Bitcoin Mining: An Overview of The Industry Status
Bitcoin has come a long way from being a geeky topic discussed by coders to becoming a nation-independent asset class that today commands a market cap of more than a trillion dollars. Mainstream media has infamously dubbed bitcoin dead a countless number of times due to its volatility but the fact remains that BTC has recovered from every price crash stronger than ever before. At the time of writing this guide, BTC is making new all-time highs (ATH) around the $66,000 mark and shows no sign of stopping with increased regulatory approval around the world.
While bitcoin has resiliently fended off all the regulatory assaults launched against it, it is important to understand how a wholly community-driven network without any major affiliation with any nation-state or company is still running and growing stronger with each passing day. What saves the bitcoin network from being overtaken? What safety mechanisms are there to safeguard the bitcoin network against a planned assault by a group of companies or government agencies that see their power being challenged by the orange coin? The answer to these questions is simple: bitcoin mining.
On this post, we will dig deep into the world of bitcoin mining. We will learn what bitcoin mining is and its significance, whether if it’s as centralized as portrayed by detractors, the Chinese ban on BTC, RSK’s contributions to bitcoin mining and Bitcoin’s potential to be environmentally sustainable in the long-run.
What is Bitcoin Mining?
Simply put, bitcoin mining is the process that generates new bitcoin issuance. Computers and other advanced mining equipment solve complicated mathematical problems to verify a transaction on the Bitcoin blockchain. The computer or the miner that can solve the problem at the earliest receives newly mined BTC as a reward for the computational energy used by the equipment.
For the uninitiated, the Bitcoin network uses the Proof-of-Work (PoW) consensus algorithm to verify transactions on its blockchain. In simple words, the PoW consensus mechanism requires BTC miners to compete against each other.
Understandably, to solve these problems the machines consume a lot of energy. The computer hardware required to mine bitcoin efficiently is called ASIC. ASICs can cost as much as $10,000 and consume an enormous amount of energy to mine bitcoin. Notably, the large energy requirement has come under the scrutiny of climate activists around the world and continues to be a major point of criticism against bitcoin due to the environmental damage it causes. However, this criticism is biased in many aspects as Bitcoin’s mining future entails a radical shift towards renewable energies and many legacy industries consume much more energy than Bitcoin mining pools.
Any mining pool that is successful in adding a block on Bitcoin’s blockchain is rewarded with a pre-determined amount of bitcoin. To give some context, the Bitcoin network undergoes an event known as halving where the BTC rewards to be distributed amongst miners is halved every 4 years. At present, the mining reward is 6.25 BTC for every new block or transaction added to Bitcoin’s blockchain.
While determining the potential rewards that can be generated via bitcoin mining, miners must take into consideration the fact that Bitcoin supply’s hard cap is fixed at 21 million BTC. Out of the 21 million, close to 18.5 million BTC is already in circulation which leaves slightly more than 10% of the bitcoin’s total supply that is yet to enter the market. Once all the bitcoin has entered the market, bitcoin miners will no longer receive block rewards. Rather, miners will only earn fees from bitcoin transactions happening on-chain.
While the idea of mining bitcoin sounds like a lucrative proposition, the reality is that due to the rising adoption and increasing popularity of BTC, the margin for profit has become extremely thin for bitcoin solo miners. The biggest reason for this can be attributed to the creation of large bitcoin mining pools where multi-billion dollar companies install high-end advanced mining equipment to mine BTC around the clock.
The presence of large players in the mining space has somewhat excluded retail investors from entering the industry unless they’re willing to spend a huge sum on purchasing multiple mining equipment. In essence, for a bitcoin miner to be profitable, their earnings must eclipse the total cost of electricity and other forms of energy used by the mining equipment. This makes the concept of RSK’s merged-mining much more significant for bitcoin miners as it represents an additional income stream without extra hardware requirements.
Why is Bitcoin Mining Important?
The importance of bitcoin mining cannot be overstated as it is the prime force that safeguards the Bitcoin network from all external threats. Bitcoin mining also saves the network from potential internal threats such as the infamous double-spending attack.
