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I can 100% say I've dug up light spheres and claws in the mine though (claw is the 4th altar element, also a possible NPC trade), so it's not only trading.
Magic staff "recipe" is simply failing the recipe while any blade is in the cauldron, so yeah, dropping a bunch of stuff in will eventually work (I believe you have a 25% chance to get a staff), even if you just keep putting in cheap magic crystals over and over without waiting the 2-5 minutes or so that recipes normally ask you to wait for before putting more in.
I've created now my first sword with 4 elements!