How Does Crypto Mining Work?

Mining virtual currencies such as Bitcoin and Ethereum has become very lucrative due to the price increases in recent years. As a result, gigantic mining farms are springing up worldwide, especially in places where electricity is cheap. These computing centers use huge amounts of computing power to mine cryptocurrencies. To illustrate,  the global network of Bitcoin miners now uses as much power as the whole of the Netherlands. But how exactly does crypto mining work?

In this article we look at the practice and we mainly discuss the economics of mining. We immersed ourselves in the world of mining and built a computer for Ethereum mining ourselves. We show which equipment we use and which software is involved. Finally, we will make a cost-benefit analysis and identify risks involved. Will it remain lucrative for a long time to mine virtual coins like Ethereum? Or has mining had its day?

How Does Mining Work?

For a full explanation of the technical side of mining, please read our previous article in this series. As we wrote in that article, miners are essential for Bitcoin and many other virtual currencies. They keep the network safe and ensure that all transactions are added to the blockchain. In return for the calculations, they receive a so-called block reward and collect the transaction costs that users pay to send crypto coins.

In this article, we start addressing the necessary computer hardware for mining, in this case mining Ethereum. Then we show what software we use and how we generate income with it. We made a calculation of the expected returns and the recovery time of the initial investment. Finally, we discuss the risks and end with a conclusion.

Processors, Video Cards and ASICs

When Bitcoin only just came into existence, there was little computing power in the network and you could even mine virtual coins with a simple computer or laptop. The complexity of the calculations was so low  that little computing power was required. As the price of Bitcoin rose, mining became more lucrative. Programmers also quickly discovered that a computer’s graphics card was much more capable of performing SHA256 calculations than the normal processor.

Where a normal processor performs all possible calculations on a few intelligent cores, modern video cards have thousands of simple cores that are optimized to perform only a limited range of calculations. These cards, which are designed to calculate images and graphical effects of a computer game, turn out to be very suitable for mining Bitcoin.

In the early days of Bitcoin, people could still mine on normal processors

However, video cards can mine much more efficiently than normal processors

Miners switched to fast video cards, which significantly increased the computing power of the Bitcoin network. As a result, the complexity of the calculations also increased, which ultimately caused revenues to fall again. To earn more money from mining, chip manufacturers therefore developed new processors, fully optimized for performing SHA256 calculations. This is the encryption that cryptocurrencies like Bitcoin and Ethereum use to keep the network safe.

In recent years, these highly specialized chips, known as application-specific integrated circuits (ASICs), have taken over the mining world. These systems are in fact much more efficient than video cards. Although they consume a lot of power (1,000 to 2,000 watts), they have considerably more processing power than video cards or normal processors. These are the systems that large-scale mining farms nowadays use. Due to the high cost of these specialized devices, mining Bitcoin is no longer an option for most people.

This Antminer S9 mining system is fully optimized for mining crypto coins

Bitcoin vs Ethereum

While mining Bitcoin is no longer profitable without specialized mining equipment, it is still interesting to mine Ethereum and other virtual coins with video cards. Especially after the enormous price increase of the past few months. Ethereum’s price hit an all-time high of more than $4,000 earlier this month. By comparison, that is more than five times as much as the price of $740 at the beginning of this year. Since then, the price has fallen sharply, but it is still much higher than the level at the beginning of this year, and why it is still attractive to mine Ethereum.

Because we wanted to know more about mining, we decided to build our own mining system. We invested in a couple of fast used video cards, a powerful power supply and other components needed to build a computer. You can see the result below. A system that can perform over 100 million SHA256 calculations per second, and that consumes nearly 500 watts of power continuously. Several fans in the cabinet provide the necessary cooling.

The mining system with three video cards

Mining Pools

Now that the computer is running we need to install the correct software. The computer must be connected to the internet to receive new transactions on the Ethereum network. It is possible to mine completely independently, but that is no longer lucrative today. There are so many miners active worldwide that the chance of finding the key to a new block has become extremely small.

By now, we could best compare mining to a lottery. Within the Ethereum network, a new block is found every 10 to 20 seconds, but the chances of finding this block are exceptionally small. The total computing power of all computers mining Ethereum worldwide is currently 596 terahashes per second (TH/s). That is 596 trillion calculations, while our mining system achieves just over 100 million calculations (MH/s).

Total computing power on the Ethereum network has increased sharply in recent months (Source: 2Miners)

Statistically, our mining computer should therefore find 1 in 500,000 new blocks. With 15 seconds for each block, that would mean that in the worst case scenario we could mine for a few months without finding a single block. That is too risky, given the size of the investment and the power consumption. That is why most miners choose to bundle their computing power in a so-called mining pool. They make the computing power of their computers available to a platform, so that they can jointly mine Ethereum. This mining pool distributes the proceeds of mining pro rata among the users. Those who add more computing power to the network will receive a larger share of the revenue.

