Is the mining of digital currencies a wise enterprise?
Bitcoin farms are popping up everywhere from Czech Republic to China, which has forced some governments to intervene, especially in countries where electricity is subsidized.
Even more people are getting tempted to enter the Bitcoin mining business, assuming that there is plenty of easy money to be made.
Others wonder whether these so-called miners are engaged in a fool’s errand; is Bitcoin mining a wise and legitimate enterprise or is it a latter-day gold rush?
Bitcoin mining was not always so mainstream.
Back in the day, mining was the preserve of black belt-level geeks, and in the eye of the masses Bitcoin was as fanciful a concept as leprechaun gold.
But ever since the value of Bitcoin came close to USD20,000, the general public has come round to the idea that generating cryptocurrencies is not merely another game for nerds.
In parallel with Bitcoin’s rising value and credibility, methods for mining it have evolved too.
In the early 2010s, amateur but tech-savvy miners generated bitcoin using little more than their spare computers armed with powerful graphic cards.
But now serious miners have to invest in purpose-built mining hardware.
Mining machines are sold at prices ranging from USD500 to USD10,000, and many hopefuls are stacking them together in groups of tens, hundreds, and even thousands.
The cost of entry to the mining business is no longer low.
What is more, mining machines have an insatiable thirst for electricity, to the extent that the lights of entire neighborhoods may go dim due to the presence of an illegal farm.
But, even so, can things be really that simple? Can you launch your money factory and worry about nothing ever again? To answer this, first we should consider a few facts about digital money such as Bitcoin.
As the world knows by now, Bitcoin has no central bank or regulating authority. This means, however, that someone else should instead accept the boring—but quite critical—responsibility of ledger keeping.
Satoshi Nakamoto—or whoever went by that name—came up with the ingenious idea of having many ledger keepers instead of just one.
When a large number of users collectively play the role of a central bank, each keeping the same identical ledger, it becomes virtually impossible to tamper with the records.
However, each time a new block is added to the public chain of records, a bookkeeper has to spend a huge amount of computing power, solving a difficult mathematical problem known as an “SHA 256 hash function.”
Why these problems need to be solved is beyond the scope of this article, but solved they must be!
And each time new blocks are added, the ledger keepers who have gone out of their way to ensure the accuracy of transactions and records are rewarded for their troubles.
Yes, you guessed it: in the world of Bitcoin the ledger keepers are the exact same people as the miners.
But there’s a catch: as more people are jumping on the bandwagon, the mathematical problems are getting harder to solve.
Meanwhile, in accordance with the Bitcoin protocol, the reward for generating new blocks is halved periodically, making the mining business ever more competitive.
To make things worse, the design of Bitcoin practically puts a cap on the number of possible Bitcoins which can be mined; it is estimated that the last possible Bitcoin will be generated sometime around 2140.
And, why shouldn’t there be a cap on the number? Anyone who has taken Economics 101 knows that no form of money—whether it is a dollar bill or a Roman gold coin—has any intrinsic value.
A currency system—whether paper, silver, gold, or digital—consists of a set of tokens standing in for the limited commodities and services that exist in an economy. The total number of Dollar bills in circulation is regulated by the Federal Reserve, while the total amount of gold coins in Rome was limited by the rarity of gold in nature.
The number of currency units should grow if. and only if, the size of an economy grows; otherwise inflation will kick in as the citizens of certain Latin America, Africa, and Asia know only too well.
To solve this problem, Nakamoto allegedly modeled Bitcoin precisely on gold: it has no intrinsic value whatsoever, but there is an extremely limited supply of it in the world which is notoriously difficult to mine and gets even more difficult as years go by.
Mining Bitcoin, too, may be getting harder by the day, but with well over a century until 2140, the window of opportunity is not yet closed.
However, the mining of the cryptocurrency is going to be ever more competitive and increasingly less rewarding as we go forward. What is more, industrial-scale farms will have a much higher chance than amateurs in getting their hands on new Bitcoin.