Crypto mining is the mechanism by which certain blockchain networks, most notably Bitcoin, validate transactions and create new coins. Miners use specialised hardware to solve complex cryptographic puzzles. The first miner to find the solution earns the right to add a new block of transactions to the chain and receives a block reward in newly minted cryptocurrency plus transaction fees.
How mining works
- Pending transactions are broadcast to the network.
- Miners collect these transactions and group them into a candidate block.
- Each miner races to find a hash, a number produced by a cryptographic function, that meets the network's difficulty target.
- The first miner to find a valid hash broadcasts the block.
- Other nodes verify the block and add it to their copy of the blockchain.
- The winning miner receives the block reward.
For Bitcoin, this process repeats roughly every ten minutes, and the difficulty adjusts every 2,016 blocks to maintain this pace regardless of how much computing power joins or leaves the network.
Mining hardware
| Generation | Hardware | Status |
|---|---|---|
| Early (2009-2012) | CPUs, laptops | Obsolete for Bitcoin |
| Mid (2012-2014) | GPUs, graphics cards | Still used for some altcoins |
| Current | ASICs (Application-Specific Integrated Circuits) | Standard for Bitcoin |
ASIC miners are purpose-built machines that do nothing except mine a specific algorithm. They are expensive, generate significant heat and consume considerable electricity.
Mining in India
Mining is not illegal in India, but high electricity costs make it less profitable compared to countries with cheaper power. Indian miners must also account for GST on mining hardware and the 30% flat tax on any mined cryptocurrency, which is treated as VDA income. The cost of acquisition for mined coins is considered zero by the Income Tax Department, meaning the entire value is taxable upon sale.
Proof of work vs proof of stake
Mining is a feature of proof-of-work blockchains. Ethereum moved to proof of stake in 2022, replacing miners with validators who stake coins as collateral. Proof of stake is vastly more energy-efficient but uses a fundamentally different security model.
Environmental concerns
Bitcoin mining's energy consumption has drawn criticism. Some mining operations use renewable energy, and the industry is gradually shifting in that direction, but the debate continues.