Bit by Bitcoin Mining

pexels-photo-844127

You load sixteen tera-tons, what do you get?
Another day older and deeper in debt
Saint Peter, don’t you call me ’cause I can’t go
I owe my soul to the electrical store

As you already know, Bitcoin is all the rage. If I wrote this in 2017, then it would be true. In 2018, not so much. Bitcoin was valued at over $19,000 on some exchanges. The specter of government regulation has knocked this down somewhat.

Notwithstanding the price volatility, the benefits of mining Bitcoin remains attractive for those that know where to look. And by look, I mean looking for cheap electricity.

Back in the heyday, you could use a simple laptop to attempt to mine Bitcoin. Now for any chance of success, you have to run a server farm. Perhaps we can change the metaphor from mining, which suggests gold, to farming, which suggests easily washable boots.

Countless computers across the globe attempt to mine Bitcoin by solving an algorithm. This proves and validates the correctness of a new transaction. Every 10 mins or so, some lucky miner solves the algorithm and receives a reward of 12.5 Bitcoins. All the other computers verify this and then stop what they are doing and start at the beginning again.

If the entire process sounds wasteful, then you would be correct. The Bitcoin mining process now takes up more electricity than the majority of countries. Current estimated consumption is 61 TWh. Mining requires the equivalent of the yearly electrical requirement of Switzerland, and just a bit more than Columbia. This power could sustain over 5 million households. Just a short while ago, some pundits were claiming that mining Bitcoin would the major user of power by 2020. And like anything, projecting exponential growth from the past into the future never really pans out.

Mining produces revenues of $6.3 billion and costs of $3 billion, providing a substantial margin of 48% plus other costs.  Needless to say the carbon footprint of this type of mining is quite extensive since a number of countries rely on coal. China plans to limit the amount of electricity to miners which are estimated to be using up to 4 gigawatts of electricity, or about three nuclear reactors worth of energy. Plattsburg in the United States placed an 18 month moratorium on crypto mining owing to the extensive electrical use.

There is a lot of debate as to the actual electrical usage, but no one really knows what is happening in the black box. Suffice to say that a lot of energy is being wasted on chasing an algorithm that someone else will likely solve.

There are only a limited number of Bitcoins and more people are chasing them with increasing levels of computing power. The electrical requirements today are quite substantial since everyone has to obtain this ‘proof of work’ standard to qualify their Bitcoins. Think along the lines of will the sun rise tomorrow probability?  A lower standard such a ‘proof of stake’ may qualify but the security standard would be lacking. Think along the lines of will I rise tomorrow probability? Usually pretty good, but I might be wrong someday.

A single Bitcoin transaction takes the energy equivalent of thousands of credit card transactions. So actually the cost of a bitcoin transaction is more akin to ‘priceless’.

The security of Bitcoins do come into question since there has been substantial hacking in some countries. Bitcoin can be like the canary in the crypto-currency mining process. But instead of the canary dying, we are talking about the crypto canary disappearing completely. And instantly.

The disappearance of all remaining Bitcoin to be mined would be the signal that someone successfully created a quantum computer. The first use of such a computer would likely not be to solve the mysteries of the universe, but rather to solve the algorithm to grab the balance of the Bitcoins to be mined.

This may take ten years, or perhaps less. As Yogi Berra opines, it’s tough to make predictions, especially about the future.

 

 

 

Photo by Make someones day from Pexels