According to Coindesk, as of this writing, the cryptocurrency bitcoin is selling for $38,062, down from its all-time high of $64,829 reached on April 16, 2021. If you could create bitcoins out of thin air, you’d be doing all right for yourself.
In actuality, you can create bitcoin, or any number of other cryptocurrencies “out of thin air” by mining them, but mining cryptocurrency isn’t as simple as heading for the hills with a pickaxe and a gold pan.
How is bitcoin mined?
Miners earn bitcoins by verifying bitcoin transactions, such as buying and selling, on the blockchain. The blockchain is an electronic ledger, and once miners make sure that the same coin has not been bought or sold twice, they can then complete “blocks” of transactions.
The mining process was conceived in 2009 by Bitcoin’s anonymous founder, Satoshi Nakamoto. The transactions are in 1 megabyte (MB) blocks, and depending on how much information is contained within a transaction, that 1 MB can contain as little as one transaction, or as many as several thousand transactions.
Verifying 1 MB worth of transactions only makes a bitcoin miner eligible to earn bitcoin, the miner must also be the first to discover the solution to what are called “hashing puzzles”.
In a process known as “proof of work,” the miner must be the first to find a number that is less than or equal to a 64-digit hexadecimal number which is known as the “target hash”.
Our familiar number system is base 10, meaning that once we count ten numbers — 0 to 9 — the next number is no longer a single digit but is a double digit, 10. The hexadecimal numbering system uses base 16 instead of base 10, and it includes the ten numbers 0 through 9, then six additional numbers that are designated as A, B, C, D, E, and F.
A typical 64-digit hexadecimal number looks like this:
and there are literally trillions of possible numbers that are less than, but close to, this number. Solving hashing puzzles requires either graphics processing units (GPUs) or else application-specific integrated circuits, ASICs.
To hit on the right number out of trillions, a miner needs a lot of computing power, which is known as having a high “hash rate”. The hash rate is measured in megahashes per second (MH/s), gigahashes per second (GH/s), and terahashes per second (TH/s). Mega means 106, giga means 109 and tera means 1012.
Many crypto miners choose to join a mining pool, which allows them to combine their hashing power with that of thousands of other miners all over the world.
In 2009, Nakamoto’s invention specified a maximum possible number of bitcoins at 21,000,000. By 2012, over half of that number had been mined, and there were only 10,500,000 bitcoin left to be mined. By 2016, that number had dropped to 5,250,000, and in 2020, only 2,625,000 bitcoins remained to be mined. Each time the number of bitcoin available to mine drops, the coins become harder to mine.
As the difficulty of mining Bitcoin has gone up over time, the reward for mining has also gone down, halving every four years. When Bitcoin was first mined in 2009, mining one block would earn you 50 BTC. By 2012, this was halved to 25 BTC, and by 2016, this was halved again to 12.5 BTC. On May 11, 2020, the reward halved again to a mere 6.25 BTC.
That means that, at the current price of bitcoin, $38,062, you would earn $236,022 (6.25 x $38,062) for completing one block.
Why isn’t everyone mining Bitcoin?
Mining cryptocurrencies is an expensive proposition, and it is costly in ways other than financial, which we’ll see below. If building your own mining rig appeals to you, you’ll need the following:
- A motherboard, approximate cost $450
- A CPU (central processing unit, approximate cost $125
- RAM (random access memory), approximate cost $65
- An SSD for storage, approximate cost $95
- A PSU (power supply unit), approximate cost $100
- A PCI-e Riser, approximate cost $60
- A graphics card, either Nvidia or AMD, approximate cost from $550 to $1,100.
If we averaging the cost of the graphics card at $800, it will cost you around $1,695 just to begin mining, and that’s with only one graphics card. In actuality, most miners utilize multiple graphics cards, so the cost of mining goes up rapidly.
