining hardware, you need a computer with a very good graphics card (GPU) or a strong processor (CPU). For prof­it­able and quick mining, a strong graphics card is required as it allows sig­ni­fic­antly higher hashrates to be achieved.

Even with the best CPU/GPU, mining rarely makes sense without a special miner with ASIC tech­no­logy. ASIC miners like Antminer for Bitcoin offer chip tech­no­logy that is spe­cific­ally designed for mining processes. An ASIC miner is connected to a router via LAN and con­figured via the browser. It is usually equipped with a power supply unit and does not require ad­di­tion­al hardware. The cost of a device can range from £00 to £3000. It should be noted that the ASIC miner has a high hashrate, i.e., it can create many hashes per second. At the same time, ASIC-resistant cur­ren­cies are in­creas­ingly in cir­cu­la­tion.

It may be more lucrative to join a mining pool or col­lab­or­ate with others to form a mining pool. Col­lect­ive mining, bundled computing capacity, and rewards dis­trib­uted according to computing capacity mean that even semi-pro­fes­sion­al users can engage in pro­fes­sion­al mining. The pre­requis­ite for joining a pool is good hardware (e.g., an ASIC miner).

Hosted mining is par­tic­u­larly con­veni­ent. In this case, you use the services of a mining provider with the necessary computing capacity for mining. The service also oversees the ad­min­is­tra­tion and con­fig­ur­a­tion. As a general rule, mining providers use mining farms with data centres that are es­pe­cially equipped for mining.

The crypto­cur­rency easiest to mine depends on a user’s equipment or how much a user is willing to invest. Fur­ther­more, currency value and demand are subject to fluc­tu­ation, which means that a currency that is lucrative today may not be worth much tomorrow.

If you want to mine from home and without much of a setup, you will require an ASIC miner in most cases, since the pro­cessing power or graphics card of con­ven­tion­al laptops or PCs is hardly suf­fi­cient. However, there are cur­ren­cies that have been created to block mining hardware which can be mined from home. Those looking to mine in groups tend to have more options to choose from.

Below are three ASIC-resistant altcoins for simple mining.

Monero is an anonymous crypto­cur­rency that prevents special ASIC hardware and is suitable for home computers. You just need an eWallet like the Monero GUI and a mining software like Mul­tiMiner, Binance, or Bitfinex.

Zcash is a crypto­cur­rency that em­phas­ises privacy and private trans­ac­tions. It uses the Equihash mining algorithm, which is supposed to be ASCI- and botnet-resistant and makes prof­it­able mining possible for in­di­vidu­al home users.

Ethereum is another ASIC-resistant block­chain that opposes automated mining in the form of mining farms and botnets. So, given you have a strong GPU or CPU, Ethereum mining can be rewarding for solo miners.

Cryp­tomin­ing poses some dangers. Illegal mining, its en­vir­on­ment­al impact, and black-market trading are some concerns.

Illegal cryp­tomin­ing en­com­passes online mining tools such as Coinhive and malware that accesses other people’s computing resources. Mining tools/programs infect web pages or use prepared web pages to drain CPU power of page visitors via Java commands. Mining malware, in turn, uses the principle of crypto­jack­ing, which smuggles malware onto computers via infected websites or downloads in order to reserve their CPU almost entirely (between 75 to 100 percent) for cryp­tomin­ing. In most cases, infected computers auto­mat­ic­ally become part of a mining botnet.

In addition to threats from malware, large-scale cryp­tomin­ing poses an en­vir­on­ment­al risk. As the demands on hardware and computing power increase, so does the power con­sump­tion by farm-style mining processes. Although no concrete figures are available, according to a study by the Uni­ver­sity of Cambridge and the IEA, cryp­tomin­ing consumes around 127 terawatt hours annually (as of 2021) and has an annual energy con­sump­tion equi­val­ent to that of the Neth­er­lands which has a pop­u­la­tion of 17 million. Mining in China alone is expected to consume 297 terawatt-hours of elec­tri­city by 2024 and account for 130.5 million tons of CO2 emissions.

Comparing the energy con­sump­tion of cryp­tomin­ing with that of small in­dus­tri­al­ized countries is not unfounded. Large mining farms rely on cheap energy prices, which are often available in poorer countries. Thus, high mining profits are generated at the expense of eco­nom­ic­ally weaker nations and poorer pop­u­la­tions. At the same time, using crypto­cur­ren­cies as black market payment further weakens economies.