Bitcoin miners help the network shield itself against the infamous double-spending attack by recording and validating transactions on the blockchain. Once a miner has added a block to Bitcoin’s blockchain, they are rewarded for using their computational power and energy in the form of newly minted bitcoin.
In all, bitcoin miners ensure nefarious elements do not breach the network’s security. For their services, the miners get rewarded in the form of BTC. However, while the bitcoin mining business has gathered lots of attention from companies around the world for many years, centralization of the hashing power has many times propelled the narrative that Bitcoin is not as decentralized as expected. On this aspect, the recent Chinese ban on Bitcoin has enabled a wider distribution of the hashing power where new actors have a relevant role to play towards hashing power decentralization.
Chinese Ban on Bitcoin Mining
Earlier this year in May, the Chinese regulators initiated a nationwide crackdown on crypto mining. The regulatory clampdown on crypto businesses reached its peak in September when the People’s Bank of China (PBoC) issued a joint notice stating that cryptocurrencies are not legal tender in the country.
On the same day in September, the National Development and Reform Commission (NDRC) and 10 other government authorities issued another notice to local governments in China ordering them to wind down cryptocurrency mining activities in their respective areas.
The pretext behind the regulatory crackdown was that the Chinese authorities believe that investing in cryptocurrencies poses a great threat to the financial assets of the Chinese and could trigger a crisis on the Chinese economy. As a result of China’s ban on bitcoin mining, the Bitcoin’s network hash rate witnessed a strong downward movement. With the regulatory attack, close to 90% of BTC miners in China had to shut down their operations.
In the same vein, the Bitcoin hash rate tumbled from its peak of 180.66m (tera hashes per second) to 127m, a six-month low at the time. However, this pattern would be reverted shortly.
Hash-Rate Recovery Post Chinese Crackdown
While the impact of China’s ban on bitcoin reduced the hash rate considerably in the short term, the longevity of the impact was not substantial. It did not take long for Bitcoin’s hash rate to recover and climb back to usual levels before the Chinese ban.
A report by on-chain analytics firm Glassnode, found that Bitcoin’s hash rate had fully recovered from the almost 50% plunge it took in May following China’s regulatory assault. It took a couple of months for Bitcoin’s hash rate to recover to the levels it was at during May.
Similarly, the current hash rate is almost at par with the peak hash rate witnessed during May 2021, just before the Chinese regulatory crackdown. A major impact of the Chinese regulatory attack on Bitcoin mining was that the vast majority of displaced companies shifted base to USA. According to a new report from Cambridge University, as of July 2021, 35.4% of Bitcoin’s hash rate was found to be in the U.S., a mammoth increase of 428% from September 2020.
The rising dominance of the U.S. over the bitcoin hash rate is a good sign given the fact that an increasing number of states in the country are slowly warming up to the top cryptocurrency. An example of regulators’ embracement of BTC would be found in the recent approval of the first bitcoin futures ETF.
Redistribution of Hash-Rate and Its Implications
As mentioned earlier, the China crackdown, if anything, came as a blessing in disguise for the Bitcoin network as it initiated the decentralization of bitcoin mining operators from China.
As an example, consider the state of Texas in the U.S. which has abundant, cheap energy at its disposal. Notably, Texas’ share of renewable energy has been steadily rising over time, with close to 20% of its power coming from wind according to the latest estimates. Similarly, Washington is considered the mecca for hydro-powered mining farms.
With the hash rate getting redistributed, it is fair enough to say that the ownership over the Bitcoin network is more diluted and decentralized than ever, thereby, strengthening the Bitcoin blockchain.
Is Bitcoin Mining Environmentally Sustainable?
Much has been said about the environmental damage caused by the bitcoin mining industry. While it is true that bitcoin mining indeed uses a lot of energy, it does not necessarily mean that the industry is beyond redemption. Not at all as renewable energies pave the way for an eco-friendly mining industry.
For instance, after Salvador adopted bitcoin as legal tender, the country’s President Nayib Bukele announced that they would use thermal energy from volcanoes to mine bitcoin, thereby adding another source for eco-friendly bitcoin mining. While it might take some time to make a full transition, the future looks green for the mining industry as we’ve previously discussed.