From Hash Rate to Renewables: How Does Crypto Mining Work in 2022?

What is Crypto Mining?

Crypto mining is the process of adding blocks to a blockchain. Whichever miner creates the next block receives newly minted cryptocurrency as a reward. This is called a block reward.

A crypto miner has two jobs. The first of which is to get the answer to a difficult math problem. The second is to construct a block that consists of the transactions that took place during since the previous block. Whoever solves the math problem first gets to construct the block. The process is called proof of work because getting the answer requires work, and it’s a reference to showing your work when doing math.

When a miner solves a particular problem, they get to produce a block with a set of valid transactions. The aforementioned block reward is then the cryptocurrency given to the miner in the asset that is part of the blockchain being mined (BTC for Bitcoin, DOGE for Dogecoin). Once a block has been mined, other miners on the network must validate that the transactions within that block are genuinely valid and they then proceed to try and solve the next math problem to produce the next block. This loop continues indefinitely.

What is Hash Rate?

Hash rate is the total computational power being used to mine and process transactions on blockchains that use proof of work such as Bitcoin. The higher the hash rate, the higher the competition for block rewards, but the more secure the network. This is because the more network participants there are, the harder it is for a malicious actor to affect the network.

Therefore you want a high hash rate because it makes it more difficult to perform a 51% attack on the network (the attackers would need an even higher hash rate). Ostensibly, the higher the hash rate, the more secure the network is.

Source: Statista

Mining Difficulty?

As more miners join the network the math problem being solved has to scale. The faster the problems are solved, the harder the problems become. The network will adjust the problems so that they become easier to solve if they are taking too long. Essentially, proof of work networks always try to balance the difficulty of the problem around a set time duration.

For Bitcoin, a block should be produced every 10 minutes, Dogecoin’s blocks are about every minute, and for Ethereum it’s approximately 20 seconds.

What You Need for Crypto Mining

In order to start mining cryptocurrencies, you will need 3 main pieces. This includes mining equipment, a source of electricity, and a reliable internet connection. While learning how to mine Litecoin, Dogecoin, and Bitcoin are also necessary, you will need these 3 things to get started:

Mining rig equipment

A crypto miner needs a Graphic Processing Unit (GPU) or Application-Specific Integrated Circuits (ASIC) mining rig. GPUs need to have a fast hash rate and be energy efficient for optimal use. ASICs are special equipment and devices made specifically for effectively mining crypto. The prices of both of these types of hardware start at a few hundred USD and can easily run into thousands of dollars. That’s why Bitcoin mining is usually left to corporations these days.

Electricity

Cryptocurrency mining necessitates a cheap and reliable source of electricity to power the mining rigs. Countries that offer cheap electricity are attractive for crypto miners. Crypto miners seek the cheapest energy possible to keep their expenses low. The cheaper the electricity, the better their profit margins.

Internet connection

Miners must be connected to the Internet for the entire mining process. Interruptions in the miner’s Internet connection can lead to setbacks during the mining process and cost them their rewards.

What Makes for a Good Mining Place/Hotspot?

There are two main factors that contribute to a place being a mining hotspot: the cost of electricity and regulation. The cost of electricity is somewhat obvious, as any place with cheap electricity can attract crypto miners assuming a stable internet connection is not a potential issue.

So, while electricity is cheap in some underdeveloped regions, the internet isn’t necessarily reliable, so miners must find a balance between the two.

Source: Investment Monitor

Regulation is important, whether current regulations or potential regulatory changes in the future. Regulatory changes are the main reason why crypto miners have had to move around at all. China once had about 75% of the global hash rate for Bitcoin mining, but once mining was banned all the miners in China had to find new locations. Operations moved to the US, Canada, and Malaysia among others. When miners are looking for a place to set up their operations, they will want to be fairly sure that regulatory changes won’t require them to move again. Therefore, crypto-friendly states with cheap sources of electricity are the ideal place for mining operations to work from.

Map of Bitcoin Mining Hotspots

Below is an image of the Bitcoin mining hotspots around the globe. On the side of the chart you can see the estimated hash rate of the top pools, most of which are located in the US.

Source: The Chain Bulletin

Top Mining Hotspots

During the infancy of cryptocurrency mining, you could mine BTC, LTC, Doge, and more on your laptop or desktop computer. The days of profitably mining in this manner are long gone. Now you either have to join a mining pool or move to a place with cheap electricity and favorable regulations.

As you can see in the chart above, crypto mining hotspots can be seen all over the world, with some mining pools having locations in multiple countries. Foundry USA, located in Ohio, has the highest of the worldwide hash rates, which is particularly impressive because it is the only server location. Other top pools such have servers around the globe. Regardless, mining hotspots are popping up all over the USA, with more appearing in countries with cheap electricity such as the Netherlands.

Why Bitcoin’s Energy Consumption is Increasing Over Time

This is actually fairly simple. Over time, Bitcoin has become more and more valuable. As a result, more and more miners join the network in an effort to profit from mining. The effect of this is two-fold. The more miners that are competing to solve the math problem, the more difficult it becomes. This is because the problem can be solved faster if more computers are working on it at the same time. So, the difficulty is adjusted by the network to keep blocks at their appropriate time duration as mentioned in the section on mining difficulty. The simple fact that more computers are competing means more energy is being used.

Next, the incentive to attempt to mine Bitcoin or other crypto assets causes some miners to join the network even with less-efficient mining rigs or less than ideal electrical costs. Inefficient mining rigs are not only a draw on energy due to the nature of them being inefficient, but also in the sense that these rigs are unlikely to solve the math problem before others. This means they are essentially consuming energy for no reason. Ideally, these inefficient mining rigs get shut down by the miner as they find them to be unprofitable, but this isn’t guaranteed.

While some may believe that increasing energy consumption isn’t a good thing, it is necessary. If Bitcoin, or any other proof of work network were to suddenly drop down in hash rate at this point, the security of the network would be seriously at risk. Rising energy consumption is simply a sign of crypto adoption.

Source: Investment Monitor

Renewable Energy in Crypto Mining

It doesn’t get publicized often but the majority of energy used by crypto mining operations is renewable. Before the ban in China more than two-thirds of the energy being used to mine crypto was renewable hydro power. The reality is that crypto miners will use whatever energy is cheapest. So, if renewable energy sources are able to reduce electrical costs for miners, they will flock to them. As is, they already use a lot of renewable energy and are helping drive forward the conversation of renewable energy.

Most people don’t even realize that excess electricity produced in their area is ostensibly thrown away if unused. Bitcoin miners are buyers for this energy, helping reduce waste in addition to helping both their and the electrical producer’s bottom line. As seen in the article linked above, if not for Bitcoin mining the Costa Rican renewable energy producer would have had to shut down because there were no buyers for the energy he was generating.

Conclusion: Bitcoin is a Case for Renewable Energy

The figure that critics of Bitcoin like to point to is its energy consumption, which rivals small nations.

While it is certainly true that Bitcoin uses a lot of energy, it is necessary to secure the network. If Bitcoin becomes a world reserve currency as many hope, you’d likely accept the trade-off of energy usage for protecting the world’s wealth reserve.

The conversation around crypto mining and energy consumption, while framed negatively, is helping push forward the adoption of both crypto and renewable energy.