What is Cryptocurrency Mining?
Table of Contents
- Cryptocurrency mining is the process of using special computers to validate groups of cryptocurrency transactions.
- Cryptocurrency mining is essential in order to uphold the security and integrity of cryptocurrencies like Bitcoin that use the proof-of-work of achieving consensus
- People who successfully mine cryptocurrencies are rewarded with newly minted units of cryptocurrency.
- The cryptocurrency mining industry has grown exponentially and is now worth billions of dollars.
Why is Cryptocurrency Mining Necessary?
All cryptocurrency transactions need to be validated before they are considered legitimate and are processed. Without transactions being validated and recorded, anyone could hypothetically make fraudulent transactions. This would destroy the integrity of cryptocurrency networks.
Cryptocurrency mining is necessary for the so-called “proof-of-work” method of validating transactions. Many major cryptocurrencies such as Bitcoin, Bitcoin Cash, and Litecoin use proof-of-work to validate transactions. However, proof-of-work is not the only method of validating transactions. Proof-of-stake is another popular method of validating transactions. Proof-of-stake involves staking cryptocurrencies in order to become a validator for the network. Validators are rewarded every time they validate a transaction and are chosen at random to do so.
Proof-of-work and proof-of-stake are two different methods of doing the same thing: validating blockchain transactions.
What is the Reward for Successfully Mining Cryptocurrency?
The particular reward that you get if you successfully mine a cryptocurrency varies significantly from cryptocurrency to cryptocurrency. For example, for Bitcoin, the current reward for successfully mining a block on the Bitcoin network is currently 6.25 Bitcoins, which is worth roughly $187,000.
However, the current reward for successfully mining Litecoin is 12.5 Litecoin, which is currently worth around $862.5. It is important to note that with some cryptocurrencies such as Bitcoin, the Bitcoin reward for successfully mining a block goes down over time. This is because there are only 21 million Bitcoins that will ever exist. So, as more and more coins are minted through mining, the reward has to decrease over time due to the supply cap for Bitcoin.
However, even though the reward goes down, this does not necessarily mean that the financial value of the reward goes down. This is because the price of Bitcoin tends to rise over time. In fact, it is a basic law of economics that price tends to increase when supply decreases and demand either stays the same or increases. So as long as the demand for Bitcoin remains the same or increases, it will likely keep rising in value over time.
Because the rewards for mining Bitcoin and certain other cryptocurrencies are so valuable, the cryptocurrency mining industry has become a billion-dollar industry. There are now Bitcoin mining “farms” all over the world. Certain areas in the world have become hubs of Bitcoin mining due to crypto-friendly governments and access to low-cost energy. For example, Texas in the United States and Iceland have both become hubs for Bitcoin mining.
Can Anyone Mine Bitcoin or Other Cryptocurrencies?
As long as cryptocurrency mining is legal in their country, yes anyone can mine cryptocurrencies. However, mining cryptocurrencies is extremely competitive. In the early days of cryptocurrency mining, all that was needed to mine Bitcoin was a laptop. However, now, a person needs highly sophisticated computer systems in addition to an abundance of cheap energy in order to successfully mine Bitcoin.
Mining competition is the most fierce for Bitcoin due to the fact that Bitcoin has the most valuable mining rewards. So it can be very difficult to break into the Bitcoin mining industry. However, it can be a lot easier to successfully start mining other cryptocurrencies.
Is Cryptocurrency Mining Legal?
Is Cryptocurrency Mining Legal?
A handful of nations such as China have banned cryptocurrency mining. However, it is legal in most nations. But some nations are wary of it due to the fact that it requires vast amounts of energy. However, many nations are extremely open to it. The top nations for mining Bitcoin are currently:
- The USA
However, this list is not set in stone and it frequently changes. For example, for many years, China was the world’s largest Bitcoin mining country. However, Bitcoin mining was banned in China in 2021. So, it went from being the country that mined the most Bitcoin to being one of the countries that mines the least.
Cryptocurrency Mining and Renewable Energy
Cryptocurrency mining is an extremely energy-intensive process. This is because it takes a lot of power to run the special computers that have to be used for mining. In fact, Bitcoin mining alone accounts for about a half a percent of all of the electricity used in the world per year.
However, despite the fact that Bitcoin uses an incredible amount of power, roughly 56% of Bitcoin’s energy use is from sustainable sources such as hydro power, solar power, and wind power. This means that Bitcoin actually uses a more sustainable mix of energy sources than the vast majority of nations and other industries.
Part of the reason why Bitcoin mining uses a large amount of sustainable energy is because oftentimes, this energy can be more affordable. It can also prevent Bitcoin miners from having to constantly seek out new sources of energy. For example, if a Bitcoin mining company can set up a hydroelectric mining operation at a dam, then this prevents it from having to keep finding more oil or coal to generate the electricity needed for its operation. This is because it can just keep using power from the damn indefinitely.
Before China banned Bitcoin mining, a large percentage of the mining in the country was done with hydroelectric power.
So, even though Bitcoin mining uses a tremendous amount of energy, miners are constantly incentivized to find cheaper, and more sustainable energy sources. So, in a way, the argument could be made that cryptocurrency mining is actually helping to incentivize sustainable energy use.