Bitcoin Mining Economics 101: How to Profit in the Digital Gold Rush

Bitcoin mining has only been here for slightly more than a decade, but has ensued a heated debate in matters of energy consumption and the viability of bitcoin miners making profit over increasing energy demands as more miners enter the fray.

Get Your Custom Essay Written From Scratch

We have worked on a similar problem. If you need help click order now button and submit your assignment instructions.

Get Answer Over WhatsApp Order Paper Now

Just from $13/Page

Before we even come to the intrigues of bitcoin mining, we can look at why it’s necessary.

Key Takeaway: Mining is sometimes likened to horserace staking, where if you are able to stake for all horses in the race, chances are high you will bag a win. However, the win can only be profitable if it transcends the cost of wagers.

What is Bitcoin Mining and Why It’s Important

Cryptocurrency and cryptography dates back to the 90s, but it took innovation by the anonymous Satoshi Nakamoto to unveil one that has passed the test of time.

One juggernaut by initial cryptos was the decentralization of the currency while the cryptocurrency remained financially valuable.

This would later be achieved through the cryptography blockchain, and the huge role by computer nodes connected to the blockchain in validating, recording and appending each crypto transaction to the crypto blockchain. And this point is where crypto miners come in.

Satoshi laid the framework for not only a self-sustaining financial system, but the foundation for remaking similar networks. 

Crypto mining began with small-scale miners solving manageable quizzes. However, after a while the industry transformed to explicitly industrial-scale mining with mining companies even getting listed on stock markets. Companies like RIOT in Texas, USA and Core Scientific have made strides in the NYSE, gaining national importance as significant stock market players.

In the month of July 2023, Core Scientific announced a mining success of over 1,022 bitcoins produced within the month, across over 220,000 miners, with 69% of these owned by the company. For context, there were only 28,000 bitcoins mined in that month across the world.

Satoshi created a self-sustainable financial network which would entail peer to peer verification and recording. In return, the public verifiers and recorders (miners) would get rewards at the initial rate of 50 bitcoins for each block verified.

A block is a stash of transactions bundled together and verified as a whole, then ultimately appended to the greater block chain. However, the system was set to self-regulate itself in controlling the number of bitcoins in circulation, to balance demand and supply dynamics.

This was done through halving, whereby the number of bitcoins awarded to miners is halved after the distribution of every 210,000 bitcoins. The 50 coins distributed in the first 210,000 blocks recorded has since been reduced to 6.25 coins in 2020, and will halve further to 3.125 coins in the year 2024 – halving happens approximately every four years. It is estimated that this number will ultimately get to zero, and that bitcoin will cease from production and distribution in the year 2140, a whole century from now. 

Miners, however, do not have to worry about halving, as long as we are not yet to 2140. This is because over the years bitcoin has been gaining significant value, and as the coins reduce in supply over time, their demand will conversely soar, attaching huge values to the few coins awarded to miners. Industrial miners have hugely capitalized in large-scale mining, while small-scale miners have struggled to remain aloft.  

Microeconomics of Bitcoin and Cryptocurrency Mining

From costs of machinery, to competitiveness of bitcoin mining, to the performances of bitcoin in the markets – microeconomics have imposed a juggernaut for cryptocurrency mining at this advanced stage. 

Bitcoin’s algorithm is built such that the hash products have difficulty levels based on the competitiveness of bitcoin mining, so as to achieve the desired circulation of 210,000 bitcoins in quite an expansive period of about 4 years.

In the wake of massive miners jumping into the fray, this self-regulatory mechanism possessed by Bitcoin has made hashes hard nuts to crack. Initially, simple CPUs or slightly advanced GPUs could manage to solve cryptography quizzes at the current rate, due to the relevantly low difficulty levels, accredited to reduced competition in the mining industry during the heydays.

However, many have come to know of bitcoin mining and its profitability, driving craze demands and as a result high difficulty levels.

Mining is expensive, an aspect that has erased small scale miners from the picture. At the current hash rate, ultra high capacity computers in the form of ASIC (Application-Specific Integrated Circuit) are required to solve a single hash quiz and get a bitcoin grant in return. Consequently, gargantuan mining farms have been set up, for one reason of making profit in large scale, but more importantly to tap into large economies of scale.

Mining is sometimes likened to horserace staking, where if you are able to stake for all horses in the race, chances are high you will bag a win. However, the win can only be profitable if it transcends the cost of wagers. Similarly, the more mining rigs possessed by a farm, given they have the requisite capacity for the existing hash rate, chances of cracking a hash are high, and so are the bitcoin rewards as a result.

However, the survival of these farms rests on the value of Bitcoin in the markets, and this value will only be profitable when deductions are made for the cost of machinery, cost of electricity, and other resources used in the mining process.

Macroeconomics of Bitcoin Mining

Bitcoin mining has initiated above anything else, a heated debate on its impact on the environment. It is not that bitcoin mining rigs exhume any poisonous gas, but it is about how much energy is consumed in the production of one bitcoin or the verification of a single bitcoin transaction. Research has it that in a year, bitcoin production consumes roughly 110 TeraWatts of electricity. To put it into context, Switzerland consumes half of this energy in the same period.

The electricity needs for mining rigs and cooling plants have imposed pressure on existing energy plants, the resulting energy demands further abetting the activation of fossil fuels in the production of electricity. It is for this reason that Tesla CEO Elon Musk banned purchase of Tesla cars with bitcoins as had been happening, and required that anyone willing to exchange Bitcoins for Tesla has to show proof of clean energy consumption in Bitcoin production and transactional processes.

While some miners have legitimate energy supplies, the energy costs have compelled most of them to go for austerity but mostly unclean alternatives like coal. In the US alone, carbon footprint was capped at 30 million tons of CO2 per year, equal to emissions of three of the largest coal plants in the USA.

KICKER: It is all interconnected. The desire to beat competition in the crypto mining industry has mushroomed ridiculously large farms, which have transformed into monumental carbon guzzlers. Bitcoin mining is no longer a commoners game, the rules do not allow it. The expectation of bitcoin mining rigs finally going silent is in a century’s time, and the world cannot hold itself before then. Cleaner alternatives can be devised, and the bitcoin mining industry can be regulated to allow for cohesive operations within the precincts of the environment. 

Needs help with similar assignment?

We are available 24x7 to deliver the best services and assignment ready within 3-4 hours? Order a custom-written, plagiarism-free paper

Get Answer Over WhatsApp Order Paper Now