The computing power of the Ethereum network is spread over a number of large mining pools (Source: 99Bitcoins)


Our computer is connected to the Nicehash network, a well-known platform for mining cryptocurrencies. This platform is linked to different mining pools that mine a multitude of crypto coins. We installed the corresponding software to connect to the network and link our computer to our account. Below you can see the overview page of Nicehash, where we can follow the system online.

Mining Ethereum Through Nicehash Platform

We can see if all video cards are active, what the revenue per day is and how much we have already earned in total from mining. We can then optimize the video cards via  software, by adjusting the clock speed and reducing  power consumption. Once everything is stable, the investment yields a passive income. The computer runs 24 hours a day and continuously receives new assignments to mine with.

The power consumption of mining is  considerable, but we also see market forces here. For example, the large-scale mining farms look for places where the energy is relatively cheap. Think of sparsely populated areas where a lot of sustainable electricity is generated (for example at a water reservoir) or where a lot of residual energy is generated. That is energy that would otherwise have been lost, but is now used by miners. (Pro-argument, mention the con-argument(s) too!)

Nicehash software puts the video cards to work

How Profitable Is Mining Ethereum?

With a total investment of approximately €2,500, we built a system with a computing power of more than 100 million calculations per second (MH/s). We also ran a second system with one video card in it. This brings the total to four video cards with a combined computing power of 147 MH/s. At Ethereum’s current price of about $2,000 and with the revenue from transactions, that makes about $10 to $15 per day.

This yield fluctuates continuously and depends on several variables. Basically, the yield naturally moves with the price of Ethereum. In addition, as a miner you also benefit from the yield feedback from transactions. If there are many transactions on the network, the transaction costs rise and the income for miners also increases. Income can also decrease, for example if more people start mining. The income must then be distributed among more miners. (Also, when more powerful processors join the digital market forces in cryptomining, you are confronted with less income, and a less profitable investment proposition then when you started.)

Our computer with three video cards and the video card in the other system consume about 550 watts together. That is a consumption of 13.2 kWh per day, which at an electricity price of 21 cents per kilowatt hour amounts to € 2.77. With a gross revenue that fluctuates between €10 and €15 per day, that is about €250 per month.

So on an investment of €2,500 that is about 10 to 15 percent per month. That means a payback period of approximately six to eight months based on full amortization. If we use a residual value of 50%, the payback period is only three to four months. Mining Ethereum is therefore still profitable.


Returns and risk go hand in hand and so does the mining of virtual currencies, such as Ethereum. The first risk, of course, is the enormous volatility of the crypto market. The price has risen sharply in recent months, but can also fall sharply. We saw that last week with prices falling more than 30% in seven days. A sharp fall in the price means that income from mining also decreases and the payback period is longer.

The investment itself also runs a risk if Ethereum price falls. Due to the popularity of mining, the prices of video cards have risen sharply in recent months, even reaching more than twice the normal recommended prices. This high premium evaporates when the prices of Ethereum and other virtual currencies fall sharply and mining is no longer profitable. Many miners will then exit the market and sell video cards, causing the market value of the investment to plummet.

As we saw in the previous article about Bitcoin, another risk is that more specialized mining equipment will come onto the market, which will significantly increase the computing power in the network. These systems are already being developed and could be on the market in the foreseeable future. This makes it less and less profitable to mine with video cards.

There is also another risk, namely the planned transition from proof of work to proof of stake. This means that transactions in Ethereum are no longer validated by parties with the most computing power, but by parties with a large position in Ethereum. Much computing power that is now used to mine Ethereum will then divert to mining other cryptocurrencies that yield much less. We will explain this further in a future article.


Mining Ethereum is currently still very profitable and relatively easy for anyone with knowledge of computers to start  a mining operation themselves. Considering the  the returns, which remain extremely uncertain, it does require a rather large investment. However, because mining Ethereum is so lucrative, the prices of video cards have risen sharply in recent months. As a result, the payback period has become longer, while the returns from mining are very uncertain in the long term.

The transition to the proof of stake model is currently the biggest risk for Ethereum mining. Why? Because an important leg of the revenue model for Ethereum mining will disappear. We will explain exactly how that works and why the developers of Ethereum want to switch to this model in a subsequent article. As long as it is still profitable, we will continue to mine, but how long this will continue, remains an open question.

This article was published earlier on Translation by Jaco Schipper

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