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Updated: Jan 11, 2023, 3:07pm
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In 2021, Tesla stopped taking Bitcoin for electric vehicle purchases. Why? Concern for the environmental toll of creating new units of the world’s best-known cryptocurrency in a process called mining.
The computers that mint new Bitcoin use a tremendous amount of electricity, often generated by fossil fuels. That real-world cost of electricity is one of the factors that give real-world value to the digital currency, which is currently trading at around $US17,000.
Regardless of the source of electricity, and the cryptocurrency mining industry is moving toward renewable energy sources, mining is central to Bitcoin’s existence as a de-centralized currency.
Whether you’re considering buying Bitcoin outright, mining it yourself or investing in the companies that mine it or make mining equipment, you’ll first want to understand what Bitcoin mining is in the first place.
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Bitcoin mining refers to the process where a global network of computers running the Bitcoin code work to ensure that transactions are legitimate and added correctly to the cryptocurrency’s blockchain. Mining is also how new Bitcoin is entered into circulation.
“Bitcoin mining is what makes the Bitcoin network secure,” says Stefan Ristić, owner of the educational website BitcoinMiningSoftware.com.
High-powered computers compete to be the first to validate a series of transactions called a block, and add the block to the blockchain.
Miners are paid transaction fees and 6.25 BTC per block for their efforts (if they solve the block correctly). That’s more than $US100,000 at today’s prices.
“The mining, or transaction processing, is accomplished by incredibly expensive and powerful computers whose sole function is to run algorithms to solve the mathematical problem that allows their owner to win a Bitcoin block—and the revenue that comes with it,” says Richard Baker, CEO of miner and blockchain services provider TAAL Distributed Information Technologies.
Verifying Bitcoin transactions and recording them on the blockchain involves solving complex algorithms. This is all part of Bitcoin’s proof of work consensus mechanism, which aims to add a new block every 10 minutes.
The more computing power a miner has, the more likely it is to win blocks.
“They have a chance to earn Bitcoin every 10 minutes based on how much computing power they use,” says Bruce Fenton, CEO of US fintech company, Chainstone Labs.
The latest Bitcoin mining machines use application-specific integrated circuits (ASICs—not to be confused with Australia’s corporate regulator, ASIC) specifically programmed for Bitcoin mining to handle the computing power needed, explains CEO of cryptocurrency miner Sphere 3D Corp, Patricia Trompeter.
The current generation of these dedicated Bitcoin mining rigs generate possible answers to the Bitcoin block equations at around 100 trillion hashes per second, says Rob Chang, CEO of Gryphon Digital Mining, a privately held Bitcoin miner.
A Bitcoin Hash is a mining measurement of the amount of computing power used on the network to process transactions.
Since Bitcoin was released in 2009, the energy required to produce the cryptocurrency has increased as the network raises the mining difficulty to keep the flow of new blocks of transactions steady even as more miners get involved.
Bitcoin mining is usually a large-scale commercial affair done by companies using data centres with purpose-built servers. Mining farms can have many mining computers held in warehouses.
“The input that determines whether such activities are profitable is the cost of electricity to power the mining computers,” says David Weisberger, CEO of trading platform CoinRoutes.
Because of this, farms are often located near energy sources like dams, oil and gas wells, solar farms or geothermal sources.
“The more network participants, the higher the difficulty gets,” says Jagdeep Sidhu, president of Syscoin Foundation, which represents the open-source blockchain project Syscoin.
High costs put home miners at a disadvantage to institutional miners, who can source low-cost power and save money with bulk purchases of Bitcoin mining rigs.
“Although there are home operators who have Bitcoin mining operations in their residences, the process of mining has become both expensive and regulated, which marginalises the smaller miners,” Baker says.
But that’s not to say mining Bitcoin at home is impossible.
If you want to mine Bitcoin at home in a serious way, you’ll need to buy an ASIC Bitcoin mining rig, which can easily cost more than $10,000.
“However, mining at home may not be profitable given residential electricity rates,” Trompeter says. “Additionally, ASICs are very loud and, if not properly cooled, can overheat.”
To explore profitability potential, you can consult an online Bitcoin mining calculator that factors your electricity costs, among other inputs.
Even people with an ASIC mining machine at home tend to pool their computing power with other ASIC owners and share the Bitcoin reward based on their contribution to the pool. While you can successfully mine a block solo, that feat is often compared to winning the lottery.
You can also consider cloud mining, where you buy or lease hardware or rent computing power hosted by a third party.
Because a new block is generated roughly every 10 minutes, a new Bitcoin is minted about every 96 seconds, Ristić points out. But that single Bitcoin is most likely shared between many miners worldwide.
It can take a single miner a very long time to mine one Bitcoin, says William Szamosszegi, CEO of Bitcoin mining platform Sazmining, which connects individual retail miners with existing green Bitcoin mining facilities.
Here’s the scope of a bitcoin mining company: Gryphon Digital Mining reported in April that it mined 61-Bitcoin equivalents for the month.
Those results take a lot of computing power. (The company even bought more than 7000 Bitcoin mining rigs in July 2021 for $48 million for its operations.)
For this reason, with such fierce competition, most Bitcoin miners work together as part of a mining pool. As part of the pool, they combine their hash rate with improving their odds of solving a block on Bitcoin’s blockchain. As Australian exchange, Swyftx, points out, if you’re pooling with other Australian miners, it’s important you make sure you join a reputable pool (do your homework) and are aware of rewards structure.
This article is not an endorsement of any particular cryptocurrency, broker or exchange nor does it constitute a recommendation of cryptocurrency as an investment class.
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Matt Whittaker specializes in natural resources journalism. Over the past two decades, he’s reported on energy, cannabis, mining, agriculture and commercial fishing from the Americas, Europe and Asia. The Wall Street Journal, Barron’s, U.S. News & World Report, New Scientist, VICE and other publications have featured his work. You can follow him on Twitter and connect with him on LinkedIn.
