How to make cryptocurrency mining profitable: beyond the technical basics

The Real Challenges of Cryptocurrency Mining in 2024

Many believe that cryptocurrency mining is an easily accessible gold mine. The reality is much more nuanced. Before equipping yourself with a high-end machine, it's essential to understand that the profitability of mining depends on a constellation of interdependent factors: the cost of hardware, electricity consumption, price volatility, and the technical developments of the network.

Let's take a step back to grasp the very essence of the process.

Foundations of Cryptocurrency Mining: Why Does It Exist?

Cryptocurrency mining serves two critical functions simultaneously. On one hand, it validates and records transactions on the decentralized ledger known as the blockchain. On the other hand, it generates new units of digital currency, but in accordance with rules that are immutably coded into the protocol.

At first glance, this may seem like creating money at will. This is not the case. Unlike a central bank, the blockchain protocol strictly regulates this creation according to fixed mathematical parameters. No one can bypass these rules without destroying the trust of the network.

Participants who perform this validation work – miners – use their computing power to solve complex mathematical problems. The one who finds the solution first gets the right to add the next block of transactions to the chain and receives new cryptocurrencies plus transaction fees in return.

The Detailed Mechanics of Mining

Fundamental steps for a successful extraction

When you send or receive cryptocurrency, your transaction first enters a waiting space called the (mempool). This is where miners go to find it.

The process unfolds in four distinct phases:

First phase: assembly and hashing

The miner collects unconfirmed transactions from the mempool and groups them into a candidate block. Before it can be confirmed, each transaction goes through a cryptographic hashing function that generates a unique fingerprint – a complex string of numbers and letters serving as an irreversible identifier. The miner also includes a special transaction called a coinbase transaction, through which he assigns himself the block reward – this is how new cryptocurrencies are born.

Second phase: building the Merkle tree

The hash fingerprints are then organized hierarchically in what is called a Merkle tree ( or hash tree ). This structure operates on a principle of progressive nesting: the hashes are paired and then hashed together, producing new hashes, which are again paired and hashed, until a single root hash is obtained. This root hash essentially represents all the transactions of the block in a single compressed fingerprint.

Third phase: the quest for valid block hash

This is where the “mining” process truly begins. The block header combines three elements: the root hash we just created, the hash of the previous block ( creating an immutable link in the chain ), and an arbitrary number called nonce.

The miner submits these three elements into a hash function. The goal: to obtain a result (block hash) that is lower than a predetermined target value set by the protocol. For Bitcoin, for example, this valid hash must start with a specific number of zeros.

Since the first two elements cannot be changed, the miner must modify the nonce thousands, millions, or billions of times until finding a combination that produces a valid hash. This is essentially trial-and-error work on a large scale – hence the required computational intensity.

Fourth phase: dissemination and verification

Once the valid hash is found, the miner broadcasts their complete block to the network. The other validating nodes examine this block to verify its authenticity. If consensus is reached, the block becomes permanent in the blockchain, all miners abandon their current candidate block, and the race restarts for the next block.

When two miners find a solution simultaneously

In the rare cases where two miners validate a block at the same time, the network temporarily splits. Each group of nodes starts processing the next block based on the block it received first. This situation creates two competing parallel chains until a new block is mined.

When the next block is added to one of the two versions, it becomes the official version. The other block, called an orphan or stale block, is abandoned by the network. Miners who had bet on the wrong version simply return to mining the winning chain. No data is lost; this is an inherent self-correcting mechanism of the system.

Dynamic Difficulty Adjustment

To maintain a regular block creation pace regardless of the number of active miners, the protocol continuously adjusts the difficulty level of the mathematical problem.

Here is how it works:

When new miners join the network, the total computing power increases. Without intervention, this would speed up the creation of blocks. The protocol detects this increase and raises the bar – making the problems harder, requiring more calculations before finding a valid solution.

Conversely, if miners disconnect or cease their activities, the computing power decreases. The protocol lowers the difficulty to compensate, temporarily easing extraction. These adjustments maintain a constant time interval between blocks (, for example, an average of ten minutes for Bitcoin) regardless of changes in the network's hash power.

The different approaches to cryptocurrency mining

CPU mining: the bygone era

At the start of Bitcoin, any laptop could mine. Central processing units (CPU) were sufficient to perform the hashing functions required by the proof-of-work model. The barriers to entry were minimal.

But as more participants joined the network and difficulty increased exponentially, CPU mining became economically unviable. Today, using a simple central processing unit to mine Bitcoin or any other PoW network is a guaranteed waste of electricity. This method belongs to history.

GPU mining: flexibility at the average price

The (GPU) graphics processors became the next preferred tools for miners. Designed to handle multiple operations in parallel, they provide a better power/cost ratio than the CPU. GPUs remain relatively accessible and can be repurposed for other uses – video games, scientific computing – if mining becomes unprofitable.

