Bitcoin Mining

At the root of every cryptocurrency is the blockchain, which is essentially an electronic ledger used to maintain an ever-growing list of records. Blocks in the chain are basically files that record data such as Bitcoin transactions, including which miner successfully created that particular block. Each block also includes a hash, a unique sixty-four-digit hexadecimal value that identifies it and its contents, as well as the hash of the previous block in the chain.

In order to win a block in most cryptocurrencies, including Bitcoin, a miner must first guess a hash equal to or lower than the hash Bitcoin generates for the transaction. As more miners compete, and more computing power is deployed, each miner's chance of getting in first decreases—currently one in a trillion—which helps ensure that currently roughly every 10 The creation speed of a new block per minute.

This competition among miners also works together to secure the blockchain by allowing transactions and data to flow in a so-called trustless manner, meaning there is no need for intermediaries like banks to ensure that Bitcoins cannot be reused. Instead, the difficulty of solving the correct hash and the financial reward for success create a secure consensus mechanism that makes hacking by malicious users too cost-effective.

The consensus mechanism used by Bitcoin is called Proof of Work, or PoW. Because the algorithm ultimately relies on the collective power of thousands of computers, it is a particularly robust way to maintain a secure and decentralized network. However, it also has disadvantages. On top of that, it's very energy-intensive. As more and more computer power is used for crypto mining, the amount of electricity required to earn cryptocurrencies and maintain the network is also increasing.

Some other cryptocurrencies, such as Ethereum, have or are planning to move to a different algorithm called proof of stake, or PoS. PoS does not require the same extensive, decentralized network of miners to support its operations and is therefore much less energy intensive. While it is less secure, its lower energy requirements may make it easier and more cost-effective for these blockchains to support next-generation crypto applications such as smart contracts, non-fungible tokens, and decentralized finance. However, Bitcoin has not announced any plans to transition to PoS.

Finally, as part of Bitcoin’s supply management system, the reward for mining a block will be reduced from 6.25 BTC per block mined after the most recent halving in May 2020 to 3.125 BTC in 2024. The current bullish sentiment surrounding mining, even in the face of planned declines, speaks volumes about the industry’s profitability and expectations that the original cryptocurrency will continue to appreciate in value. This also reflects the fact that the so-called hash rate plummeted in 2021 when Chinese operators were forced to shut down. This creates huge opportunities for new miners.