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.