February 24, 2022
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 2022, paper money is no longer backed by gold, and it is also no longer rare. 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, Ethereum 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.
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.
CI Global Asset Management is a registered business name of CI Investments Inc.
©CI Investments Inc. 2022. All rights reserved.
Published February 24, 2022