How do investors make profits from crypto mining? The mechanism and challenges.

Main Content

Cryptocurrency mining represents one of the most important mechanisms in blockchain networks, especially those that rely on the Proof of Work consensus model (PoW). This process is not limited to merely verifying transactions, but also includes the issuance of new coins and ensuring system stability.

The profit from mining depends on a set of sensitive factors: the efficiency of the equipment used, electricity consumption, price fluctuations, and adjustments to blockchain protocols. Miners who understand these factors well can achieve stable returns.

Cryptocurrency Mining: From Basics to Application

At first, imagine a distributed global financial system that records every Bitcoin transaction (BTC) or another digital currency. Miners play the role of the guardians of this system, using advanced computer equipment to solve complex cryptographic equations. The device that solves the equation first receives the reward.

This process does not resemble the random printing of money; rather, it follows strict programming rules embedded in the blockchain protocol. These rules ensure:

• Issuing new currencies at a regular pace
• No party can create additional currencies arbitrarily.
• The application of these restrictions by all distributed network nodes

Mining is considered the backbone of decentralization in networks like Bitcoin, as it enables them to operate without a central authority controlling them.

How the Mining Mechanism Works: The Short Version

Phase One: Transaction Aggregation When someone sends or receives a cryptocurrency, the transaction waits in a pending state to be aggregated with other transactions into a “block.”

Stage Two: Solve the Mathematical Puzzle Miners use computer power to find a special number called Nonce. When this number is combined with the block data, it results in a number that meets predefined conditions.

Phase Three: Adding the Block to the Chain The first miner to find the solution can add their block to the blockchain after the other nodes in the network verify its validity.

Stage Four: Receiving the Reward The winning miner receives rewards consisting of newly created digital currencies as well as the transaction fees included in the block.

Detailed Mechanism: Inside the Mining System

When sending a new transaction on the blockchain, it is sent to a pool known as the mempool (memory pool). Network nodes validate these transactions, while mining nodes collect and organize these pending transactions into blocks.

A miner can also be a validating node, but the two functions are technically different. The mining node takes unconfirmed transactions and assembles them into a candidate block. The miner's task is then to convert this candidate block into a confirmed block by solving a complex mathematical problem that requires massive computational resources.

Upon the successful completion of this process, the miner receives a block reward that includes new cryptocurrencies along with transaction fees.

Phase One: Processing Transaction Data

The first step in block mining begins by taking transactions from the mempool and passing them one by one through the (hash function).

Every time data is processed using a hashing function, a fixed-size value called a hash value is produced. This value acts as a unique identifier for the transaction and represents all the information contained within it.

In addition to hashing each transaction, the miner adds a special transaction known as a coinbase transaction, which represents the transfer they send to themselves as a reward. This transaction is usually the first in any new block, followed by all other pending transactions.

Phase Two: Building a Merkle Tree

After hashing each transaction, the hash values are organized into what is called a Merkle tree (hash tree).

This tree is built by arranging the hash values in pairs and hashing them together. Then, the new outputs are arranged in pairs and hashed again, and this process is repeated until a single hash value known as the Merkle root is reached. This root uniquely represents all the previous hash values.

Phase Three: Calculating the Value of Block Sharding

Each block on the blockchain has a unique identifier which is the block hash value. When creating a new block, miners combine the hash value of the previous block with the Merkle root of the current block.

The miner must also add a random number known as Nonce. Then he tries to pass this set of three pieces of information (previous block hash + Merkle root + Nonce) through the hash function repeatedly.

The goal is to create a valid hash value that is lower than the target value set by the protocol. Since the previous hash values and the Merkle root are fixed, the miner must repeatedly change the Nonce value until the correct value is found.

In Bitcoin mining, the hash value must start with a certain number of zeros. This target value is known as the mining difficulty.

Phase Four: Broadcasting the Block to the Network ###

Once the miner finds a valid hash value for the block, they broadcast it to the network. All the validating nodes verify its correctness, and if it is valid, they add it to their copy of the blockchain.

The candidate block now becomes a confirmed block, and all miners move on to compete for the next block. Any miner who did not find the solution in time discards their candidate block and starts over.

Special Case: What Happens When Mining Two Blocks Together?

In rare cases, miners may broadcast two valid blocks at nearly the same time. The network temporarily splits into two different versions of the blockchain, with each miner starting to mine the next block based on which one they received first.

The competition continues until the next block is mined on one of the two chains. At that point, the block that came before it is considered the winner, and the other block is excluded and is known as the “orphaned block.” Miners who chose the losing block are forced to switch to the winning chain and return to mining on it.

