The principles of cryptocurrency mining: how the digital monetary network sustains itself

Cryptocurrency mining is the heart of digital ledger systems—a process through which new coin units are created and all transactions in the monetary network are verified. While it may seem abstract, it involves practical steps that ensure the security and stability of the blockchain. Millions of miners worldwide use specialized computers to solve mathematical puzzles and make crypto mining a profitable activity.

Maintaining the Digital Ledger and Creating New Coin Units

Imagine a global, uncontrolled digital ledger where every cryptocurrency transaction is recorded. Mining is the mechanism that keeps this ledger accurate and tamper-proof. Miners—individuals working with specialized hardware—collect pending transactions and organize them into blocks. Confirming these blocks involves solving a puzzle: the first miner to find the correct solution is rewarded with new coin units.

Crypto mining is thus twofold: it ensures network operation and simultaneously creates new cryptocurrency units. Although the process resembles printing money, each mined coin unit is actually a form of compensation—payment for work that secures the network. This work is governed by code embedded in blockchain protocols and enforced by the entire decentralized network.

How Crypto Mining Works: Practical Steps

Transactions become blocks

At any moment, when someone sends or receives cryptocurrency, the transaction is added to a mandatory collection—called the mempool in technical terms. Miners select these pending transactions and group them into candidate blocks for confirmation.

Hash functions transformation

The first step involves processing each transaction through functions that convert the information into a standard-sized alphanumeric output—a hash. Each transaction gets a unique identifier. Additionally, the hash of each existing transaction is combined with a special nonce—an arbitrary number that miners change with each attempt—and the combined data is repeatedly hashed until the output meets certain criteria. The goal is to produce a hash that matches the network’s difficulty target—Bitcoin, for example, requires the block hash to start with a certain number of zeros. This target is called the mining difficulty.

Merkle tree: creating a hierarchy of information

All transaction hashes are combined into a Merkle tree (hash tree). The process is straightforward: pairs of hashes are re-hashed, then these outputs are paired again and re-hashed, continuing until only one hash remains. This final hash is called the Merkle root and represents all transactions in the block.

Finding the correct numerical combination for the block header

Each block has an identifier—the block header (block hash). To create a new block, miners combine the previous block’s hash, the Merkle root, and a nonce. This combination is hashed repeatedly, changing the nonce each time, until the output matches the network’s difficulty target—Bitcoin’s block hash must start with a certain number of zeros. This target is also called the mining difficulty.

Distributing the successful block to the network

When a miner finds the correct combination, they broadcast the block to the network. Other nodes verify the block’s validity. If all approve, the block is added to the blockchain, and a new mining cycle begins. Miners that did not find the correct solution abandon their candidate and start a new race.

Two-Chain Forks and Network Adaptability

Sometimes, two miners find valid blocks simultaneously, causing a temporary split—creating two competing chains. Miners then continue working on the chain they received first. The chain that gets extended first becomes the main chain; the other becomes orphaned, often called an orphan block or stale block.

Changes in Mining Difficulty and Network Balance

Protocols adjust mining difficulty periodically to keep block creation times stable. When new miners join and competition increases, difficulty rises. When miners leave, difficulty decreases. These adjustments ensure that finding a new block takes roughly the same time regardless of total network hash rate.

Different Methods of Crypto Mining: Hardware and Approaches

Classical CPU mining

In Bitcoin’s early days, anyone could mine with a regular computer CPU. As the network grew and difficulty increased, specialized hardware emerged. Today, CPU mining is practically obsolete, as most professional miners use dedicated equipment.

Using Graphics Processing Units (GPUs)

GPUs are designed for parallel processing of multiple tasks. While primarily used for gaming or graphics rendering, they can also be employed for crypto mining. GPUs are cheaper and more flexible than specialized hardware, but their efficiency depends on the mining algorithm’s complexity.

ASIC (Application-Specific Integrated Circuit) solutions

ASICs are chips built for a specific purpose—in crypto mining, designed for maximum efficiency at a particular algorithm. They are the most effective but also the most expensive. As ASIC technology advances rapidly, older models quickly become obsolete. Mining with ASICs requires significant upfront investment and regular hardware upgrades.

Mining pools

Solo miners have a very low chance of finding the next block and earning rewards. The solution is mining pools—groups of miners combining their computational power. When a pool finds a block, the reward is shared among participants proportionally to their contribution. Pools simplify small miners’ work but can lead to centralization risks and potential 51% attacks.

Cloud mining

Instead of purchasing hardware, miners can rent mining services via cloud platforms. This is easier but involves risks such as scams and lower profitability compared to direct mining.

Bitcoin and Proof of Work: The Beginning of Mining

Bitcoin is the most popular example of crypto mining, based on the proof-of-work (PoW) consensus mechanism introduced by Satoshi Nakamoto in 2008. PoW determines how a decentralized network reaches agreement without a central authority. It requires significant electricity and computational power, deterring malicious actors from manipulating the network.

Bitcoin miners organize pending transactions into blocks and compete to solve mathematical puzzles using specialized hardware. The first to find the correct answer broadcasts the block to the blockchain. Validating nodes confirm the block, and the miner receives a reward.

From December 2024, the block reward is 3.125 BTC. Bitcoin’s halving mechanism reduces this reward by half approximately every four years (every 210,000 blocks). This ensures Bitcoin’s total supply is capped and inflation is controlled.

Ethereum shifted in September 2022 to a different approach—replacing mining with a proof-of-stake (PoS) consensus, making mining obsolete.

Is Crypto Mining Profitable? Risks and Opportunities

While crypto mining can generate income, it requires careful planning and risk management. Investments in hardware, electricity costs, and crypto price volatility are involved.

Mining profitability depends on several factors. First, cryptocurrency prices—rising prices increase the real value of rewards, while falling prices can make mining unprofitable.

Second, hardware efficiency significantly impacts results. Mining equipment is expensive, and miners must balance hardware costs against potential earnings. Electricity costs are critical—high rates can turn operations unprofitable. Additionally, hardware becomes outdated quickly, requiring regular upgrades.

Third, protocol-level changes can drastically alter mining. Bitcoin’s halving reduces rewards, and Ethereum’s transition to PoS has eliminated mining altogether.

Before entering crypto mining, miners should conduct thorough research, evaluate all costs, and practice risk management.

Summary: Crypto Mining as the Backbone of the System

Crypto mining is a vital component of Bitcoin and proof-of-work-based blockchains. It keeps the network secure, stabilizes the issuance of new coins, and provides income for miners.

It offers benefits—potential rewards and participation in the growing crypto economy—but also has significant drawbacks. Effective crypto mining requires research, investment, and disciplined risk management.