Motherboard maker Asus has published instructions for adding 11, 13, and 19 GPUs to its Asus B250 Mining Expert motherboard. At around $1,100 apiece, 19 of AMD’s popular GPU, the PowerColor RED DEVIL Radeon RX 5700 XT, would cost you around $21,000!
If you’re thinking an ASIC might be a cheaper alternative, think again. ASIC prices range from around $2,000 and go up into the five figures.
Costly to the environment
The real cost of mining Bitcoin comes from the amount of electrical power mining rigs need. A recent study by the University of Cambridge estimates the Bitcoin network uses more than 121 terawatt-hours (TWh) a year. If Bitcoin were a country, it would rank as one of the world’s top 30 electricity consumers. According to the BBC, that is more energy than the entire country of Argentina.
Bitcoin miners tend to look for the cheapest electricity. In the U.S., the states having the highest electricity rates are Alaska, Hawaii, California, New York, and Connecticut. The cheapest electricity can be found in Washington State, Nevada, Idaho, Utah, Wyoming, and Texas.
Worldwide, a 2018 study determined that electricity is cheapest in Venezuela, Paraguay, Kuwait, and Egypt.
Generating the electricity used to mine crypto from fossil fuels such as coal presents a problem for companies who have espoused climate initiatives, such as PayPal, Square, and Tesla. In late 2020, PayPal disclosed plans to allow customers to conduct transactions in bitcoin. Square, whose CEO is Jack Dorsey who is also CEO of Twitter, not only conducts transactions in bitcoin, but holds around five percent of its cash reserves in bitcoin.
Tesla, whose whole reason for existence is to reduce carbon emissions, has invested $1.5 billion in bitcoin. In a reversal, on May 12, 2021, Elon Musk tweeted that Tesla would no longer accept bitcoin as payment for its cars, but that it also would not sell any of its bitcoin.
Tesla & bitcoin pic.twitter.com/YSswJmVZhP
— Elon Musk (@elonmusk) May 12, 2021
China is the world’s leader in bitcoin mining, accounting for over 75 percent of all mining. China also manufactures most of the world’s cryptocurrency mining equipment. However, a lot of China’s electricity is also generated using coal.
Just nine days after Musk’s announcement, on May 21, 2021, Chinese Vice Premier Liu He announced that the Chinese government would “clamp down on bitcoin mining and trading activity.” It had been projected that by 2024, bitcoin mining in China would generate over 130 million metric tons of carbon emissions.
The next day, Chinese company HashCow, owner of the world’s largest crypto mining farms, announced that it would no longer sell mining machines to clients within China. And a Chinese mining company, BIT.TOP, announced its intention to move, saying, “Next, we will mainly mine in North America.”
In February 2021, Inner Mongolia announced a ban on crypto mining operations because that country had become a mining hub due to its cheap, coal-powered electricity.
The future of crypto mining
In February 2021, graphics card maker Nvidia announced that it would engineer a 50 percent reduction in efficiency into its latest graphics processing unit (GPU), the GeForce RTX 3060 card, when it is used to mine the cryptocurrency Ethereum.
When asked by the BBC why they singled out Ethereum, Nvidia responded that they, “focused on Ethereum because it “has the highest global mining yield for any GPU-mineable coin at the moment and thus is likely the main demand driver for GPUs in mining.”
In February 2021, Nvidia announced that it is creating a dedicated cryptocurrency mining processor, or CMP, that will require less electricity than its GPUs. The new CMPs will “have a lower peak core voltage and frequency, which improves mining power efficiency.”
In March 2021, GPU maker AMD followed suit with an announcement of their own CMP.
As we previously reported, on May 22, 2021, Elon Musk tweeted his support for all cryptocurrencies:
The true battle is between fiat & crypto. On balance, I support the latter.
— Elon Musk (@elonmusk) May 22, 2021
The fact is that cryptocurrencies are secure, worldwide value transfer and storage systems, and may indeed be the future of global finance. The only question is, what will we have to sacrifice in order to get there?