What Is Mining Coin?
Cryptocurrency mining is the process by which transactions are verified and added to a blockchain. This is the crucial step that allows some cryptocurrencies, like Bitcoin, to function without oversight from a central authority, such as a bank. Mining is also how new coins are introduced into the market.
To validate a block of Bitcoin transactions, miners solve complex cryptographic hash puzzles. The first miner to find a solution earns a reward of Bitcoins and transaction fees. The amount of Bitcoins awarded per solved block started at 50 in 2009 and is halved every 210,000 blocks (about four years). As of November 2021 the reward was 6.25 bitcoins.
To win a Bitcoin reward, a computer needs to correctly guess the target hash—an irreversible process that turns the clear text of a transaction into a random string of 64-bit hexadecimal numbers. The process requires a lot of computing power and time, and the odds of guessing correctly are one in ten trillion. As more computers join the network, the odds of winning reduce even further.
For this reason, it’s extremely expensive to purchase and operate the specialized hardware required for mining. The high upfront costs are compounded by the electricity costs for running and cooling the equipment. A single ASIC can use as much power as a million PlayStation 3s, which drives up operating costs and has limited mining profitability.
In addition to purchasing and running ASICs, miners must pay for a fast, reliable Internet connection and rent warehouse space for the equipment. The most profitable miners have large warehouses full of ASICs and employ teams of people to manage them. Smaller miners can pool their resources in groups called mining pools to increase their chances of finding a hash. Some companies offer cloud mining services where you can rent mining capacity for a monthly fee.
Although the technology is relatively young, mining is already a multibillion-dollar industry. But the biggest concern for prospective miners should be the cost and reliability of electricity, which can make or break mining operations. As energy prices increase, mining becomes less profitable and may become unsustainable. A growing number of mining companies are searching for cheaper energy sources, including renewables and carbon offset credits. Others are transitioning to less energy-intensive consensus mechanisms, such as proof of stake (PoS).
As with all investments, mining comes with risks, including the risk of losing your entire investment. You should carefully consider your investment objectives and personal financial situation before investing in cryptocurrency mining. For more information, see the Fidelity Investments Crypto Assets Disclosure and Terms of Business.