Bitcoin has had a banner start to the year. Less than 2 months after breaking the $20k barrier for the first time, the digital currency more than doubled in price, hitting a high of $49,344 this week. Every time bitcoin...
Less than 2 months after breaking the $20k barrier for the first time, the digital currency more than doubled in price, hitting a high of$49,344 this week.
Every time bitcoin is proclaimed to be dead, it seems to surge back, buoyed by bullish investors, favorable legislation, and tech titans’ tweets.
At this point, nearly everyone has heard of bitcoin. But many folks still don’t quiteunderstand how the currency is created.
It’s not printed like cash. It’s not a physical object like a gold bar. It’s not stored on a piece of plastic like a debit card. It just exists somewhere in a vast digital expanse until it’s excavated into circulation by a so-called bitcoin miner.
In this illustrated guide, we’ll cover the following:
How bitcoin is created (a process called mining)
How the economics of mining have changed over time
The effects this process has on power consumption
The digital miner
To help explain all of this, we’d like to introduce you to a man named Willy “Wild Eyes” Tibbs.
Wild Eyes made a fortune in the California Gold Rush in 1849. Now — 170 years later — he’s back from the grave for his next prospecting adventure.
Zachary Crockett / The Hustle
Wild Eyes has heard that there are riches to be made in mining a newfangled digital resource called bitcoin.
As he sees it, bitcoin shares a few similarities with gold:
There’s a finite supply: As dictated by bitcoin’s creator, there can only ever be 21m total coins.
They must be mined: The only way to release new bitcoin into circulation is through the efforts of digital excavators.
Wild Eyes digs a little deeper and finds out that bitcoin was created in the wake of the financial crisis in 2008 by an elusive pioneer (or group of pioneers) under the alias of Satoshi Nakamoto.
Nakamoto’s mission was to create a decentralized currency system that wasn’t beholden to middlemen. Among it’s touted benefits:
It’s democratic: Unlike paper money, where a single central authority like a bank manages a record of all transactions, bitcoin is minted, circulated, and audited by thousands of users.
It’s harder to manipulate: Government agencies can’t intercede by doing things like increasing volume or fiddling with interest rates.
It’s global: Someone in Tennessee can instantaneously trade bitcoin with someone across the globe in Tokyo at a low cost.
The backbone of this concept is a distributed network called the blockchain, where a record of all bitcoin transactions is stored.
Now, for an old-school argonaut like Wild Eyes, this is a tad complicated.
Zachary Crockett / The Hustle
To help him out, let’s step back a bit and briefly explain the blockchain using something he can understand: a choo-choo train.
Imagine that the blockchain is a loooong train — a blocktrain, if you will.
This train contains a public record of allbitcoin transactions. Each time a trade is made through a cryptocurrency platform like Coinbase, the details of the transaction are coded and broadcast, along with other transactions, to a vast network of users called bitcoin miners.
From there, the following process unfolds:
Miners compete to add the next car to the train by bundling up a bunch of transactions into “blocks.”
Miners solve a computational problem (called “proof of work”) that assigns the block an identifying code (a hash).
The “winning” block is distributed to, and verified by, all the other miners in the network and is added to the blockchain.
Only one car can be added to the train at any given time, and each one takes ~10 minutes on average to verify and attach.
Zachary Crockett / The Hustle
These bitcoin miners serve 2 major functions:
They are the printing press of bitcoin: Adding new blocks to the blockchain is the only way to release new bitcoin into circulation.
They are the auditors of bitcoin: Through the process of mining, they verify the legitimacy of all transactions on the blockchain.
By solving the equation first and adding the next block to the chain, a miner is rewarded with a set amount of bitcoin.
When bitcoin mining first started, the reward was 50 bitcoin (BTC). But as dictated by the coin’s creator, the reward is cut in half every time 210k new blocks are added to the chain — or roughly every 4 years.
As of February 2021, miners receive 6.25 bitcoin for every new block they mine — or ~$294k based on the current market value. They also get to keep the transaction fees from the trades in that block, which are currently around $20/trade.
Today, it’s estimated that there are more than 1m bitcoin miners in operation — and they’re all competing to add the next block to the chain.
Combined, the rewards these miners earn top$1B per month.
The bitcoin mining arms race
The power problem
Collectively, bitcoin miners use121.4 terawatt-hours (tWh) of electricity per year to sustain their operations.
To give that number some additional context, that’s enough to power the entire population of Argentina (45m) for an entire year.
Zachary Crockett / The Hustle
Of course, traditional financial institutions aren’t much better.
It has been estimated that the world’s banks collectively consume at least100 tWh of power per year, when factoring in branches, servers, ATM machines, and paperwork.
Eventually, though, the power used by miners will be a moot point.
Roughly 18.6m (88.5%) of the possible 21m bitcoin have already been mined. At the current rate, the final bitcoin is projected to be mined in the year 2140.
Most of the gold, so to speak, has been snatched from the streams. So ol’ Wild Eyes may be better off just buying bitcoin on the open market.
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