How Does Cryptocurrency Mining Work? And What is Cryptocurrencies Hashrate?

Bob Mason
Updated: Jul 24, 2017, 12:53 GMT+00:00

Until now, while there are investors who have a clear understanding of the process and the mechanics, many are highly exposed to the nuances of mining.

How Does Cryptocurrency Mining Work? And What is Cryptocurrencies Hashrate?

Until now, while there are investors who have a clear understanding of the process and the mechanics behind it, many are highly exposed to the nuances of mining and with current valuations, are certainly susceptible to sizeable losses, June’s Ethereum flash crash and increased volatility a reminder that as an investor, it’s not just following the masses, but far more.

Last year’s Ethereum blockchain split was an event that could have resulted in significant loss and with the 1st August Bitcoin Fork event just around the corner, a greater knowledge of the process and the risks is certainly relevant as cryptocurrency demand continues to build.

While many have looked at simply trading cryptocurrencies such as Bitcoin, others have gone into the mining, which is the process through which coins are created.

For want to be miners, appropriate hardware and access to the internet is needed for an investor to mine, the actual process being the compilation of recent transactions into blocks in order to solve complex puzzles. The person who solves the puzzle first is permitted to place the next block on the blockchain and reap the rewards, which include transaction fees associated with the transactions carried out in the block, together with a newly released coin, the amount of which is referred to as the block reward.

The difficulty in mining is adjustable and is adjusted every 2016 blocks, equivalent to around every 2-weeks, with the adjustment made to ensure that the block rate discovery remains constant, the difficulty is therefore adjusted to the computational power used for mining.

It’s a word that many would have heard of, but perhaps not necessarily appreciated, a miner’s profitability ultimately dependent upon how much hashing power the miner contributes to the network. A miner isn’t going to get too far with your standard desktop…

How Does Cryptocurrencies Mining Work?

Crypto mining started back in 2009, with CPUs of your standard computer being used to hash, but as is the case with any new market, things moved particularly quickly in the mining sector, with the mining industry seeing a shift away from the standard CPUs to graphics processing units (GPU), which were able to hash, work out the cryptographic puzzles, at a much faster rate, the rate of solving the crypto puzzles referred to as the Hashrate.

With miners armed with the knowledge that hashrates were key to income, the use of single GPUs shifted to miners linking multiple GPUs, to create what is referred to as a mini farm, the multiple number of GPU accelerators driving the hashrates northwards.

Miners using mini farms were faced with significant power consumption and as always, in search of a solution to the issue, which resulted in a shift to FPGAs (Field-programme gate array), which delivered significant improvements in power consumption, giving FPGA miners a material edge over miners using GPUs, with any miners attempting to mine with CPUs falling well behind the pack.

It ultimately boiled down to cost, with the cost of mining with FPGAs significantly higher than mining with GPUs.

For Bitcoin miners, GPU and FPGA miners faced a new miner, miners mining with application-specific integrated circuits (ASIC), with ASIC having been developed solely to mine cryptocurrencies, ASIC miners having a significant power advantage over CPU and GPU users, leading to ASIC miners becoming mainstream back in 2012.

As miners increased by number, the complexities of crypto calculations increased with it, hashrates being the variable, which is the speed at which the crypto puzzles are calculated and deliver income to the miner. The amount of profit for a miner dependent upon how much hashpower the miner has relative to the network.

As more miners shifted to the ASIC platform, the complexity of the calculations also increased, the complexity of the calculations adjusted every 2016 blocks. The adjustment to the complexity is made in accordance to the computational power being used for mining, as advancements are made by miners, the complexity increases with it, the purpose of this being to ensure that the block rate discovery remains a constant.

Obviously this means that it’s a never ending cycle of computational power advancement, followed by increased complexity of calculation required for mining, which also pushes miners, unable to move on to the more advanced platforms, out of the picture.

As the complexity of calculation advanced, miners moved from using mini farms to data centres, which are now widely used today, computational power provided by the centres rather than the individual miners. The added advantage for miners mining through a data centre is the economies of scale, a cost to an individual miner reduced.

While data centres are certainly of immense popularity, the market has also seen the evolution of cloud mining, with cloud mining removing the need for miners to acquire costly mining equipment or cover the power costs resulting from the use of ASIC platforms, though there is a cost involved and will lead to reduced income as a result.

Cloud mining, which is also referred to as cloud hashing, allows the user to buy the output of cryptocurrency mining hardware, which are located in remote data centres, with all mining done remotely, removing the issues faced by miners using powerful platforms, including sizeable power usage, heat, insulation and of course, maintenance.

There are some disadvantages to using cloud mining services however that want to be miners need to be aware of and include:

  • Lower profits than having your own hashing systems.
  • Possible fraud, with cloud mining operators being unverifiable.
  • Inability to change mining software as the miner does not possess the hardware.
  • Contracts can be terminated with service providers able to shut shop should cryptocurrency prices be too low, which could result in nonpayment of income.

