Is mining profitable? A comprehensive guide to the mechanisms of crypto mining

Basics to Know

Cryptocurrency mining is not just a complex mathematical process; it is the backbone that maintains the security of decentralized networks. Miners perform three essential tasks:

• Verification and Organization: Collecting pending transactions and arranging them into digital blocks.
• Coin Creation: Issuing new units of digital currencies regularly and under supervision.
• Protection: Utilizing massive computing power to prevent manipulation and fraud on the network.

The mining process relies on massive computational resources, and this huge investment is what makes the network secure. The more resources that are invested, the harder it becomes for any malicious entity to manipulate the system.

How does mining happen in reality?

The process goes through four sequential steps:

Step One - Aggregation and Organization: When someone sends a digital currency, the transaction remains pending for a while. Miners take these pending transactions and group them together into a “block.”

Step Two - Solving the Puzzle: This is where the competition comes in. Miners use specialized equipment to solve a very complex mathematical puzzle. The goal is to find a special number ( called Nonce) that, when combined with the block data, results in a predetermined value. The first one to find the correct answer wins.

Step Three - Registration: The winning miner broadcasts their block to the network. The other miners verify its validity, and if it is valid, it is added to the permanent blockchain ledger.

Step Four - Reward: The winning asset receives two rewards: new digital currencies recently created by the network, in addition to the transaction fees paid by users.

Technical Structure of the Process

Before the block reaches the network, the metal undergoes precise technical stages:

Hashing and Ordering: Every transaction is passed through a mathematical function that converts it into a unique number called “hash value”. This number acts like a fingerprint for the transaction - any small change in the transaction alters the value completely.

Merkle Tree: All hash values are arranged in a hierarchical structure called a Merkle Tree. Each pair of values is hashed together repeatedly until we reach a single value that represents all transactions - called the root.

Finding the Correct Value: The miner combines the Merkle root with the previous block hash and a random number (Nonce). It then applies a mathematical operation to these inputs and looks for a result that meets specific criteria set by the protocol. If unsuccessful, it changes the random number and tries again, and again, until it finds the correct value.

Broadcast and Acceptance: When the miner finds the correct value, it immediately broadcasts the block to the network. The remaining nodes verify its validity within seconds, and if it passes the test, the block becomes official and is added to the chain.

What happens during competition?

Sometimes an exciting race occurs: two miners find the correct solution almost at the same time and broadcast their blocks together. The network momentarily splits - some miners follow the first block, while others follow the second block. But this doesn't last long. When the next block is mined on one chain, that chain becomes the official one. The block from the other chain is rejected and becomes “orphaned,” and the miners who worked on it immediately switch to working on the winning chain.

Difficulty Level - How Does the Network Control Mining?

The network does not leave things to chance. The mining difficulty level is automatically adjusted to ensure a consistent rate of block creation - approximately every 10 minutes for Bitcoin.

When new miners enter the network and the total computing power increases, the difficulty rises. This makes the puzzles harder so that the creation process does not speed up. Conversely, when miners leave the network, the difficulty decreases to facilitate the process. This self-regulating system maintains the stability of the network.

Types of Mining Equipment

Central Processing Units (CPU)

In the early days of Bitcoin, anyone with a regular computer could successfully mine. But as more people entered, competition became fierce and difficulty increased significantly. Today, CPU mining has become impractical - profits don't even cover electricity costs.

Graphics Processing Units (GPU)

These units are designed to handle complex multi-tasking quickly. Although they are less specialized than professional mining devices, they are cheaper and more flexible. Miners use them to mine some altcoins, but their efficiency depends on the type of algorithm.

Specialized ASIC Miners

These devices are designed exclusively for mining - they do nothing else. Their performance is excellent and their efficiency is very high, but the price is steep. Another issue: technological advancement is rapid, and older devices quickly become unprofitable. This means that the massive investment you make may become worthless within a year or two.

Mining Pools

Instead of counting on the metal alone (, which has a very slim chance of winning ), it can join a group of miners. They combine their computing power together, and when the group wins, the reward is divided based on each individual's contribution. This increases stability and regular income, but raises concerns about concentration and centralization in mining.

Cloud Mining

Instead of buying equipment, you rent computing power from a specialized company. A simple and easy way to get started, but it carries risks: potential fraud, lower profits because the company takes its cut, or a sudden drop in profitability.

Bitcoin Mining

Bitcoin uses a mechanism called “Proof of Work” (PoW). This mechanism was developed by Satoshi Nakamoto, the founder of Bitcoin, in 2008. The idea: instead of having a central bank managing the currencies, this task is distributed among thousands of miners around the world. Each one verifies transactions independently, and this distribution ensures decentralization and security.

The current Bitcoin ( target writing with ) reaches a price of $88,330 approximately, with a daily fluctuation of +0.12%.

Each successfully mined block on Bitcoin is rewarded with 3.125 BTC starting from December 2024. This amount is not fixed - Bitcoin has a system called “halving”. Every 210,000 blocks, approximately every 4 years, the reward is halved. This ensures that the number of Bitcoins is limited to 21 million only and that the issuance rate is decreasing.

Is mining haram? And the profitability of the process

This is a complex question related to local laws and religious opinions. Legally, it depends on the country - some allow it, some prohibit it. Religiously, opinions vary. But from an economic perspective, the calculation is clear.

Profitability is not guaranteed. There are many factors that affect it:

Electricity Costs: The biggest factor. If your monthly bills are high, your profits may fall short of expectations and the equipment becomes a lost investment.

Market Prices: When the price of Bitcoin or the cryptocurrency you are mining rises, the rewards become more valuable. When prices drop, your profits may fall below zero.

Equipment Efficiency: Old equipment consumes more energy and does not solve puzzles quickly. Investing in modern equipment may be necessary, but the price is high.

Protocol Updates: The network may have changed the way it operates. The most famous case: Ethereum transitioned from PoW to PoS ( Proof of Stake ) in September 2022, which suddenly made mining on it impossible. Ethereum miners had to switch to other coins.

Future Changes: PoW mechanisms may not remain the preferred choice. Some networks may switch to other alternatives.

In short: mining can be profitable if you have efficient equipment, cheap electricity, and a long-term commitment. But it is fraught with risks and is not an easy investment.

Summary

Cryptocurrency mining is not just a complex technical process, but a backbone for the security of decentralized networks. Miners perform vital functions: verifying transactions, issuing new coins, and protecting the system from attacks.

The process is theoretically profitable, but actual profit depends on multiple practical factors - electricity costs, market prices, equipment quality, and protocol developments. Before getting into this field, make sure to carefully study your economic feasibility and objectively assess the risks.