Bitcoin mining is a process in which computing devices, called nodes, communicate and verify transactions with the decentralized network. The miners, who run these nodes to earn bitcoin by verifying these transactions as true, are rewarded for their work as part of the block reward.
Bitcoin has now reached a $100 billion market capitalization, so an understanding of how it works is valuable for those looking to enter into a new field. Before you begin mining bitcoin using your own node, there are a few drawbacks that you need to be aware of:
Bitcoin Mining Energy Use
The bitcoin blockchain has been running since January 3 rd 2009 and has grown exponentially since then. This system currently consumes over 1-2 gigawatts (GW) of power per day. You can also visit Brexit Millionaire for further information.
One study from researchers at the University of Cambridge examined how much power was needed to mine bitcoin. They extrapolated that if bitcoin were to be used for “electronic cash”, it would require over a billion servers and lead to higher energy costs per transaction than the ones with traditional payment methods.
Another report from environmental researcher Sebastiaan Deetman showed that just one bitcoin transaction emits as much carbon dioxide as an average household in the Netherlands uses in a week.
Since there is no government or central agency regulating this system, any company looking into mining bitcoin has no choice but to draw their power from the electrical grid. And since most people do not have access to cheap green energy, they are likely offsetting their mining power with dirty energy from the grid.
This issue is compounded by the fact that bitcoin mining machines are not built to last. People purchase fresh hardware when it becomes available and replace old devices after several months or a few years, resulting in an exponential increase in the network’s power consumption over time.
Bitcoin Mining Competition
The amount of competition between miners has also risen since bitcoin became a hot commodity. Before 2015, a miner could run their node on a home computer and still generate a decent number of bitcoins each month before electricity costs outweighed revenue from mined coins. But as more people have begun joining the fray—mining 24/7 with specialised rigs—the block rewards have been divided among more nodes due to increased hash rate.
Since the amount of bitcoin received by miners is set to decrease in the future, there will likely be an even greater increase in hash rate and energy consumption. Mining has become so competitive that it’s no longer profitable for many people unless they are running multi-million dollar mining rigs that consume considerable amounts of electricity.
Bitcoin Mining Dependency on Banks
Since most financial blockchains process transactions 24 hours a day, seven days a week, it means that the system is always running. Even when major banks take down their servers for scheduled maintenance, bitcoin transactions continue flowing through the network almost uninterrupted.
This dependency cuts into profits from transaction fees—which don’t really factor into account at all until you’re sending millions of dollars over the blockchain—and orphaned blocks, which are valid transactions that aren’t written into the current blockchain.
The problem with this dependency is that it makes bitcoin transactions vulnerable to hacking. For example, if a hacker gains access to one of these nodes, they could issue themselves 25 bitcoins from an unverified transaction—more than $72,000 at today’s prices—in the form of a block reward. This vulnerability was exposed in 2015 when hackers stole bitcoins worth more than $65 million from the Bitfinex exchange by compromising nodes on their network.
Overall, running your own node for bitcoin mining has become nearly impossible due to its rapidly rising hash rate and competition among miners. There are still some people who run individual nodes just because they believe in the decentralised system or want to support the network, but they might not be able to generate enough revenue from mining through fees and block rewards in order to offset electricity costs.
Most Bitcoin node operators rely on third-party service providers such as Bitnodes or Bitcoin Knots that host their software and simplify management of key nodes in order to provide this essential indexing and verification functionality without having to run a full node themselves, giving them indefinite uptime and access to aggregated data about bitcoin transactions around the world.