Mining is perhaps one of the most important components of the Bitcoin ecosystem. The complex computational math problems that miners work to solve enables the execution of transactions. These problems are so complex that they are difficult even for incredibly powerful computers. The luck and work required by a computer to solve one of these problems is the digital equivalent of a miner striking gold in the ground. The chance of getting it right is about 1 in 13 trillion.
Bitcoin mining serves two purposes. First, by solving computational math problems, Bitcoin miners make the Bitcoin payment network trustworthy and secure, by verifying its transaction information. Miners are the ones who make sure transactions are accurate and Bitcoin is not being duplicated.
Second, when computers solve these complex math problems on the Bitcoin network, they produce new Bitcoin, not unlike when a mining operation extracts gold from the ground. That reward is called the ‘block reward’ and the amount is cut in half periodically during events known as ‘halvings’. The concept of newly minted Bitcoin is a crucial component of the Bitcoin protocol. The Bitcoin that miners receive is new in the sense that it was not in circulation before that.
Because miners will eventually sell that Bitcoin, they are a critical source of supply and liquidity. As Chainalysis reported, many crypto exchanges rely on miners for receiving Bitcoin and adding to the liquidity on the exchange. Typically, exchanges receive about 88% from other exchanges, with Bitcoin miners as the largest source for the remaining percentage. As you can imagine, there is fierce competition between exchanges to receive Bitcoin directly from the miners.
From mining at home, to Bitcoin industrial farms
At first, Bitcoin mining involved a lot of individuals at home with simple equipment performing the service. Over time, miners began to use better and better equipment and in 2013 they started using computers called Application-Specific Integrated Circuits (ASIC) specifically designed for Bitcoin mining. These are powerful, efficient computers and today most, if not all, mining is performed using this equipment. In fact, if you use a regular desktop computer, the cost of energy required to mine Bitcoin likely exceeds the revenue you would generate.
But even if you manage to get the right equipment, you’d still be out of your league compared to the mining pools – the alliances made by large Bitcoin mining companies where they pool their power. Bitcoin mining pools now dominate the market, with a handful of pools controlling most of the hashrate for Bitcoin – a general measure of the processing power of the Bitcoin network.
Where are the Bitcoin mines?
The Bitcoin Mining Map created by the University of Cambridge shows the geographic distribution of the global Bitcoin hashrate. At first glance, the distribution of Bitcoin mining seems distributed to a satisfactory degree.
But upon closer inspection, we see that over 70% of the average monthly hashrate is actually located in one country, China.
Zooming in further, most of the mining activity is performed in only 4 provinces, with the top two being Xinjiang and Sichuan making up nearly half of all Bitcoin mining in China. In these areas, electricity is cheap, and the weather is cold. This helps keep mining profitable and the equipment cool during the 24/7 operation of Bitcoin mining.
But for the crypto-initiated, this is nothing new. For many years, China has consistently been a major market for Bitcoin miners due to its cheap electricity and affordable resources. Companies like Bitmain, F2Pool, and Canaan that account for a large portion of the Bitcoin network’s hashrate are all based in China.
Whether this is negative or positive depends on your perspective. But for a decentralized, distributed, permissionless network, geographic spread across multiple entities is healthier for the entire ecosystem.
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