Bitcoin, launched in January 2009, is the original decentralised cryptocurrency from which hundreds – if not thousands – of other cryptos have spawned. The process of generating bitcoins is called ‘mining’. Forget pick axes and underground tunnels, though; this kind of mining requires incredibly powerful computers, specialised software and a super-fast internet connection. Or at least it used to.
In various ways the mining analogy is apt: miners invest in equipment and expend energy, using whatever technical advances at hand to gain an advantage over rivals in order to ‘mint’ or ‘discover’ an item of great value. Little wonder bitcoin is often called “digital gold”. It’s worth noting, though, that if all crypto mining halted, every coin in circulation would cease to exist.
Indeed, the form of mining in question is not about discovering or producing any physical object. Rather it uses cryptography to continuously secure a digital, distributed ledger – called the blockchain – via proof-of-work, and new coins are simply the programmed reward.
So how does it work? At the heart of all proof-of-work cryptos – of which bitcoin is the first to flow into the mainstream – is a blockchain. Computers on bitcoin’s network continually compete in a race to solve a complex mathematical puzzle to create a batch of data that forms the next block of the blockchain.
To do this, computers use a process of brute-force trial and error to guess the cryptographic signature, or ‘hash’ – a combination of the record of the most recent crypto transactions along with a proof-of-work solution and the signature for the previous blocks. Once the winning answer is found and verified by the network a new block is added to the blockchain. The race for the next hash then begins.
The mining analogy is strengthened by the fact that the first computer to solve the block is rewarded with a number of newly minted bitcoins – a veritable gold strike, given that the value of one bitcoin peaked at just under $20,000 in December 2017. This happens about every 10 minutes and sets bitcoin apart from fiat currency, as new money is issued not by a central bank, but by the network collectively.
The amount of bitcoins released with each mined block is called the block reward. Back in early 2009 the block reward was 50 bitcoins. However, the block reward is halved every 210,000 blocks – if blocks are mined every 10 minutes, on average, that means about 144 blocks are created every day – which equates to approximately every four years. So, for example, the solution of block 210,001 resulted in a prize of 25 bitcoins. In 2018 the block reward is 12.5 bitcoins, and it will continue to decrease.
Currently there are just over 17 million bitcoins in circulation, with less than four million to be mined before the 21-million limit is reached. At that stage, predicted to be in 2140, some 6,930,000 blocks will have been solved. The next block reward drop is expected to be in May 2020, when solving one block will yield 6.25 bitcoins, and as the reward for solving a bitcoin block decreases the appeal to mine will diminish.
In the very early days of bitcoin, mining was a nifty way to make money in the cryptocurrency market, for those in the know and with the most powerful computers. Laszlo Hanyecz, who in May 2010 made the first documented real-world purchase using bitcoin (he exchanged 10,000 bitcoins – then valued at $80 – for two pizzas), was an early successful miner.
He worked out his computer’s graphics processing unit (GPU) – a specialised processor board responsible for rendering three-dimensional digital images – could do the hashing for bitcoin rather than his computer’s central processing unit (CPU). In fact, a single GPU can produce a hash rate of at least 10-times quicker than that of a solitary CPU, typically.
As bitcoin became more valuable, it didn’t take long before the landscape changed, though, and mining became exorbitantly expensive for individuals as more computers joined the race to mine bitcoins and connected to the network, making the rewards more difficult to gain. It was the start of an arms race, with millions of dollars worth of bitcoins on offer for the victors.
Soon individuals raised their game by building powerful mining rigs – tall towers of computers with a number of GPUs linked together. This increased the personal reward of new bitcoins, and additionally boosted the overall computing power in the network, called the ‘global hashrate’.
As the mining market became more competitive, miners sought out processors even more powerful than GPUs. Field-programmable gate arrays (FPGAs) – logic circuits that could be programmed by their users to accomplish very specific tasks – were the next to be used.
At the same time other devices called application-specific integrated circuits (ASICs) were being tailored to be used solely for bitcoin mining and sold by organisations looking to get rich by staying true to the old adage that you should sell shovels in a gold rush.
Before long, the conventional computer hardware used by many early bitcoin miners became obsolete. It simply didn’t add up. Compared to the amount of hash generated by a desktop computer, for instance, an ASIC works at a rate more than a million times faster.
Now the market is dominated by mining pools – huge numbers of powerful computers specifically programmed to mine bitcoins – with a majority believed to be in China. The digital gold rush may be ongoing, but the actual mining is no longer done by individuals.
Oliver is a multi-award-winning journalist, ghostwriter, media consultant and editor based in south-east London. He specialises in tech, business, sport and culture, has been by-lined in every English newspaper and regularly contributes to The Daily Telegraph, The Times, The Guardian, and The Financial Times Weekend Magazine. On Twitter he is @OliverPickup.