Updated January 2023
If you’ve done any light reading on cryptocurrencies, you’ve probably seen the term ‘mining’ chucked around a bit. If your mind goes to the cavernous, blackened, coal-laden realms of a true-to-life mine, you’d be easily forgiven. But the truth is, crypto mining (or bitcoin mining) has nothing to do with mines, digging, nor anything that requires a headlamp. Crypto mining doesn’t require any physical exertion at all. Your computer does all the work for you.
At least, your computer used to be able to do it for you. Things are a little bit more complicated now, though.
Back in 2010, when cryptos were still yet to hit the mainstream, some clued-in technophiles discovered a digital token, at the time worth around 10 cents a pop, named Bitcoin [BTC].
It’s probable that most of these early adopters heard of these digital tokens from a white paper, released on the website P2P Foundation. It was named ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, and it was written by a supposedly Japanese man named Satoshi Nakamoto. If you’ve seen that name before, Satoshi Nakamoto, it was probably accompanied by a word like ‘mysterious’, ‘elusive’ or ‘enigmatic’. That’s because no one knows who it really is. All we know about them is that they created bitcoin.
During these early stages, when bitcoin was still relatively unknown, people who had an even reasonably powerful computer (one with a graphics card and a few gigabytes of RAM) were able to mine for bitcoin. Allow us to explain how and why that has changed.
First, it’s important that you understand blockchains and blockchain technology. The blockchain is the thing that makes bitcoin all the things you hear it referred to as: decentralised, secure, peer-to-peer — The blockchain is, essentially, a big ledger. It records every bitcoin transaction and movement. Simple. But what makes the blockchain so revolutionary is its ubiquity. Instead of there being just one, centralised ledger, the blockchain is global, with millions of copies of it in nearly every country. The reason it’s so widespread? Miners.
What is Bitcoin Mining?
As we mentioned at the beginning of this article, mining for bitcoin requires no physical labour on your part. Your computer does (well, used to do) all the work for you. Mining is, put simply, verifying your copy of the ledger against another miner’s copy. Every time a transaction is made, it is placed by computers known as ‘nodes’, into what is known as a ‘mempool’. From these mempools, a ‘node’ will add transactions to a ‘block’, which can later be verified by the blockchain at large.
Once a block has been created, it is then the job of a mining computer (a node with additional software) to solve an algorithm that simultaneously verifies all the transactions on that block and encrypts it with a ‘hash’. Once a block has been ‘hashed’ it is added to the blockchain, and the miner who was first to complete the hashing process is rewarded.
It should be noted that, if someone solves a block before you, they get the reward, even if you started first.
Originally there was a reward of 50 bitcoin per block. After the first 210,000 blocks (10.5 million coins), the reward dropped to 25 coins. After the next 210,000 blocks (5.25 million), the reward dropped to 12.5 coins. The reward is currently 6.25 coins. But after another 210,000, the reward will be 3.175, and so on and so on, until all coins are in circulation.
The whole mining system is engineered to take, on average, 10 minutes to mine a block. So you can see how, in the early years, pre-Fox news headlines, people had a fair few bitcoin on their hands. During the 50-coin reward phase, efficient miners using high-end home computers, could mine around 300 coins an hour. In today’s crypto market, that’d be worth around AU$2.5 million.
During the time of the first reward phase (2009–2012), however, the above was worth barely anything. Just before the first halving, in 2013, when the reward dropped to 25, one bitcoin was worth around $12. That still would’ve been worth around AU$3,600 an hour — nothing to shake a stick at — but still worth less than half of a single coin today.
Going back to around mid-reward-phase one, say late 2010, and one bitcoin was worth around 10 cents. Just AU$5 an hour. If you had a machine running 24/7, you’d end up with just AU$840 after a week’s mining. Although, if you decided to hold on to the 8,400 bitcoins you would’ve accumulated after that week, and still had them now, you could sell them for a pretty reasonable AU$51.6 million. $51 million for a week’s work, and you wouldn’t have needed to do anything but turn on your computer.
How Mining Bitcoin Has Changed
So then, why are we using our computer to write this article, when we could be using it to mine bitcoin? Well, because it doesn’t work like that anymore. As we mentioned earlier, every single miner, worldwide, is racing to solve the same block. Whoever gets it done first, gets the reward. And now, specialised machines purpose-built for bitcoin mining are being used commercially in massive warehouses. These warehouses, owned by companies whose sole business is mining, are chock-full of machines running application-specific integrated chips, or ASICs. These chips have been engineered for the sole purpose of mining as efficiently as possible, and without one, mining today is virtually impossible. We’re years past the time when a mid- to high-end GPU was sufficient for a mining set-up.
That’s not to say that all the money that can be made from cryptos is sitting in the pockets of those who own these warehouses. There are myriad opportunities in the cryptocurrency space. It’s just that passively mining bitcoin is no longer one of them.
If you want to find out where today’s crypto opportunities lie, you can find all our articles on the topic here.