As a miner, the safest way to go about mining for cryptocurrencies would be by acquiring the necessary hardware as a starting point and build your own cryptocurrency hashing system, though there are obviously costs associated, with the set up and ongoing costs including sizeable electricity bills and the need to update hardware and software, which would also require selling once hardware needs to be updated.

For the average Joe, cloud mining is perhaps one of the simplest ways of entering the mining world, though as previously mentioned, some care needs to be taken and some research needs to be carried out on which service package best meets an individual’s needs to avoid over subscription, which would eat into possible earnings.

Cryptocurrency mining is certainly different to mining for commodities such as gold and silver, in that cryptocurrency mining does not deliver a physical asset and could be compared more closely to investing in the commodities futures markets than physicals.

The mining processes are worlds apart, where mining for commodities involving a search and extraction of a physical product, whilst cryptocurrency mining is electronic, with cryptocurrency wallets also being electronic and not physical.

Cryptocurrency mining, whether through a data centre, cloud mining service provider, own mining hardware or other, is the generation of new units of a particular cryptocurrency, depending upon the exchange on which the mining is carried out.

The mining process is a computational one and has advanced since the early days into a far more complex crypto puzzle solving process that requires significant processing power.

The miner, by way of the mining platform, is then rewarded for solving the complex crypto puzzles.

It’s important to note that should you be looking to mine using your standard desktop or laptop at home, the processing power is just not enough to mine profitably, with successful miners using specialized hardware and also, lower running costs, such as cheaper electricity bills.

For this reason, subscribing to mining programs that utilize your home computer or laptop are, not likely to generate profits for you, but for the program providers, who are taking the advantage of putting your hardware to use, but without the additional costs at their end and of course they receive a fee for the program itself.

How can you mine cryptocurrencies?

For the beginner, Litecoins, Dogecoins and Feather coins are recommended Scrypt-based cryptocurrencies with the best cost-benefit, with Litecoins giving a miner between 50 cents to $10 per day, when using consumer level hardware, which has an upfront cost of around $1,000.

Mining for cryptocurrencies deliver more attractive returns with more sizeable upfront investment in hardware, with a $3,000 to $5,000 investment in hardware delivering $50 per day or more in income.

The upside for beginners mining Litecoins could come from a bounce in cryptocurrency value, though this shouldn’t be the basis for mining and miners shouldn’t place their hopes on such an outcome. The better option being to invest in cryptocurrencies and hold in the more traditional way rather than get involved in mining.

So, to get started, there is a list of requirements to get into mining for Litecoins, Dogecoins and / or Feather coins:

  • Create a coin wallet, which is password protected and holds the earnings from mining, while also keeping a network wide ledge of transactions.
  • A mining software package made up of cgminer and stratum.
  • Membership at an online mining pool, where the pooling of hardware resources will increase profitability and stability of returns.
  • Membership to an on-line currency exchange, where coins can be exchanged for cash and vice-versa.
  • A full time internet connection with at least 2 MB per second.
  • A location to setup the hardware, which will need to be somewhere cool.
  • A desktop or mining rig, with a separate dedicated computer recommended, as mining and gaming cannot run at the same time.
  • An ATI graphics processing card (GPU) or an ASIC mining chip, the cost of which can be up to $3,000 each for new or $90 for used.
  • A house fan to keep the mining computer cool, which is essential for mining success.

If the above is unfeasible, then cloud mining is an alternative.

What is the next Cryptocurrency to mine?

While Bitcoin may well continue to have the largest market cap amongst the cryptocurrencies, as is the case with any asset class, miners and coin investors alike will be looking for value in the market and how the playing field is likely to expand in the years ahead, which could see other cryptocurrencies capture some of Bitcoin’s allure.

To put it into perspective, Bitcoin is now accounts for just under 50% of total market share of cryptocurrencies, despite the fact that Bitcoin’s market capitalisation has surged from around $10bn to over $40bn over the last year and having accounted for as much as 80% of total market capitalisation of cryptocurrencies a year ago, taking the total market cap of cryptocurrencies from $12.5bn to a whopping $90bn.

With the banking system looking to get involved, Ripple has certainly positioned itself to take advantage of the banking sector’s desire to get back at Bitcoin, with Ripple gaining traction in partnering with the banking sector in the digital currency world.

If it plays out and draws in all of the major banks, with deals having already been struck with the likes of RBC and Bank of America, Ripple could be the next wave in the market, though with Ethereum’s smart contract platform and decentralized network, it’s hard to bet against it, despite its recent issues, with many citing Ethereum as the next big player and the only cryptocurrency that could topple Bitcoin from the top spot.

