Bitcoin mining creates new coins each time that transactions are validated and added to the blockchain, with bitcoin’s Proof of Work (PoW) consensus algorithm requiring miners to solve complex cryptographic equations for the right to validate transactions and earn bitcoin as a reward.
Verifying the integrity of transactions is referred to as “hashing” a block.
The network hash rate increases as more machines are added to the network and as the mining equipment provides more processing speed, memory, and power.
This increase in the network’s total computational power also contributes to its security, as it becomes more difficult for malicious attackers to compromise its operations.
As the sector has developed over time, new technologies have been adopted to advance mining capabilities. Market players are investing heavily in mining equipment and technological initiatives to increase mining efficiency and profitability.
Bitcoin Initiates Mining With CPUs
When bitcoin first launched, mining coins was a relatively simple process that could be done using a regular computer’s central processing unit (CPU). Early miners could use their personal computers to earn bitcoin rewards. The network was small, and the difficulty level of the cryptographic equations for mining was low, making it accessible to the average user.
However, as more miners joined the network, competition intensified, and the difficulty level increased. This led to miners installing more powerful hardware to gain a competitive edge in the mining process.
Miners Switch to GPUs
As the difficulty of bitcoin mining increased, miners made the switch from hardware using CPUs to rigs using graphics processing units (GPUs). GPUs are better suited for the parallel processing required by the PoW algorithm, boosting mining efficiency compared to CPUs. This transition marked a turning point in the evolution of bitcoin mining technology, enabling miners to optimize their operations and profitability.
GPUs allow miners to mine more bitcoin in less time and contribute to the network’s security by increasing the computational power dedicated to the blockchain. Mining pools, in which miners combine their computing resources to increase their chances of earning rewards, also became prevalent with the shift to GPUs.
Specialized Equipment Emerges: FPGAs and ASICs
While GPU mining was a substantial improvement over CPU mining, it was not long before even more powerful hardware became available. Field-Programmable Gate Arrays (FPGAs) and Application-Specific Integrated Circuits (ASICs) emerged in 2013 as the next evolution in bitcoin mining technology.
FPGAs and ASICs are specialized hardware designed exclusively for bitcoin mining, making them more efficient than GPUs. They can perform PoW calculations at much higher speeds but with lower energy consumption. The latest generation of ASICs offers hashrates above 200 terahashes per second (TH/s) while using around 20 joules of electricity per terahash (J/T).
With the introduction of ASICs, mining has become increasingly competitive and resource-intensive, putting it further out of the reach of individual bitcoin enthusiasts. Large mining pools have come to dominate the space, with mining operations combining their computational power to increase their chances of mining blocks consistently.
The average household electricity cost for a solo miner to mine a single bitcoin has reached $46,291.24, according to a CoinGecko study. This is 35% higher than the average daily bitcoin price in July 2023 at around $30,000. It would take around seven years to complete the process and consume about 143 kilowatt hours (kWh) per month – equivalent to roughly one-sixth of typical US annual household consumption in 2021.
Service Providers Offer Cloud-Based Mining
In response to the emergence of large miners, some service providers have begun to offer access to cloud-based mining so that users can participate without having to buy expensive equipment.
For example, in June 2023, Binance – the world’s largest cryptocurrency exchange by volume – launched a subscription-based bitcoin cloud mining service. The service provides several different products with different durations and electrical power fees, each offering a different rate of return.
Other cloud-based mining providers include StormGain, ECOS, Hashing24, and BitDeer.
Artificial Intelligence Optimizes Performance
For instance, UK-based Quantum Blockchain Technologies (QBT) has developed AI algorithms aimed at increasing the efficiency of ASIC bitcoin miners. QBT has developed two algorithmic search methods, one that could improve efficiency by 10%, while the other could increase the probability of a miner winning the chance to mine a block by 260%.
QBT’s short-term goal is to improve the performance of commercial ASIC chips by adding AI software to mining rigs. Over the long term, the company aims to use quantum computers to mine bitcoin using a SHA-256 computation method, Message Scheduling for Cryptographic Hashing ASIC (MSFCA), that it has in development. QBT filed a patent application for this method in July 2023. MSFCA pre-processes the data used by subsequent blocks on the bitcoin blockchain, which reduces the number of logic gates needed in ASIC chips and in turn increases their efficiency while lowering energy consumption.
Stablecoin issuer Tether is also incorporating AI into bitcoin mining, building a specialized software program called Moria to optimize mining and renewable energy operations using data analytics.
The software could help the performance of Tether’s own mining sites, as it announced in May 2023 that it is investing resources into energy production and the launch of sustainable bitcoin mining operations in Uruguay, and said in June that has participated in the first round of a new $1 billion renewable energy initiative in El Salvador to support sustainable mining.
Bitcoin Miners Continue to Invest
The financial barriers to entering the bitcoin mining sector are high, requiring a location with access to an affordable and stable energy supply, as well as expensive advanced hardware and maintenance. But mining can provide a high return on investment.
Bitcoin miners in 2023 are producing $20 million to $30 million worth of bitcoin per day, according to data from Blockchain.com. This indicates that miners can produce substantial daily income if they have efficient equipment operating continuously.
Despite the slump in the bitcoin price from its all-time high approaching $69,000 in November 2021, bitcoin miners continue to invest in new equipment.
As higher efficiency and lower energy consumption become increasingly important – and as the next halving of block rewards approaches in 2024 – miners are looking to install rigs that optimize their output. Rig suppliers including Bitmain and Canaan have announced plans to launch new products later in 2023. Bitmain claims that its upcoming Antminer S21 Pro rig has a hashrate of 250TH/s and an efficiency of 14.2J/T, while Canaan promises an “industry-redefining product that will shape the future of bitcoin mining” and help miners survive the challenges of halving.
Addressing Environmental Concerns
As bitcoin mining has grown in scale and complexity, it has attracted criticism for its significant energy consumption.
Large-scale mining operations, particularly those using ASICs, consume large volumes of electricity, leading to concerns about their environmental impact. In response, some miners have sought to use renewable energy sources to mitigate their carbon footprint, while others have explored alternative consensus mechanisms such as Proof of Stake (PoS) that are less energy-intensive.
Major mining firms and blockchain players such as Tether are focusing on using more energy-efficient mining equipment and investing in renewable energy supply, such as solar and wind power, to reduce the carbon footprint of the mining process and increase its sustainability.
These efforts emphasize the growing recognition within the blockchain and cryptocurrency industry of the importance of balancing its technological advancement with environmental responsibility. This is also attracting environmentally conscious investors to cryptocurrency mining who have been concerned about its impact.
The adoption of new technologies has played a pivotal role in developing the industry from solo hobbyist miners to large-scale operations and making it more competitive. Bitcoin mining has evolved significantly from its inception, and there are now entire server farms and data centers dedicated exclusively to mining operations.
The global bitcoin mining hashrate currently stands at nearly 400 exhashes (EH), according to Blockchain.com, with a significant portion of it attributed to large-scale miners. This underscores the growing attractiveness of bitcoin mining from a financial perspective, in line with the growing adoption of cryptocurrencies as a mainstream investment asset.
More key crypto players could enter the mining sector as miners or providers of mining services, as we have seen with Binance and Tether. And more technological innovations are likely to emerge as miners look for new ways to increase efficiency, which will propel the mining industry’s growth in the coming years.