When thinking about how money is made, it’s common to picture large printing presses creating thousands of new bills at a time. With cryptocurrencies, everything is digitized, so the process of making money is very much different. Cryptocurrencies trade in the printing press for a server room with blinking lights and the deafening whirr of computing power.
The process through which digital currency is created is called mining. The unique difference between paper money and digital money is that (almost) anyone can become a Bitcoin miner.
As discussed in our cryptocurrency breakdown, bitcoins and other digital currency are not regulated by a government entity, but instead, by individuals across the world who verify transactions. As such, mining operations have popped up worldwide in the last decade, with estimates pegging the number of active Bitcoin miners around 1 million.
So, should you become a Bitcoin miner? Well, here’s what you need to know before joining the worldwide force of crypto enthusiasts:
- What is bitcoin mining?
- Why do people mine for bitcoins?
- Bitcoin mining roadblocks
What is bitcoin mining?
Bitcoin mining is the energy-intensive process of adding new blocks to the transaction chain, which results in the introduction of new bitcoins. It involves enormously complex mathematical computations that can’t be done by humans.
Basically, incredibly powerful computers run software to develop the correct hash to complete a block of verified transactions. Once the block is completed, the miners are rewarded with a prize paid in, you guessed it, bitcoin.
The completed block is then sent to everyone else in the network to verify and accept it as the next block in the chain. All other miners will then discard the equations they had been attempting to solve and begin anew with another trial and error attempt to virtually “unlock” the chain’s next block.
That sounds complex and time-consuming
That’s because it is. Just as the blockchain technology on which Bitcoin runs is heavily influenced by mathematics and computational theory, so are all the other moving parts of bitcoin, including how it’s mined.
The mining difficulty is adjusted every few thousand blocks to make it more or less challenging based on the number of people mining (assessed as to how much computing power is on the network.) Due to the difficult nature of producing a valid block, miners complete only one approximately every 10 minutes.
Why do people “mine” for bitcoin?
Why does anyone work at anything? For the money, of course. But in this case, it’s bitcoins and other cryptocurrencies. When a new block completes, a “block reward” is released. The value of this reward decreases about every four years when the rewards are halved.
The halving process was designed to lower available bitcoin supply due to reducing the rate at which new coins are available. After the most recent halving in May of 2020, the reward sits at 6.25 bitcoins per block, roughly translating to $75,000 at today’s price of almost $12,000 per bitcoin.
It’s also worth noting that most people who mine for bitcoin don’t go it alone. Mining pools have developed where groups of individual miners band together to use their superior computing power and share in the benefits in return.
So if all it takes is a computer program to do a thing or two and you’ll be rewarded with bitcoin, why isn’t everyone doing it? Below are just a few reasons why everyone and their brother aren’t quitting their day jobs to mine for bitcoin.
There are start-up costs
While some people might think it’s worth it to mine bitcoin from an android phone, all serious Bitcoin miners buy a specific machine, called ASIC, to support their efforts.
The fact that these computers can cost thousands of dollars on the front end deters many people from getting started. But for those who are serious about getting into the game, you’ll need to be prepared to pay a lot more in ongoing costs because…
It takes a lot of resources
When I say resources, I’m talking about computing power. Think about vast rooms of server racks with blinking lights. The energy required to run the types of computers and servers that perform mining work is significant, and it has to come from somewhere.
Depending on the electricity cost in a given country, the cost of mining can increase exponentially. To mine a single bitcoin in Kuwait will run you a little less than $2,000 while setting up an operation in Germany will hit you with a hefty price tag of almost $15,000.
For this reason, many bitcoin miners have begun to travel to greener mining pastures where electricity costs are significantly lower than their home countries.
The environment and population health are taking a hit
Bitcoin mining requires some serious electricity consumption, and the carbon footprint and electronic waste are baffling as well.
According to Digiconomists’s Bitcoin Energy Consumption Index, it’s estimated that a single bitcoin transaction uses as much energy as it takes to power a US household for around 20 days and the entire Bitcoin network’s energy consumption is on par with that of the Czech Republic.
Researchers attempted to assess the health and climate damages of cryptocurrency mining in a 2019 report. They found that in the US in 2018, for each $1 of bitcoin value created, it resulted in health and climate damages (from impacts of CO2 emissions and exposure to pollution) that cost almost half that amount ($.49).
It seems that the allure of new technology has so far overshadowed potential negative environmental impacts. But it will be interesting to see if governments try to jump in to offer regulations as these implications are brought further into the light.
So should I become a Bitcoin miner or what?
Unlike the paper money supply in the US, Bitcoin has a maximum limit of 21 million coins. Once all 21 million exist, miners will no longer receive a stipend for solving the puzzles but will rely solely on transaction fees. Miners can continue to confirm transactions on the chain, but will no longer solve blocks for larger rewards.
Experts believe all bitcoin won’t be mined until the year 2140, so there’s still a bit more time to become a miner and stack your digital cash high. But even after all the new coins are in circulation, you can still reap benefits off transaction fees.
So while it doesn’t look like bitcoin mining as a career is off the table just yet, you’ll want to do a fair bit of research before you quit your day job.
Contributor’s opinions are their own. Always do your own due diligence before investing.
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