Innovation will be key to the success of Bitcoin’s competition, while Bitcoin could continue to rise should the cryptocurrency become even more widely accepted by merchants and governments across the globe, the only uncertainty being the effects of regulation should it ever come about.

On the mining front, with the largest mining organizations making it difficult to mine for the likes of Bitcoin, increased mining for the smaller cryptocurrencies is certainly likely, but hashrates are unlikely to ever reach the levels seen for the likes of Bitcoin and Ethereum, so to see similar exponential growth may be a hard push from mining itself.

Looking to see how decentralization can benefit everyday businesses and in which areas is where investors should be focused on, Ethereum’s smart contracts an example of how an archaic process can be brought forward to the 21st century.

Best Bitcoin Mining Pools

While some miners will look to build their own mining rigs, the advancements in the cryptocurrency space have led to the creation of another form of mining, referred to as mining pools.

Bitcoin mining pools provide Bitcoin miners the ability to pool resources together, combining hashing power, dividing the spoils according to the amount of shares they contributed to solving the puzzle.

As hashrates accelerated, largely attributed to the development of mining data centres and cloud mining, the complexities of the puzzles have also increased, which left miners requiring even faster hashrates that an individual miner with a home system would unlikely be able to achieve.

Pooling resources is one of the solutions in generating the necessary hashrate, so that blocks can be created more quickly, thereby increasing income for the miner and on a frequent basis, which would not be the case if a miner mined alone.

Miners are awarded shares once proof of work in solving the puzzle has been verified.

When choosing a mining pool the prospective miner will need to find a pool that sits within the philosophy of the miner with regards to Bitcoin mining, which requires some degree of due diligence.

The fork event that is expected at the end of the month have come about as philosophies towards Bitcoin diverge and it ultimately comes down to the responsibility of each and every miner to ensure that the pooling and increased hashpower goes to the appropriate network and not one that looks to move Bitcoin in a direction in which, you as a miner, are not aligned.

Before joining a Bitcoin mining pool a prospective miner will need Bitcoin mining software and a Bitcoin wallet.

There are many Bitcoin mining pools in existence today, with a few holding the lion’s share of the blocks, these being Antpool, which holds 15% of all blocks; F2Pool, which holds 12% and BitFury, which holds 11.8%, though BitFury is a private pool and cannot be joined, with BTCC holding 7%.

While these are the largest of the mining pools, the general view is that it is better to join one of the smaller pools to ensure that there is no build up in hashpower that could lead to concentration of blocks with pools that have malicious intent.

Antpool has been singled out as a pool that was reported to have included malware within mining equipment being sold, with the malware designed to remotely shut down equipment of customers or competitors in the interest of increasing Antpool’s profitability.

Bitcoin mining is normally carried out in countries that tend to have the cheapest electricity costs, with China mining the most Bitcoins and is therefore the largest exporter of Bitcoins, with Antpool, F2Pool and BTCC having interfaces in China, which can lead to language barrier issues for non-Mandarin speakers, though China is also estimated to hold as much as 60% of Bitcoins’ hashpower

Other geographies with sizeable numbers of Bitcoins include:

  • Georgia: Home to BitFury
  • Sweden: Home to KnCMiner
  • U.S: Home to 21 Inc.

Combined, the 4 countries above have an estimated 80% of all Bitcoins, which suggests that they will be able to mine 80% of Bitcoins. recommends p2pool for a fully decentralized mining pool.

Finally, it’s important not to confuse mining pools with cloud mining, as mining pools require miners to have the actual mining equipment in order to share the spoils, whilst cloud mining does not, but incurs a fee in its place, clouding mining service providers ultimately doing the mining and providing returns.

What is Cryptocurrencies Hashrate?

For mining, crypto hashrates are of particular importance from an income perspective.

Each miner, depending on the hardware used, will have a particular calculation speed, which is commonly referred to as the hashrate, with the miner’s profit correlated to the miner’s hashrate.

The hashrate is a measure of the power of the miner’s hardware and reflects the frequency of hash function computation per second.

Hashes are designed to be a variable and so, to solve a particular hash, the best course for success is to try as many random inputs as possible per second, until the correct input is found.

A miner who finds the correct input will then broadcast it and, upon verification, becomes the next block the cryptocurrency’s blockchain.

The miner will then receive the reward for contributing his or her hardware resources to operate the cryptocurrency protocol.

There is no simple way to find the correct inputs and so requires a search, with the probability of success rising with faster hardware. There are now machines that can compute trillions of these hashes each second, which is why using a home computer or laptop will simply not cut it in the mining world.

As an example, if an investor has a hashrate of 10 Ethers per day and puzzle complexity rises by 30%, the investor’s daily mining income at the same hashrate, but with increased complexity, would fall and the more miners that enter the greater the fall in income, the calculation above, assuming that no new miners enter, the investor’s money would fall by 23%, 7.69 Ethers.

