What is Bitcoin Mining?
By Kapil Rajyaguru
Despite the cryptocurrency’s wildly volatile price and the increasing environmental concerns, Bitcoin mining is booming in North America. The state of Texas, in particular, has begun to emerge as an epicenter since China banned the industry in 2021, sparking an exodus of miners from the country.
For those unfamiliar with Bitcoin’s inner workings, “mining” is how transactions are validated for a blockchain. It’s essentially a cryptographic competition to add blocks, or records, to the cryptocurrency’s ever-expanding blockchain network. In exchange for this service, winning miners are paid in Bitcoin (BTC), which reached a record price of more than $68,000 in November 2021.
In the wake of the Chinese ban, companies based in North America, which include Riot Blockchain and Marathon Digital Holdings, are raising record amounts of capital as they ramp up production and expand their industrial-scale operations.
The cost of power is one of the most significant factors in cryptocurrency mining. That means companies with access to reliable, low-cost electricity—particularly from renewable sources—have an opportunity to play a central role as industry evolves in North America.
How to Mine Bitcoin: The Basics
At the root of every cryptocurrency is a blockchain, which is essentially an electronic ledger sustaining a continuously growing list of records. The blocks in the chain are basically files where data such as Bitcoin transactions are recorded, including which miner successfully created that block. Each block also includes a hash, a unique 64-digit hexadecimal value identifying it and its contents, as well as the hash of the previous block in the chain.
To win a block in most cryptocurrencies, Bitcoin included, a miner has to be the first to guess a hash value equal to or lower than the one that Bitcoin generates for the transaction. As more miners compete, and more computing power is deployed, each miner’s chance of coming in first is reduced—the current odds are one in the tens of trillions—helping ensure a pace for creating new blocks that is currently about one every 10 minutes.
This competition among miners also collectively secures the blockchain by allowing transactions and data to flow in what is known as a trustless manner, meaning that an intermediary like a bank isn’t required to ensure that a Bitcoin can’t be spent twice. Instead, the difficulty of solving for the right hash and the financial reward for success create a secure consensus mechanism by making it too cost-ineffective for malicious users to hack.
The consensus mechanism used by Bitcoin is known as proof of work, or PoW. Because this algorithm ultimately relies on the collective power of thousands of computers, it’s a particularly robust way to maintain a secure and decentralized network. Still, it has drawbacks. Most significantly, it’s exceptionally energy intensive. As more computer power is used for crypto mining, the amount of electricity required to both earn cryptocurrency and maintain the network rises.
Some other cryptocurrencies, like Ethereum, have switched or are planning to switch to a different algorithm called proof of stake, or PoS.
PoS doesn’t require the same extensive, decentralized network of miners to support its operations and is thus far less energy-intensive. While it’s not as secure, its lesser energy demands may make it easier and more cost-effective for those blockchains to support a next generation of crypto applications like smart contracts, non-fungible tokens, and decentralized finance. Bitcoin, however, has not announced any plans to transition to PoS.
Finally, as a part of Bitcoin’s supply management system, the reward for mining a block is set to be cut in half, from 6.25 BTC per block mined after the most recent halving in May 2020 to 3.125 BTC in 2024.
The current bullishness around mining, even in the face of that planned drop, says a lot about the profitability of the industry and the expectation that the original cryptocurrency will keep appreciating. It also reflects the fact that the so-called hashrate, which measures the total number of hash guesses being computed at a given time in the network, plummeted when Chinese operators were forced to shutter in 2021. This created a huge opportunity for new miners. In December 2021, the hashrate was about 175 quintillion hashes—or 175 exahashes—per second (EH/s).
Bitcoin Mining Setup
The resources required for mining Bitcoin include:
- At least one specialized computer (called an application-specific Integrated Circuit or ASIC miner), which is specifically designed to compete for and support a particular cryptocurrency.
- A reliable and inexpensive energy supply.
- A dependable internet connection.
- A cooling infrastructure (whether you’re mining at home or on a Bitcoin farm).
- A computer, software, and the technical skill to establish and monitor operations.
A home mining operation might consist of just a computer and a handful of ASIC miners.
Solo hobbyists were largely responsible for Bitcoin’s initial popularity, but they’re now more likely to join a virtual mining collective like Slush Pool or AntPool to increase their odds of success.
Today’s industry is more accurately represented by an industrial-scale mining farm containing thousands of ASIC miners housed in a warehouse or even a series of warehouses.
The next priority is power, which is needed both to run and to cool the ASICs. Given the relatively low overhead and variance in equipment costs, the price of electricity becomes the most significant factor in calculating your bottom line.
While Bitcoin mining economics at scale are very attractive, producers must recognize their regulatory and environmental context. For new entrants like power companies, incorporating Bitcoin mining into existing operations to better manage their own energy output offers a unique opportunity to leverage public opinion in addition to excess resources.
You need to login in order to Like
