Crypto mining sounds like something out of a sci-fi movie: “Planet Bitcoinus 7 was known across the galaxy as a soul-crushing graveyard where miners went to die.” Actually, it's the process by which a cryptocurrency like Bitcoin is able to maintain its integrity while at the same time incrementally increasing the number of coins in circulation. Crypto mining is essential to the success of the decentralized currency model. Today, however, there are so many coins in circulation and so many high-quality exchanges offering easy, alternative ways of getting your hands on virtual money that some are questioning whether crypto mining is worth the time and effort any more. It’s an important question that could have existential implications for Bitcoin and its myriad copycat cryptocurrencies.
What is Crypto Mining?
A cryptocurrency uses the blockchain concept to produce a distributed encrypted ledger. It is this incorruptible blockchain ledger which ensures the integrity of the coin. But it isn't the type of ledger that automatically updates itself. That updating has to be done by outsiders. These outsiders are known as "miners." Miners voluntarily work to verify transactions.
Each time a transaction is validated the data cluster known as the block is updated, a new block created containing all valid information about the currency and a fraction of a “coin” is released to the miner who performed the validation. The validation process requires enormous computing power and devours equally vast amounts of energy.
Before we get into the question of whether mining is worth it these days, let’s first look at what any miner’s goals should be and what is needed to be a competitive miner.
Those are all very standard business goals. Now let’s look at what’s needed to have a chance to achieve those goals.
Once you have all those things, hook up the rig to the computer and get to work.
So What’s the Problem?
In the early days of Bitcoin mining was about the only way to get your hands on a unit of cryptocurrency. Scores of eager computer geeks intent on virtual riches rushed to join the validation fray, and for a while, things might even have been considered fun. Today, however, that has all changed.
Competition amongst miners has increased to an absurd degree, more processing power than ever before is needed to have a chance to make money for your efforts and the rise of the centralized exchange has encouraged the entry of millions of non-miners into the crypto culture, changing it both for better and for worse and bringing it to the attention of government regulators from Shanghai to San Francisco.
Anyone with the financial resources can start an account with a centralized exchange and buy some Bitcoins - or any other type of cryptocurrency - to call their own. It’s the rise of the centralized exchange and the millions of new investors and speculators they have brought to the table that is largely responsible for the astonishing spike in valuations that have occurred during the past couple of years. A Bitcoin you could buy for less than $10 in 2011 is now worth more than $11,000 (coming off a recent high of nearly $18,000). The success of Bitcoin has also ignited a bonfire of competing cryptocurrencies with each one having its value fuel-injected through trading on centralized exchanges.
As such it’s understandable why some people who may have been considering mining as an occupation would simply opt to pay the fees involved and get some coins through an exchange. Also, purchasing all the equipment outlined above and burning through all the energy required to run trillions of calculations per second to validate transactions is a costly endeavor. Indeed some miners are never able to earn enough crypto to turn a profit. So if we put ourselves in the lonely miner’s shoes then struggling to stay above water through crypto mining is becoming increasingly hard to justify. The hours are long, expenses are high, and payoffs are often small. Why not just sell all the equipment and use the money to open an account on a centralized exchange?
The Future of Mining
It’s a good and valid question and not one with a simple answer because crypto mining has become paradoxical to a degree. And by that, we mean the integrity of the currency depends on the work of miners. Without them, the blockchain grinds to a halt and confidence in the currency plummets. At the same time, however, the very success the miners have helped produce is creating a situation where mining is increasingly looking like the worst way to obtain coins. So what can be done?
Perhaps increasing the amount miners are rewarded for their efforts is the only way for the whole process to move forward. Maybe miners will organize and demand higher compensation under the threat that if their situation isn't addressed, they'll go on strike. Or virtual strike anyway. Maybe the whole thing will find some as yet unanticipated resolution, and we'll all go skipping merrily down the yellow bit road to financial nirvana. Only time will tell.