However, GPUs only shine on certain altcoins using specific algorithms. For Bitcoin, their efficiency has proven insufficient against the specialization of following hardware.

ASIC Mining: the ultimate in efficiency

An application-specific integrated circuit (ASIC) is designed for one and only one task. In the field of cryptocurrency, these are machines fully dedicated to mining Bitcoin or other cryptocurrencies using specific algorithms.

ASICs now dominate PoW mining for one simple reason: they offer unmatched energy efficiency. But this power comes at a price. A single high-end ASIC costs several thousand euros. Worse still, technological advancements quickly render older models obsolete. An ASIC that is two or three years old may barely be enough to cover its electricity costs. To remain competitive, ASIC miners must invest heavily and regularly, which makes this type of mining reserved for those with significant capital.

Mining pools: pooling together to survive

The probability that an individual miner will discover the next valid block is extremely low – almost zero for most. A solo miner could potentially wait for years before winning a reward.

Mining pools solve this dilemma by pooling the computing power of thousands of participants. When the pool discovers a valid block, the reward is shared fairly among all contributors based on their share of work provided.

This arrangement offers several advantages: regular and predictable income, material costs diluted among several participants. Nevertheless, the concentration of mining in a few giant pools has raised legitimate concerns about decentralization and the theoretical risk of a 51% attack on the network.

Cloud mining: the promise and the pitfalls

For those who do not want to invest in expensive equipment, cloud mining seems attractive. You simply rent the computing power of a third party that manages the infrastructure on its behalf. You receive a share of the profits without the installation and maintenance costs.

The downside? Fraud, unreliable suppliers, and reduced profitability. If you choose cloud mining, select only established providers with a strong reputation in the ecosystem. Never trust promises of exorbitant returns – they often hide a Ponzi scheme.

Bitcoin: The Case Study of Cryptocurrency Mining

Bitcoin embodies the archetype of proof-of-work mining (PoW). This consensus mechanism, invented by Satoshi Nakamoto and described in the 2008 whitepaper, determines how a distributed network reaches a collective agreement without a central authority.

PoW operates through a system of economic incentives: heavily investing in electricity and computing power makes a malicious attack costly and impractical. Transactions are sorted, grouped into blocks by miners competing to solve cryptographic puzzles, and then transmitted to the blockchain after validation.

The Bitcoin reward for mining a block was originally 50 BTC. Every 210,000 blocks (approximately every four years), this number is halved in an event called halving. In December 2024, discovering a Bitcoin block yields a reward of 3.125 BTC, plus the transaction fees included in that block.

This gradual reduction mechanism ensures that no new Bitcoins will be created after the year 2140, creating an ultra-fixed supply that contrasts with the devaluation of traditional fiat currencies.

Profitability: the real issue

Yes, mining can generate income. No, it is not guaranteed and it is certainly not easy.

Several factors influence profitability:

The evolution of prices

When the value in euros or dollars of cryptocurrencies rises, your mining rewards are worth more. Conversely, a drop in prices can turn a profitable operation into a financial sieve.

The efficiency of the hardware

A modern ASIC consumes less electricity per terahash than a previous generation. However, powerful ASICs are expensive. Miners must weigh carefully: does an investment of 5,000 euros in an efficient machine generate enough revenue to justify the expense, considering the expected lifespan of the hardware?

The cost of electricity

It is often the decisive factor. In regions where electricity costs €0.30 per kWh, many mining operations are not profitable. In areas with cheap electricity (hydropower in Iceland, geothermal energy at Hydro-Québec), miners can remain competitive.

The obsolescence of hardware

New generations of ASICs are appearing regularly. Your ASIC, once high-performing, is gradually becoming less efficient compared to the new models. If you cannot afford to upgrade, you will find yourself disqualified from the market.

Protocol changes

A Bitcoin halving immediately reduces block rewards. Other blockchains may completely abandon PoW. Ethereum is a famous example: in September 2022, it fully transitioned to proof of stake (PoS), rendering GPU and ASIC mining on Ethereum instantly useless. Thousands of miners saw their investments turn into dead weight overnight.

In summary

Before you start, conduct a serious cost-benefit analysis. Test different online profitability calculators. Evaluate pessimistic scenarios as much as optimistic ones. Consider that prices can drop by 50% just as easily as they can rise. If after this reflection you decide to proceed, do your own thorough research (DYOR) and accept the inherent risks of this investment.

Conclusion

Cryptocurrency mining remains a vital component of PoW blockchain networks like Bitcoin. It secures the network, validates transactions, and, according to the protocol rules, gradually introduces new monetary units into circulation.

It is a technically fascinating process, but financially demanding. Block rewards and transaction fees effectively offer potential income. However, these gains are eroded by electricity costs, hardware depreciation, and the inherent uncertainty of cryptocurrency markets.

The profitability of cryptocurrency mining is therefore far from guaranteed and varies greatly depending on local conditions, the chosen timing, and the type of equipment used. Proceed with pragmatism and clarity.