What is Bitcoin Mining?
I was asked recently what Bitcoin mining is.
A simple question but incredibly difficult to answer depending on your audience. That elementary question inspired me to write this short paper.
There will only ever be 21 million bitcoin in existence, and the final Bitcoin placed into the network is to be expected in 2140. There are multiple reasons that the anonymous creator, Satoshi Nakamoto, selected to slowly release all Bitcoin into the network.
If all Bitcoin were dumped in the marketplace simultaneously, it would be a cash grab. This would push the value to quickly climb but eventually collapse due to the speculative nature of humans.
Another reason Satoshi did not allow access to 100% of Bitcoin immediately is to maintain network support. If all Bitcoin wherein circulation, there would be no incentive to sustain the network creating a less secure ecosystem. For Bitcoin to be an unstoppable programable form of money, you need an extensive part of the population physically supporting its use case. Satoshi understood that for a revolutionary monetary concept to cement in our minds, it needs a longer time frame.
Bitcoin Mining is now a billion-dollar industry. Unfortunately, it’s no longer something individuals can make profitable doing in their basement.
There are two functionalities of mining.
To support the Bitcoin network. Nodes (computers) work around the clock, validating transactions from the digital ledger to combat fraud and manipulation. Whenever there is a request for a change to the ledger, i.e., selling, buying, or transferring Bitcoin. The requests will go to what is called the Memepool. The Memepool is similar to an old-fashioned taxi rank, where taxis line up for their next passenger. The nodes pick up the requested change to the blockchain/network and, in some cases, bid for who gets to validate the transaction. The node will then handle the transaction and, in most cases, a sequence of transactions simultaneously. Once completed, a new block entry will be documented on the Blockchain. New blocks, on average, are constructed every ten minutes. The node owner will be rewarded for supporting and validating the network in Bitcoin.
Bringing new Bitcoin into existence. The network produces a complex mathematical question that nodes will compete against to break. Once a node completes the question, a Bitcoin will come into existence, and the node will be rewarded. This is an extremely basic way to convey a super complex equation.
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There are up to 900 Bitcoin mined every day. At its current value, that’s $40,500,000 worth of Bitcoin mined every day. Making mining an exceedingly profitable but competitive industry.
Before you start researching how to get your hands on this billion-dollar industry, it’s essential to be aware that companies use powerful computers to handle the mining process. Sorry, your old Macbook Pro won’t cut it. Some mines host thousands, even hundreds of thousands of nodes, all working around the clock attempting to brake complicated mathematical codes to receive some rewards.
It’s not just the mining companies that are being profitable. The manufacturers of these specifically designed computers are reaping profits from Bitcoin mining in the hundreds of millions of dollars.
Nakamoto was very aware of how the demand for mining would increase as the adoption of Bitcoin expanded. Satoshi programmed the network to make it more complex to mine bitcoin over time to offset this. The mining rewards get cut in half every four years, making it less profitable to mine. This is commonly called Bitcoin Halving.
As the profits for mining decrease, the rewards for supporting the network increase. The network currently sits at a rough estimate of 90% of nodes being rewarded for mining and 10% for validating transactions. As more and more Bitcoin comes into circulation, that ratio will gradually shift in the opposite direction. Ultimately, we will have millions of computers supporting the network.
Energy consumption is the biggest quarrel against Bitcoin mining. Energy will be needed for the world to have a safe, decentralized, secure monetary system. There is no way around this.
The contrast between oil, gas and precious metal mining is that Bitcoin mining is 100% Mobil. Meaning that it can be carried out anywhere globally with an internet connection and a power source. Miners seek out states and governments that are stable and supportive of Bitcoin. The last thing miners want to do is set up business in an unstable country to save money on energy and later have their mines seized by a corrupt government.
Bitcoin miners run on a margin that is inevitably shrinking. The only way they can increase their profits is to reduce the costs. And the only realistic way to do this is by reducing energy expenses. The most cost-effective power source is renewable energy. Bitcoin mining has seen a considerable shift towards safe renewable energy within the last year. Countries like Norway now have a 100% renewable Bitcoin mining industry. El Salvador runs Bitcoin mines on volcanic power. Mining operations across the USA run solely off the by-product of natural gas mining. Bitcoin is driven by innovation, and it is no different from Bitcoin mining. Within a short few years, Bitcoin miners will be run from clean, renewable energy.
The question always comes up. “Should I mine Bitcoin?” If you are doing it for monetary rewards, it’s probably not worth the expense and the time it takes. It will be more profitable to just buy Bitcoin. If you are doing it because you want to understand how it all works, then the learning process is probably well worth it.
Bitcoin is a learning process that stretches far further than the concept of digital money.
End,
Luke Derrin
