You often hear the term “mining” accompanying Bitcoin (BTC) or the names of other digital currencies. This brings up visions of traditional mining and people in overalls digging the ground for gold or silver. But in the case of mining for digital currencies, computers take the place of pickaxes. And ‘miners’ are people who set up high-powered computers and software so they can compete to solve large and complex maths problems in order to create or mint brand new coins.
With typical paper currency or fiat, the government decides when to print and distribute new money. With distributed Blockchain networks, there is no central government; digital currencies are issued through mining. When a miner solves these maths problems, they are rewarded with a certain quantity of the digital currency in exchange, providing a smart way to issue the currency and give an incentive for mining.
So How Does the Mining Process Work?
It starts with a ‘node’ – which is the powerful computer mentioned previously, that helps the Blockchain function by relaying information in the network. Anyone can be a miner run a node as the software is free, it just requires a very powerful computer and a good budget for electricity. From here the node will send information to nodes it knows, then those nodes will send information to nodes they know and so on, causing the information to reach the whole network quickly.
Mining nodes compete to guess a combination of numbers and letters to validate and verify a block which can take a lot of computing power and luck. The node that solves the equation, in the case of bitcoin, is rewarded 12.5 BTC (worth over $123,000 USD at the time of writing) for solving the block. After the block is verified, it is passed through more validation nodes to confirm the information it contains is true and it is then added to the Blockchain.
Miner Rewards and Business Models
Every 210,000 blocks of bitcoin, the reward for adding a block is cut in half in what is known as the halving and happens every few years. Because there will only ever be 21 million BTC, halving is done to create scarcity and avoid inflation. With fewer BTC around, the ones that already exist will be more valuable. This makes it a deflationary asset as opposed to an inflationary one.
While the current reward for adding a block to the Blockchain is 12.5 BTC, it does not always stay that way. When bitcoin mining originally started, the node to add a block was rewarded 50 BTC for each block. In 2012 this was cut to 25 BTC, and again in 2016 to the current 12.5 BTC. It is predicted to be halved again in May of 2020 to 6.25 BTC. Predictions also say that all BTC will be mined by 2140, at which point a miner will be rewarded 0.00000001 BTC or 1 Satoshi for every block added.
While anyone can be a miner, Bitcoin mining today is largely done by mining companies like Hut8 and Genesis Mining. They employ huge server farms to achieve economies of scale and profitability given the increasing computing power required and electricity costs. This is balanced against the expectation the price of BTC and other digital currencies will increase over time and hence they often employ advanced financial management and investment strategies as part of their business model. As the digital assets industry matures, becoming a miner using that spare computer in the basement appears to be less viable today than a few years ago. If you are an individual miner, would you agree? Share your experience with us via our social channels, see links below.
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