Bitcoin mining is a lucrative business for many investors interested in cryptocurrency. As miners are rewarded for their work with crypto tokens. So, let’s learn more about it. Potential investors should keep in mind that Bitcoin mining is the process by which new bitcoins are entered into circulation. Nevertheless, it is also a critical component of the maintenance and development of the blockchain ledger. This process requires sophisticated computers. Such computers have the capacity to solve extremely complex computational math problems.
It is worth noting that, cryptocurrency mining is painstaking, costly, and only sporadically rewarding. So, investors should take into consideration various factors before making a decision. In this article, we will focus on Bitcoin (throughout, we’ll use “Bitcoin” when referring to the network or the cryptocurrency as a concept, and “bitcoin” when we’re referring to a quantity of individual tokens).
Bitcoin mining and important details
As stated above, cryptocurrency mining is a complex process Interestingly, miners are getting paid for their work as auditors. Notably, miners are doing the work of verifying the legitimacy of Bitcoin transactions. In particular, by verifying transactions, they are helping to prevent the “double-spending problem”.
People should not underestimate the importance of double-spending. It refers to a scenario in which an owner of the world’s largest cryptocurrency illicitly spends the same bitcoin twice. When it comes to a physical currency, this is not an issue. In the case of digital currency, there is a risk that the holder could make a copy of the digital token. He or she can send it to a merchant or another party while retaining the original. However, miners check transactions to make sure that people have not illegally tried to spend the same digital token twice.
Importantly, after verifying 1 MB (megabyte) worth of Bitcoin transactions, known as a “block”, miners are eligible to be rewarded with a number of bitcoins. Nonetheless, not everyone who verifies transactions will get the cryptocurrency as a reward.
Furthermore, 1MB of transactions can theoretically be as small as one transaction (though this is not at all common) or several thousand. As a reminder, it depends on how much data the transactions take up.
In order to earn the world’s largest cryptocurrency, you need to meet two conditions. Notably, one is a matter of effort and one is a matter of luck.
Miners have to verify ~1MB worth of transactions, this is the easy part. Furthermore, you have to be the first miner to arrive at the right answer or closest answer to a numeric problem.
Mining and technical aspects
Apart from lining the pockets of crypto miners as well as supporting the Bitcoin ecosystem, mining serves another important purpose. Importantly, it is the only way to release new cryptocurrency into circulation. It is possible to say that miners are basically “minting” currency. For example, there were around 18.5 million bitcoins in circulation as of November 2020.
Without miners, Bitcoin as a network would still exist, but there would never be any additional digital token. Interestingly, at some point in the future mining will come to an end. Nevertheless, miners will continue to verify transactions in order to keep the integrity of Bitcoin’s network.
People should keep in mind that the rewards for mining are reduced by half every four years. Last year, the reward halved to 6.25 BTC. For example, in November 2020, the price of the biggest cryptocurrency was about $17,900 per BTC. Thus, miners who completed a block would earn $111,875 (6.25 x 17,900).
If potential miners want to keep track of precisely when these halvings will occur, they can consult the Bitcoin clock.
In the beginning. it was possible to compete for blocks with a regular at-home computer. But this is no longer the case.
The network aims to have one block produced every 10 minutes or so, to guarantee the smooth functioning of the blockchain and its ability to process as well as verify transactions
Interestingly, if there are one million mining rigs competing to solve the hash problem, they’ll likely reach a solution faster than a scenario in which 10 mining rigs are working on the same problem. Due to that reason, the world’s largest cryptocurrency evaluates and adjusts the difficulty of mining every 2,016 blocks.
Mining and risk factors
Potential investors should not forget that the risks of mining are often that of financial risk and a regulatory one. As stated earlier, crypto mining is a financial risk. Miners could invest money in the mining equipment only to have no return on their investment. Hopefully, it is possible to reduce the risk by joining mining pools. It is also desirable, to research your country’s regulation and overall sentiment towards cryptocurrency. Otherwise, it will be harder to enter the crypto mining industry.
We should not forget about one additional potential risk from the mining. That risk is the impact of mining on the environment, as mining requires a lot of electricity. Hopefully, microchip efficiency increased dramatically for ASIC chips. Nonetheless, the growth of the network itself is outpacing technological progress. Consequently, there are concerns about the environmental impact and carbon footprint of cryptocurrency mining.
The industry is trying to adapt to the new reality by seeking cleaner energy sources for mining operations. Another solution is to switch to less energy-intensive consensus mechanisms like proof-of-stake. Nonetheless, proof-of-stake comes with its own set of drawbacks and inefficiencies.
Cryptocurrency mining gained popularity across the world, but the legality of Bitcoin mining depends entirely on your geographic location. The concept of cryptocurrencies can threaten the dominance of fiat currencies as well as government control over the financial markets. Unfortunately, it is completely illegal in certain places. For instance, it is illegal in Algeria, Morocco, Egypt, Bolivia, Ecuador, Nepal, and Pakistan. But, people in many countries can own the world’s largest cryptocurrency and mining is also legal.