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February 24, 2022

The New Gold: What is Bitcoin Mining?

During the 60 years leading up to WWI in 1914, you could walk into a Canadian bank and demand that your banknotes be exchanged for gold. In the United States, the gold standard was in place all the way until 1971. The idea was to make dollars as rare as gold itself, so that they would remain a reliable store of value.

In 2024, paper money is no longer backed by gold in Canada or the U.S. Central banks now have carte blanche to print all the bills they want. This has helped fuel interest in bitcoin - a cryptocurrency that, like gold, is expensive to mine and, unlike gold, has a finite limit to how much can ever be mined.

How Bitcoin Mining Works

Processing transactions on the bitcoin blockchain requires individuals known as “miners” to compete in solving mathematically complex problems linked to blocks of transactions. The miner who solves the problem first gains permission to add the block of transactions to the ledger, and this results in the creation of new bitcoin, which the miner earns for their effort.

Several factors contribute to the scarcity of bitcoin. First, every 210,000 blocks, the reward for each new block falls by half, which means the rate of creation of new bitcoin is steadily falling. As the system scales, the cost and difficulty of mining new bitcoin is continually increasing. And ultimately, production is programmed to stop for good at just under 21 million bitcoins.

How to Become a Miner

The process used to mine bitcoin is known as Proof of Work (PoW), and it requires highly specialized computer hardware. The hardware must be capable of solving complex math problems using brute force - rapidly generating 64-digit number combinations to solve a unique equation that is ‘less than or equal to’ the puzzle’s winning answer, or “hash.”

It takes a lot of computational power to solve these mathematical problems, verify transactional data, and reap mining rewards. What’s more, the level of difficulty is adjusted roughly every 14 days in an effort to manage the pace of bitcoin creation. The more miners competing, the more difficult and expensive it becomes to arrive at a solution.

If you want to be a miner, the two main barriers to entry are the need for costly, power-hungry computer hardware and the electricity to run it. The reality is that bitcoin mining is simply not economical at certain times and places based on the price of bitcoin and the cost of energy.

One potential solution is to join a mining pool where you work with other miners to achieve economies of scale, although you will still have to weigh the potential mining rewards and market value of bitcoin against the energy and hardware required to do the mining.

Other Ways to Participate

Bitcoin mining is just one of the potential opportunities in the world of blockchain and cryptocurrency. Other options include owning bitcoin, ether and other cryptocurrencies directly, investing in commercial projects built on these platforms, such as the emerging world of smart contracts and decentralized finance, and exploring the emerging alternative to mining, which is called Proof-of-Stake (PoS), and offers the opportunity to earn dividend-like yield from digital assets.

Learn more about cryptocurrency and how we’re making it affordable and accessible for every investor.

About the Author

Galaxy Digital

Galaxy Asset Management LP is a diversified investment management company with a team of long-tenured institutional experienced professionals managing third-party capital across traditional and alternative asset classes, with strong relationships and connectivity in the digital asset, cryptocurrency and blockchain technology sector.

IMPORTANT DISCLAIMERS

 

This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.

 

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