Bitcoin has a banner start to the year.

Less than two months after breaking the $ 20,000 mark for the first time, the price of the digital currency has more than doubled to a high of $ 48,297 this week.

Every time Bitcoin is declared dead, it seems to strike back, buoyed by bullish investors, auspicious laws and tweets from tech titans.

At this point, almost everyone has heard of Bitcoin. But a lot of people still don’t fully understand how the currency is created.

It is not printed like cash. It is not a physical object like a gold bar. It is not stored on a piece of plastic like a debit card. It only exists somewhere in a huge digital space until it is put into circulation by a so-called Bitcoin miner.

In this illustrated guide, we’ll cover:

  • How Bitcoin is created (a process that is called Mining)
  • How to economy mining have changed over time
  • The effects of this process on power consumption

The digital miner

To help explain all of this, let us 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 heard that there is a fortune in mining a new digital resource called Bitcoin.

In his view, Bitcoin has some similarities to gold:

  • There is a finite supply: As dictated by the creator of Bitcoin, there can only ever be 21m Total coins.
  • They need to be dismantled: The only way to get new bitcoin into circulation is through the efforts of digital diggers.

Wild Eyes goes a little deeper and finds that Bitcoin was created by an elusive pioneer (or group of pioneers) under the pseudonym Satoshi Nakamoto in the wake of the 2008 financial crisis.

Nakamoto’s mission was, one decentralized Monetary system that was not committed to the middlemen. Among its touted advantages:

  • It’s democratic: Unlike paper money where a single Central Authority Like a bank maintains a record of all transactions, Bitcoin is minted, circulated, and audited by thousands of users.
  • It’s harder to manipulate: Government agencies cannot intervene by, for example, increasing volumes or playing around with interest rates.
  • It’s global: Someone in Tennessee can instantly trade bitcoin with anyone around the world in Tokyo at a low cost.

The backbone of this concept is a distributed network called blockchainwhere a record of all Bitcoin transactions is kept.

For an old school Argonaut like Wild Eyes, this is a bit complicated.

Zachary Crockett / The Hustle

To help him out, let’s take a step back and briefly explain the blockchain with something he can understand: a choo-choo train.

Imagine the blockchain is a long pull – a blocktrain, if you want.

This train contains a public record of all Bitcoin transactions. Every time a trade is made through a cryptocurrency platform such as Coinbase, the details of the transaction are encoded and sent along with other transactions to a large network of users known as Bitcoin miners.

From there, the following process unfolds:

  1. Miners compete to get the next car on the train by bundling a series of transactions into “blocks”.
  2. Miners solve a math problem (called “Proof of work”), Which assigns an identification code to the block (a Hash).
  3. The “winning” block will be distributed to and reviewed by all other miners in the network and added to the blockchain.

Only one car can be added to the train at a time, and everyone takes ~ 10 minutes check and append on average.

Zachary Crockett / The Hustle

These bitcoin miners serve two main functions:

  1. They are the Bitcoin printing machine: Adding new blocks to the blockchain is the only way to get new bitcoin into circulation.
  2. They are the verifiers of Bitcoin: Through the mining process, they check the legitimacy of all transactions on the blockchain.

If you solve the equation first and add the next block to the chain, you are a miner rewarded with a set amount of bitcoin.

When bitcoin mining first started, the reward was 50 bitcoin (BTC). But as dictated by the creator of the coin, the reward is cut in half every time 210,000 new blocks are added to the chain – or roughly all of them 4 years.

From February 2021, miners will receive 6.25 bitcoin for every new block they mine – or ~$ 294,000 based on the current market value. You can also keep the transaction fees from the trades in this block that currently exist $ 20 / trade.

Today there are estimated to be more than 1 million bitcoin miners up and running – and everyone is competing to add the next block to the chain.

Collectively, the rewards these miners deserve receive the highest $ 1 billion per month.

Zachary Crockett / The Hustle

On paper, those numbers make mining an extremely attractive proposition for the likes of Wild Eyes.

But it turns out that getting the money is not that easy.

The arms race in Bitcoin mining

As mentioned above, in order to successfully add a new block to the blockchain and receive its reward, a Bitcoin miner must solve a computational problem.

We won’t go into any further detail on this problem here (see this post for a full breakdown of the math).

But in simple terms, a miner basically has to use a computer to go through Trillions of hexadecimal number combinations until an acceptable 64-digit code is output. This coding protects the blockchain.

The difficulty of this problem adapts proportionally On the overall mining power of the network: The more Bitcoin miners join the network to take part in the competition, the more difficult it will be to solve the problem, so that even more computing power is required.

This led to an arms race in bitcoin mining.

A decade ago it was possible to mine Bitcoin with a simple computer processor. But as the mining industry expanded, people started using more powerful hardware like GPUs (Graphics processors), FPGAs (field programmable gate arrays) and dedicated ASIC Mining machinery.

The volume of miners on the network – and the randomness of the number generation – has made winning a block reward one thing lottery.

Zachary Crockett / The Hustle

Bitcoin miners have to weigh the cost of hardware (and most importantly, the cost of hardware) electricity required to run it) against the low odds regularly.

In most cases, running alone is no longer financially viable.

Let’s say Wild Eyes bought an old ASIC machine – let’s say an Antminer s9 (~ $ 400 on eBay) – and set it up in their basement. According to Bitcoin mining calculators, it would probably need him 225 years create a block.

And while he sat around waiting for it, he was spending ~ $ 3.50 per day (~ $ 1.3,000 per year) on electricity for just the one machine.

Because of this, the Bitcoin mining scene today is dominated by two factions:

  • Mining basin: Groups of individual miners who combine their computing power and then split the rewards proportionally based on how much computing power each person contributed
  • Massive mining farms that has thousands of machines that run around the clock

Around 66% Global Bitcoin mining is now happening in China, where cheap hardware makes large operations more economical.

In Dalian – China’s Bitcoin mining capital – only one factory is being dismantled 750 bitcoin per month or $ 35.6 million worth at current market price. It uses more than 3,000 ASIC machines for this purpose and spends more than $ 1 million on electricity every month.

Zachary Crockett / The Hustle

Bitcoin costs on average for all types of operations between $ 5k and $ 8.5k to me. Electricity accounts for most of the overhead.

The key for many mine operators is locating where the cost of electricity is cheap – places like Iceland, New York State, small towns in Washington State, and rural Texas.

However, power consumption is not just an economic consideration, it is one of the greatest controversies in the practice of bitcoin mining.

The electricity problem

Together they use bitcoin miners 121.4 terawatt hours (tWh) electricity per year to keep it running.

To give this number additional context, this is enough to show the entire population of Argentina (45m) for a whole year.

Zachary Crockett / The Hustle

Of course, traditional financial institutions aren’t much better.

It has been estimated that the world’s banks are at least consuming together 100 tWh Annual electricity consumption when factoring in branches, servers, ATMs, and paperwork.

Ultimately, however, the energy used by miners will be a moot point.

About 18.6 m (88.5%) of the possible 21m Bitcoin have already been mined. At the current rate, the final bitcoin is expected to be mined in 2140.

Most of the gold was torn from the streams, so to speak. Old Wild Eyes may be better off just buying bitcoin on the open market.