The Dangers of Mining Coin

Mining Coin

Cryptocurrency miners form vast, decentralized networks around the world that verify and secure blockchains — the digital ledgers that document cryptocurrency transactions. In return for processing power, the computers on the network are rewarded with new coins. This virtuous circle is called mining, and it’s what allows Bitcoin and other cryptocurrencies to operate without central control.

But mining isn’t without its challenges. In addition to high upfront costs for the specialized computer equipment needed, a miner must also pay for ongoing electricity costs. One specialized computer (called an application-specific integrated circuit or ASIC) can consume as much energy as half a million PlayStation 3 devices, according to a 2019 report from the Congressional Research Service. And then there’s the price volatility of cryptocurrencies, which can make it hard to determine whether the reward will outweigh the risks.

Mining essentially involves competing in a giant lottery. The goal is to be the first miner to solve a complex cryptographic puzzle by submitting pending transactions to a blockchain network. The network then rewards that miner with a block of new Bitcoin. This proof-of-work process makes it difficult to hack or counterfeit cryptocurrencies and ensures the decentralized system remains trustworthy.

To generate a valid candidate block, a miner must submit a block header and the transaction data to an algorithm that turns a piece of text into a number based on how it was encoded. The miner then tries to create a hash value that matches this previous hash and adds an arbitrary number, known as a nonce. The computer that guesses the value first wins the prize. The odds of finding a match are extremely low for a solo miner with a small amount of computing power, even with a powerful mining rig.

Because of this, the majority of Bitcoin miners are part of a “mining pool”—groups of miners who pool their computing power and share the mined coins. The size of a mining pool affects the probability that a member will find a hash value first. With Bitcoin’s current difficulty, the chance of a miner discovering the solution on their own is about one in ten billion.

As a result, some governments have started to crack down on crypto mining operations. For example, a bill now moving through the New York state legislature would prohibit new crypto mining for two years because of the high cost of electricity used by these operations.

Some miners have started to respond by switching to renewable energy sources. Companies such as Great American Mining and Crusoe Energy have built mines that are powered by flared natural gas from oil fields, excess wind or solar power that can’t be stored, or hydropower from dam overflows.

Still, the overall profitability of mining is a question mark because the upfront costs for high-tech equipment can be prohibitive, and the energy used to run that equipment isn’t cheap. The price volatility of cryptocurrencies also presents an unpredictable risk, as does the potential for government regulations to restrict the industry. For these reasons, it’s crucial to do your own research before investing in any mining opportunities.