In 2009, all it took for a Bitcoin enthusiast to mine the cryptocurrency was a computer at home. It was simple enough, rewarding you for the time spent with your computer dedicated to the task. Today, it’s practically impossible for anyone to do it like that.

The increased difficulty of the blockchain plus the competitiveness leaves very little room for operations that aren’t resource heavy. Now, depending on rig structure and efficiency, mining a Bitcoin potentially costs up to $50,000 at today’s electricity prices.

For some, it’s a small price to pay for the digital coin’s value, as many assume it could eventually be worth $100,000 or more. Yet the question remains, why does it use up so much energy?

How Does Bitcoin Mining Work?

To understand why Bitcoin uses so much energy, we first have to see how the entire infrastructure operates. Mining is the process by which a Bitcoin enters into circulation. Miners are responsible for upholding the blockchain, its maintenance, and further development. To mine Bitcoin, you need computational power, and lots of it. The more computing power you have, the better your chances are of mining Bitcoin.

Each miner competes for a chance to solve the cryptographic puzzle that rewards Bitcoin. After one reaches the solution, the computations begin anew, solving another problem. Even with all the work, money and energy put into it, it’s very appealing to investors because the rewards could be large.

Miners participate in keeping the blockchain afloat, and they get rewards in the form of Bitcoin. You can earn cryptocurrency without having to spend money to buy it. Instead, you invest in the equipment. In Bitcoin’s case, it is the application-specific integrated circuit (ASIC).

The Electricity Issue

According to Business Insider, mining Bitcoin takes 90 terawatt hours of energy, which is more than the amount of electricity used by the entire nation of Finland. That means powering the entire operation would mean electricity that millions of people could use.

The biggest problem with this is revealed when you take into account where the electricity comes from. Most of the world still heavily relies on fossil fuels to generate electricity. Burning it is a pollutant, and Bitcoin is responsible for around 34 megatons of carbon emissions.

Inefficiency

When the founder of Bitcoin, Satoshi Nakamoto, envisioned its creation, electricity use wasn’t much of an issue. The concept back then was a small network of computers helping to decentralize the financial system.

The problem lies with the coin’s system, proof of work. Verifying transactions means solving math problems that get more complex. Complexity requires more energy, and the competitive nature of mining exacerbated the problem… but it also makes the price bitcoin go up.

Imagine this scenario. Everyone is working to build the same luxury resort meant to attract the wealthiest clients. Each participant pours in their effort, using money and other resources for their attraction. They all have the same features, layout, materials, and more. Out of a thousand participants, one finished the construction earlier than expected. Others were more than halfway through their projects.

The result? The first builder receives the reward of the clients that reward their effort. The rest? They start building all over again, throwing away the first project.

That is what happens in a proof of work system. The winner gains thousands of dollars’ worth of Bitcoin. 99% of those who participate throw away the resources they poured into solving one problem because they weren’t first and have to start over again. Multiply that by the thousands of large-scale operations mining Bitcoin, and you have a global issue.

A Growing Problem

In the last five years, electrical usage for Bitcoin mining has increased 5x. Maintaining a mining operation means enough space to accommodate computers and cooling. Most of these mining centers have company or organization ownership. Around seven groups control 80% of all computing power in the network.

Most of these operations stayed in China because of more affordable electrical prices. However, recently they’ve begun to spread around the world because of the Chinese government’s crackdown on mining and bitcoin transactions.

Apart from the carbon footprint it leaves, another issue is how fast these mines churn hardware. Machines fill up landfills, and there is also a shortage of specific parts like computing chips, increasing prices all around.

Finding Solutions

While some don’t seem to pay attention to the electricity problem, a large portion of the community is beginning to implement solutions to the issue. There have been some creative options, and we expect more innovations will spring up in the coming years. Here are the most popular ones:

Proof of Stake

The inefficiency of the proof of work system is something highlighted by newer blockchains. While they don’t boast the popularity of Bitcoin at the moment, their advancements are attracting those who are wary about mining waste. The proof of stake system potentially removes the issue of everyone trying to mine for one puzzle. Of course, the easier it is to mine a cryptocurrency, the less value it will have.

In a PoS, participants must use a small amount of crypto to stake. Those who do so will then become a part of a lottery that will open the door for them to become part of the verifying process. It removes the competitive element and allows machines to work on a single problem, increasing efficiency.

The most notable proponent of this system would be Ethereum, the second-largest cryptocurrency. While it remains a proof of work system, they have a roadmap to transition to proof of stake. The most active blockchain in the system will eventually reduce its electrical consumption by 99.5%.

Carbon Credits

Another development is the application of carbon credits. Governments can limit the amount of carbon usage by setting limits. If someone goes beyond that, they have to pay a hefty fee.

Renewable Mining

The biggest issue with electricity usage is not the energy itself but its source. Renewable energy sources address the problem by using sources that do not create a high carbon footprint. Today, more mines rely on friendlier resources. Hydropower, solar, and wind energy and nuclear are powering large operations in Bitcoin mining. It can only grow from here.

For investors who want to get into mining, seeking a renewable energy source may be their best bet. They can still claim rewards while knowing that they aren’t contributing to existing environmental problems.

Pre-Mining

Some cryptocurrencies have introduced pre-mining, something similar to how traditional finance works. An authority will be responsible for releasing a set amount of crypto to control participants.

However, many don’t like this system because it defeats the purpose of digital currency. Originally, Bitcoin’s aim was to remove the middleman, and pre-mining brings back a method that many in the industry reject. For this reason, it is unclear whether or not pre-mining will be an effective solution to Bitcoin’s energy usage in the future.

Want to Learn More About Crypto Mining?

Most people wanting to try their hand at crypto mining likely won’t be able to set up efficient operations on their own. You can only do that if you have money. The best option is to invest in a mining farm, a pool or a publicly traded mining stock that could provide you returns based on your investment. Because of the increasing value of Bitcoin, it is one of the best options if you want to get something back for helping their operations run.

However, if you choose this route, make sure that you are getting into an investment that’s operating using renewable energy. You can help reduce the unwanted effects plaguing the space for the last few years.

Sources:

1. https://www.forbes.com/advisor/investing/cryptocurrency/bitcoins-energy-usage-explained/#:~:text=That’s%20because%20to%20verify%20transactions,verifying%20transactions%20on%20centralized%20networks.
2. https://www.investopedia.com/tech/how-does-bitcoin-mining-work/
3. https://www.nytimes.com/interactive/2021/09/03/climate/bitcoin-carbon-footprint-electricity.html
4. https://www.businessinsider.com/bitcoin-mining-electricity-usage-more-than-google-2021-9