Bitcoin’s advocates claim that it is immune from government control. ”It can’t be shut down,” they say. This might have been true in the early days, when Bitcoin could be mined on an ordinary laptop. But in these days of giant mining farms, Bitcoin desperately needs abundant cheap electricity supplies. Without access to abundant electricity, Bitcoin mining can’t continue, and without mining, Bitcoin is dead. And ultimately, electricity supply is controlled by governments.
Bitcoin’s desperate need for electricity arises from its Proof of Work (POW) protocol. POW is often described as “complicated puzzles” that Bitcoin miners must solve in order to earn the right to verify a block of transactions and claim the mining reward of (currently) 12.5 new bitcoins plus transaction fees. In this article, for example, the author explains POW thus: “These computations for finding the blocks are basically mathematical puzzles that a miner cannot just guess without a lot of computation.”
This gives the impression that hard-working miners with advanced computer equipment will win out. This is true. But it is not because the “puzzles” require analytical power. The reality is much more mundane.
What POW does is generate a hash (a sequence of digits). Miners have to find out what the sequence is. But it’s very misleading to describe this as a “puzzle” that can be “solved”. There are no clues, no logic. There is only a hash. So guessing is all that miners can do. The more guesses per second miners can come up with, the better their chance of guessing the right sequence before another miner does. It’s rather like a lottery. The more tickets you buy, the better your chances of winning. That’s all. No analytical ability is needed. No problem-solving ability. Just a very, very fast computer – and access to unlimited electricity.
The famous “difficulty adjustment,” which forces miners to work harder for their rewards when the Bitcoin price rises, simply makes the hashes longer and therefore harder to guess. There is absolutely no intelligence involved. No-one has to apply their brains. The “complicated puzzles” are a myth.
The number of guesses per second needed to mine a block is known as the “hashrate,” and it rises in line with the difficulty. To maintain hashrate as the difficulty rises, miners need faster computing equipment. So a rising Bitcoin price creates an “arms race” among miners. They must constantly upgrade to more advanced equipment or lose out to other miners.
Unsurprisingly, the computer hardware industry has responded to the demand for ever faster processing. Gone are the days when anyone could mine Bitcoin on an ordinary laptop. These days, you need a specialist mining rig with a dedicated processor known as an Application-Specific Integrated Circuit (ASIC). These things don’t come cheap.
As with all hardware-intensive enterprises, those with the most bucks inevitably have the advantage. So miners have grouped together into “pools”, sharing resources and benefiting from economies of scale, which helps them to gain market share. Bitcoin mining is now dominated by three big pools, which together account for 55% of total hashpower.
About 80% Bitcoin mining is currently done in China. But it is growing in other places too: Iceland, Japan, Georgia, the Czech Republic, India, parts of the United States, Venezuela. Anywhere with cheap and abundant electricity, in fact. This is because, despite the hardware “arms race,” by far the biggest cost for Bitcoin miners is electricity.