Mining Difficulty: How to Maintain Balance

The protocol regularly adjusts the mining difficulty to maintain a constant rate of new block creation, thereby ensuring the issuance of coins in a regular and predictable manner.

The difficulty is adjusted based on the total computing power (hash rate) on the network. When new miners join and competition increases, the mining difficulty increases, preventing the acceleration of the block creation process. Conversely, if miners leave the network, the difficulty decreases to facilitate the process.

This dynamic balance maintains a stable block creation rate regardless of changes in network power.

Different Methods of Mining Cryptocurrencies

There are several ways to mine digital currencies, varying based on the equipment and algorithms used.

CPU Mining (

In the early days of Bitcoin, mining costs were low and anyone could take advantage of their regular computer processor. However, with the increase in the number of miners and the hash rate, CPU mining became completely unprofitable.

The emergence of specialized equipment with greater computational power has made CPU mining nearly impossible. Today, it is no longer a practical option as all professional miners use advanced devices.

) mining with Graphics Processing Units ###GPU(

Graphics processing units are designed to handle multiple applications simultaneously, and although their primary use is in gaming and graphics, they can also be employed for mining.

GPU units are relatively cheaper and more flexible than specialized equipment, but their efficiency depends on the mining difficulty and the algorithm used.

) mining with specialized ASIC circuits

ASIC circuits ###Application-Specific Integrated Circuit( are designed exclusively for one purpose: mining. They are characterized by very high efficiency but have a very high cost.

Since ASIC equipment represents advanced technology, the price of a single unit far exceeds that of CPU or GPU prices. Furthermore, the rapid evolution of ASIC technology can quickly render older models unprofitable.

Nonetheless, ASIC equipment remains the most efficient choice and the most capable of achieving profits when mining on a large scale.

Mining pools: Sharing opportunities and profits )

The probability of an individual miner successfully mining a block on their own is very low, especially if their share of mining power is small. This is where the importance of mining pools comes in.

Mining pools are groups of miners who combine their computing power together to increase the chances of finding a block. When the pool successfully finds a block, the reward is distributed among its members based on the effort each one contributed.

Mining pools offer lower costs for equipment and electricity, but their control over mining raises concerns about centralization and the risks of 51% attacks.

Cloud Mining: An Alternative Option

Instead of buying equipment, miners can rent computing power from cloud mining service providers. This is a simpler way to get started, but it carries risks such as fraud or decreased profitability.

When choosing this option, a reliable service provider with a good reputation must be selected.

Bitcoin Mining: The Basic Application

Bitcoin ###BTC( is the clearest example of a mineable currency. Its mining relies on the Proof of Work )PoW( consensus algorithm, which is the original mechanism developed by Satoshi Nakamoto and introduced in 2008.

The work guide specifies how the blockchain network reaches consensus among distributed participants without central mediation. It achieves this by requiring significant investments in electricity and computing power to deter malicious actions.

On PoW networks like Bitcoin, miners compete using specialized equipment to solve puzzles. The first miner to find a correct solution can broadcast their block to the blockchain. When the network’s nodes accept the block, the miner receives a block reward.

Starting from December 2024, miners on the Bitcoin network will receive 3.125 BTC as a reward for each block. Under the Bitcoin halving mechanism, the reward is halved every 210,000 blocks, approximately every four years.

Is mining really profitable?

Although it is possible to make profits from mining, it requires careful study and precise risk management. The process involves significant investments and numerous risks.

) Factors Affecting Profitability

Volatility of Cryptocurrency Prices: When the prices of cryptocurrencies rise, the value of the received rewards increases. Conversely, a decrease in prices directly reduces profit levels.

Equipment Efficiency: Choosing high-efficiency equipment is crucial to ensure better returns. The costly equipment requires a careful balance between its price and the expected rewards.

Electricity costs: These costs represent a significant portion of expenses. If they are very high, they may exceed profits, making mining unprofitable.

Equipment Update: Mining devices become outdated quickly. New models can significantly outperform the old ones, forcing miners with limited resources out of the competition.

Protocol Changes: Modifications to the protocol such as Bitcoin halving affect profitability by reducing rewards by half. In other cases, mining may be replaced altogether by other consensus mechanisms.

For example, networks like Ethereum witnessed a complete transition from the PoW model to the PoS model (Proof of Stake) in September 2022, completely eliminating the need for traditional mining.

Summary: Mining in the Current Digital Landscape

Cryptocurrency mining is a vital component of blockchain networks that use the PoW model, as it helps maintain the security of the network and issues coins in a stable and controlled manner.

Mining has clear advantages such as potential income from rewards; however, profits are affected by multiple factors like energy costs and market conditions. Before venturing into this field, comprehensive research and a thorough assessment of all potential risks should be conducted to ensure a well-informed investment decision.