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Bitcoin seems to be practically everywhere these days. Participants on social media share memes and swap stories of epic gains and losses. Banks, hedge funds, and more are reviewing it in boardrooms in hopes that they can use it to turn a handsome profit. And regulators around the world are attempting to find how they and their rules fit in the new paradigm brought about by Bitcoin and blockchain. Quite a showing for a technology that’s only been around for twelve years.
What’s driving these developments? Simply put, the exponential growth of Bitcoin from an obscure collectible worth basically nothing to an asset worth tens of thousands of dollars apiece. And what’s driving Bitcoin’s price growth? Nothing more or less than the desire of millions of people the world over to acquire and hold onto Bitcoin for months or years at a time.
For most people, the simplest way to obtain Bitcoin is by buying it on a cryptocurrency exchange. After all, exchanges literally make their money by making it as easy as possible for you to click the “buy” button. That said, I’d argue that buying through an exchange, while simple, is not the most productive way to acquire Bitcoin. Instead, I’d argue that the best way to get Bitcoin and also support the blockchain as much as possible is through mining.
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Why Mine Bitcoin You Ask?
Bitcoin in its true form cannot exist without mining because Bitcoin cannot exist outside of its blockchain…which requires mining to operate. Thus, while buying Bitcoin is certainly productive in that it supports Bitcoin’s growth and price, mining is more productive because it provides for Bitcoin’s continued existence.
As can be expected then, Bitcoin mining has been around as long as Bitcoin, with one caveat: you’d be right if you credit the publishing of Bitcoin’s whitepaper as its de facto origin. But remember that if Satoshi Nakamoto hadn’t mined the first block, with many people mining blocks alongside and afterward, it’s basically a given that we wouldn’t be sitting here today talking about Bitcoin.
In a nutshell, Bitcoin mining is the process of performing a complex mathematical calculation over and over again in order to find a specific number that has been randomly generated by the algorithm on which Bitcoin’s blockchain is built. While it’s technically possible for you and me (or at least for a great mathematician) to solve the aforementioned calculation, doing so by hand would be painstakingly slow and would severely limit the blockchain’s ability to grow. As a result, computers have been used to run the blockchain since day one.
A Brief History of Bitcoin Miners
A lot has changed about the mining process since Satoshi mined the genesis block. Bitcoin was designed to maximize decentralization of the blockchain, meaning that Satoshi wanted it to be as easy as possible for as many people as possible to mine Bitcoin. With that in mind, it’s straightforward to understand why Bitcoin mining was originally performed using CPUs (Central Processing Units). All computers have CPUs, meaning anyone anywhere in the world can easily hook their computer to the Bitcoin network and start mining.
As we know, Bitcoin started out very small with just a handful of people mining on the network. Those first participants were in essence motivated solely by the desire to prove that the blockchain could work since Bitcoin had little or no monetary value at the time. However, as more people began to join the network and understand the innovation that is Bitcoin, the cryptocurrency started to acquire status as a collectible. This of course jump started Bitcoin’s price appreciation, and the rest is history.
Bitcoin mining is not a participation sport, however, in the sense that you don’t get Bitcoin every time you mine on the network. As mentioned previously, mining Bitcoin comes down to having your computer guess a random number before anyone else’s. So your ability to successfully mine Bitcoin and mine them more frequently is essentially determined by the number of guesses that your computer can make compared to everyone else’s computers. With Bitcoin’s price appreciating over very short periods, you can imagine that it didn’t take long for people to start looking for ways to make their computers more powerful at mining.
CPUs have a lot of different functionality and are used to run most of the hundreds of different processes on your computer. In short, CPUs are good at a lot of things, but not really great at anything because they don’t need to be. By comparison, GPUs (Graphics Processing Units) have a much more specific set of use cases, like gaming for example, which requires extremely powerful processors in order to run and render the gaming software and its graphics. Coincidentally, this means that GPUs are also much more powerful when it comes to performing mathematical calculations like those required by the Bitcoin blockchain. The miners who first started using GPUs instead of CPUs to mine Bitcoin had a huge advantage over their peers. It didn’t take long for the rest of the market to make the switch to GPU mining.
As one can imagine, the gains realized by switching to GPUs made market participants wonder how much more efficient the mining process could become. While more specific in purpose than CPUs, GPUs and FPGAs (Field Programmable Gate Arrays), which are slightly fast than even GPUs, are multi-purpose and weren’t developed with Bitcoin mining in mind. As a result, some participants in the market set out to design a machine that’s sole purpose was to mine Bitcoin and do it well. ASICs, or Application-Specific Integrated Circuits, were born.
ASICs are powerful to say the least. It’s estimated that today’s ASICs are 100 billion times faster than the average CPU in 2009. They are also rather expensive, with the latest models often costing several thousand dollars apiece. Consequently, mining power on the network has tended to aggregate in the hands of corporations who are able to invest large sums of money to buy lots of ASICs and pay for electricity to power them. To a certain degree, there has been a tradeoff of reduced decentralization of mining capacity in exchange for much higher network security. That said, the Bitcoin blockchain’s code hasn’t changed much and anyone can still run it off of their computer’s CPU. There’s just an extremely small chance that they’ll successfully mine new Bitcoin for their efforts.
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This is not financial advice. This newsletter and related content are for informational purposes only. Cryptocurrencies, stocks, and similar assets can be risky. Always do your own research before making any sort of investment.