Mining is one of the most important components of the cryptocurrency world. Without it, we wouldn’t have Bitcoin or a blockchain. The name conjures up the image of an army of pale crypto nerds labouring deep under the earth, hewing Bitcoin from solid rock, one fragment at a time. Fortunately for them, this couldn’t be further from the truth.
What is mining?
In one easy-to-remember phrase, mining is the process of adding new blocks to the Bitcoin blockchain.
Mining occurs when powerful computers crack complex mathematical problems to create “blocks” of verified Bitcoin transactions. These are then added to the blockchain. Each new block is made available every ten minutes. When a miner successfully verifies 1MB of data, roughly 2,500 Bitcoin transactions, and is also the first to solve the mathematical puzzle, they are rewarded with 6.25 Bitcoin. This system is called proof of work (PoW).
Mining Bitcoin is essentially a race to solve computational problems that secure and develop the Bitcoin network. The miners earn coins for their work and the network both grows and becomes more secure. It’s a win-win.
Can I become a miner?
Before cryptocurrency became well known, it was possible to mine Bitcoin at home. Anyone could do it. In theory, you still can. You probably just won’t make much money on your own.
Now, the competition is so fierce that miners need to invest in powerful and expensive computers. It is still possible to buy devices to mine at home. These are known as mining rigs. But, without a graphics processing unit (GPU) or application-specific integrated circuit (ASIC), the chances of successfully mining Bitcoin are low.
The vast majority of mining is now done by companies that have warehouses full of extremely powerful computers. The computational power of just a handful of these machines dwarfs the capabilities of any personal computer. The sheer quantity and advanced nature of most professional mining operations means that humble bedroom miners have almost no chance of successfully winning the race to both verify the necessary transactions and crack the computational puzzles necessary to get their hands on that all-important Bitcoin reward.
But that doesn’t put people off. Individual miners often join a mining pool. Mining pools are groups of cryptocurrency miners that combine their collective computing power and share any winnings equally between all members of the group.
Miners today don’t just have to invest in expensive equipment. They also need to pay for the huge amount of electricity that is used up to 24 hours a day. On top of this, mining operations need large and secure premises. The profits for mining are potentially huge but both the start up and operations costs can be very high depending on the location. For this reason, many of the world’s largest mining operations are moving to developing countries with temperate climates and low energy costs.
Mining is also illegal in some countries. Because cryptocurrency is a developing industry, it is regulated in different ways around the world. While mining is legal in most countries, it is illegal in Algeria, Egypt, Bolivia, Morocco, Nepal and Pakistan. China, home to many of the top mining companies, has toyed with outlawing cryptocurrency mining several times in recent years. It is very important to research the legality of mining in your country before starting, as well as to remember that the law can sometimes change very quickly.
Mining is not just a way to get Bitcoin without having to pay. It is a vital part of ensuring the strength of Bitcoin’s distributed ledger, the blockchain. It also makes sure that a regular supply of Bitcoin enters the supply until the limit of 21 million tokens is reached sometime around 2140.
Mining and the proof of work system also helps stop something called the double-spending problem. Double spending happens when the same currency token can be spent more than once. PoW verifies past transactions on the blockchain and requires consensus across the network in order for new blocks to be added. This means that the data from a token that has already been spent is publicly available and would be spotted during the verification process.
Each block that is verified helps to make the network more secure. Because the responsibility for mining Bitcoin is spread across millions of users, the network is decentralized and does not rely on any central authority to function. It is composed entirely of code and the community that use it to improve both the financial world and their own circumstances.
What’s the catch?
While cryptocurrency mining can be a very lucrative practice. It does consume a lot of energy.
But miners are cleaning up their act. A 2019 study showed that 76% of cryptocurrency miners use electricity from renewable sources. Miners are even developing ways to transfer excess heat to homes in their local communities.
The energy used in Bitcoin production pales in comparison to other sectors. The industrial sector uses a huge 45% of global energy, with building and transportation taking up 29 percent and 21 percent respectively. Bitcoin consumed a mere 0.51%. Perhaps this is why climate-conscious millennial investors are choosing cryptocurrency as their first investment.