Hashrates are of particular importance in both the trading and the pricing of cryptocurrencies, with any increase in a cryptocurrency’s exchange rate also driving up the mining’s hashrate, which tends to lag whilst proportionate to the size of the exchange rate moves, the two being correlated.

As a miner, your profit will ultimately be dependent upon how much hashing power you contribute to the network. Assuming your hashrate remains the same, as the network’s total hashing power increases, the miner in question’s hashing power falls relative to the network.

The more hashing there is within a given network, the less profitability there is for an individual miner.

Once a miner has understood the mechanisms behind the mining process and the importance of having a fast enough hashrate to generate income, the next question will be for which cryptocurrency a miner wishes to hash or mine.

The most well-known cryptocurrency is Bitcoin established in 2009, which has until recently dominated the mining world, but there are others including Ethereum launched in 2015, Ripple (2013), Litecoin (2011) and many more, with more than 900 cryptocurrencies currently active and being mined for and the number is growing.

By market capitalization, Bitcoin has the largest blockchain network, followed by Ethereum, Ripple and Litecoin.

Each cryptocurrency will have different functions. Bitcoin was ultimately established to be a digital currency, which is become more widely accepted by governments and merchants across the world as an alternative to traditional currencies.

In contrast, Ethereum, which is fuelled by its currency Ether, was developed to not only be a digital currency, but also to include smart contracts, which use blockchain stored applications for contract negotiating and delivering contracts, with the blockchain environment providing a decentralized approach to verify and enforce.

An added advantage of Ethereum is that it allows the creator to create digital tokens that are essentially shares in the virtual world, providing proof of ownership with the smart contracts being compatible with any wallet or exchange, providing a medium for developers to raise funds for projects.

From a transaction time perspective, Ethereum breaks the mould, with a transaction time of as little as 10 seconds for confirmation, competing with credit card confirmations.

With so many cryptocurrencies available, each will have different functions and benefits.

Litecoin, which has a market capitalization of around $1.6bn, has provided a significantly faster transaction time, compared with Bitcoin. Bitcoin transactions can take as long as 10 minutes to confirm, whilst the speed of Litecoin transactions are significantly lower at around two and a half minutes.

Ripple has a transaction confirmation time of a few seconds, as it has no public ledger and uses an “iterative consensus process.”

For now, despite the transaction speeds, Bitcoin is most widely accepted though still far from where it needs to be, to really compete with cash and credit cards and, to add to the nuances, increasing numbers of cryptocurrencies are fragmenting the market, with Bitcoin losing market share, despite other cryptocurrencies generally not being accepted or recognized by governments or merchants who have embraced Bitcoin.

Hashrate Growth

Cryptocurrencies have seen sizeable returns of late, easing the bubble talk as the markets look back on opportunities missed and what’s likely to come, with Bitcoin not alone in the exponential growth being seen, sizeable gains seen across the crypto world, as the market cap passes the $90bn mark, following a blip in the markets over concerns of a Bitcoin civil war that could see the largest cryptocurrency by market share, disintegrate, taking the rest of the crypto world with it.

The recovery ahead of the 1st of August fork event suggests that the panic is over, with Ether having fallen to sub-$200 levels for the 1st time since 2014 before recovering, Ether having surged to beyond $400 in June, with the gains widespread across the cryptos, the break through $90bn representing an almost 50% increase since mid-July, when total market cap had fallen to $61bn.

As the cryptocurrency market continues to rise, hashrates certainly influencing direction, with the combination of increased demand for cryptocurrencies and advancements in hardware technology driving hashrates higher, miners having started on desktops before moving to building warehouses of hardware dedicated for mining.

To put it into perspective, hashrates have surged from under 1,500,000 trillion hashes per second (TH/s) to over 6,000,000 TH/s in just the last 12-months.

Prices for mining hardware have been on the rise as demand continues to increase, as the cryptocurrency net widens. As more and more miners come on board, whether hashrates can continue to rise at the rates seen over the last few years remains to be seen, mining having already advanced from miners sitting at home with desk tops to the more advanced ASIC hardware.

The real question will be whether leading mining companies have upgraded mining rigs, with some mining companies seeing total hash rates increase, whilst others have fallen, in recent months

It suggests that a pickup in hashrates is on the horizon as large mining companies look to upgrade mining equipment, though this will ultimately depend on valuations through the coming months.

Optimism remains for now on mining profitability as new hardware hits the market and mining organizations look to upgrade mining hardware, with an increase in investment capital expected to enter the mining domain. It will boil down to hardware technological advancements keeping up with the pace.

About the Author

Bob Masonauthor

With over 20 years of experience in the finance industry, Bob has been managing regional teams across Europe and Asia and focusing on analytics across both corporate and financial institutions. Currently he is covering developments relating to the financial markets, including currencies, commodities, alternative asset classes, and global equities.

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