As the cryptocurrency boom continues to garner attention from the general public at large, 2018 has seen an explosion of newcomers to the blockchain ecosystem. Ever since Bitcoin surged in popularity towards the tail end of 2017 and soared to a price of over $20,000, people who never heard of cryptocurrencies before had become aware of this area and were jumping at the opportunity to make some money. While in part this has led to a surge in ICO interest from the financial markets, the topic of mining cryptocurrencies (especially Bitcoin) has bloomed as well.
One reason why this topic has gained such attention is that cryptocurrency mining is quite unlike any other economic activity in humanities history. The idea that an ordinary individual can devote some of their idle computing power to help “mine” a non-tangible, abstract currency that can then be exchanged for fiat is very appealing. Unfortunately, the world of crypto-mining has changed significantly, with an exponential increase in miners in the last couple of years ensuring that specialized software and hardware are needed in order to make any sort of a profit. For those of you curious about the subject, here is an overview of the current state of cryptocurrency mining, as well as what the future holds in this regard.
For the purpose of this article, we’ll be describing how mining works from the perspective of Bitcoin. Although there are other mineable currencies that operate on a similar basis, it makes sense for the sake of familiarity to start off with the flagship cryptocurrency.
How Cryptocurrency Mining Works
Unlike traditional currencies, in which a central bank decides when to print and distribute money, cryptocurrencies don’t have any central government deciding when to create more tokens. Instead, this function is reserved by cryptocurrency miners, whose dedicating computing power is spent solving mathematical puzzles formed from hundreds of pending bitcoin transactions as well as their subsequent details. The first miner (or group of miners) to find the solution announces this to the rest of the network, which then verifies both if the sender of the money is indeed able to do so, and whether the first miner’s solution to the puzzle is correct. If enough miners approve of this, these hundreds of pending transactions become a “block” and are added to the ledger and the miner(s) involved get a bitcoin reward before they move on to the next block to solve. It should be mentioned that this bitcoin reward is only given after another 99 blocks have been added to the blockchain ledger – encouraging that miners continue to participate instead of quitting once they’re compensated.
This system gives miners an incentive to contribute to the system and is how transactions get validated in the first place. This is also how people can’t double-spend on cryptocurrency, as digital bank-robbers would need to rewrite the blockchain – a feat that would need more than half of the entire mining-networks puzzle-solving capability. Considering that the cumulative computer power of bitcoin miners globally is 13,000 times larger than that of the world’s 500 largest supercomputers combined, this remains an unlikely eventuality.
The Early Days
In the first days and weeks of bitcoin, the few participating miners could find and solve these blocks with an ordinary CPU on their computers. However, the situation quickly changed as GPU’s, or graphics processing units, came to the forefront. With a computational power equivalent to dozens of CPU’s, these components became the mainstay for miners after a while before more specialized components flooded the market. The issue was that CPU’s and GPU’s were generalized, flexible components. These all-around computational devices made significant compromises to their maximum potential in order to be useful for a wide variety of functions.
In response, hardware manufacturers ended up producing specialized hardware devices called application-specific integrated circuits, or ASIC’s, which essentially are miniature computers build specifically for a dedicated function – in this case, mining cryptocurrencies. The very first ASIC’s were exponentially superior to GPU’s, with modern day ASIC’s being 200 times as powerful as their predecessors only a few years ago. Ever since these hardware devices became the gold standard for cryptocurrency miners.
While an ordinary person looking to get involved in the crypto-mining world could realistically make a return on their investment some years ago, the unfortunate situation is that’s not a likely possibility anymore. There is an often-touted figure that we’ll still be mining bitcoins until 2140, which is how long it would take for miners to mine the final, 21st million coin. The reason why we haven’t already done this is because as time goes on and more computers participate in this activity, cryptocurrency mining (as is the case with Bitcoin) becomes increasingly difficult. The underlying mathematical problems that create these blocks become harder to solve, and the number of Bitcoins that are given as rewards for solving these problems decreases over time. Today’s landscape makes cryptocurrency mining difficult and off-putting for casual investors as ASIC hardware becomes increasingly more expensive. As time goes on, it costs more money to retrieve fewer bitcoins in an increasingly competitive arena.
For the everyday investor, the only way for Bitcoin mining to be profitable would be if Bitcoin prices continued to skyrocket as optimists hoped they would in 2017. If prices go up in the future between $30,000 to $100,000, then it would make sense to mine because even earning chump change amounts of Bitcoin would be worth a lot in the future.
Unfortunately, it seems quite unlikely that prices will surge to those levels again anytime soon.
The Prevalence of Mining Farms
Aside from the aforementioned developments, cryptocurrency mining is starting to become less decentralized as Chinese miners, with cheap access to abundant electricity, start dominating the arena. Some companies, such as China’s Bitmain Technologies, operate some of the largest mining farms in the country and are looking to expand into other nations. Despite China’s ban regarding Initial Coin Offerings (ICO’s), crypto-mining still remains legal in the country, but many farms are seeking to move operations to other, more crypto-friendly countries.
This increasingly prevalent trend of centralized mega-mining farms taking the place of decentralized individual-miners has been startling to crypto enthusiasts of old, who see this trend as killing the original spirit of Bitcoin. As of April 2018, the largest cryptocurrency mining farm with an estimated investment of $2 billion has already been approved to be built in Armenia, with other major farms planned to be built in countries all across the world. One of the major requirements for these massive farms is plentiful sources of cheap energy. On average, $50 per kilowatt per month is typical for these companies at the current Bitcoin price range, with farms that can acquire cheaper rates being more successful. Should the price of cryptocurrencies drop further, however, farms whose energy bills are on the upper range of the $50 per kilowatt figure could go out of business.
In response, independent miners have flocked to other cryptocurrencies in order to alleviate these problems. Bitcoin Cash is one such alternative, and while ASIC hardware can be used to mine BCH, the trade-off is that the price of the token is significantly less than regular Bitcoin.
The big takeaway from this article is that cryptocurrency mining has transitioned from being available and profitable for individual miners to enter the domain of large, centralized mining farms. Unless you have plenty of money available to invest into setting up an operation or you’re a passionate crypto enthusiast who just wants the satisfaction from mining for themselves, mining isn’t likely to be a fruitful use of an individuals time or money. However, the blockchain community still has other options available with new tokens entering the marketplace at a frequent rate.
Also published on Medium.