7 Major Limitations of Mining Bitcoin

Data & Research / 25.05.2021

Since its introduction in 2009 by Satoshi Nakamoto, Bitcoin has realized widespread adoption with substantial value growth. Bitcoin is currently the most prominent cryptocurrency in market capitalization with over 100 billion dollars. Its’ value has soared enormously since the launch despite several bearish runs that saw it lose value. Bitcoin relies on a highly replicated public ledger as a decentralized currency, secured utilizing a hash and validated via community consensus. On the Bitcoin network, a transaction is considered valid and included in the block (ledger) only if most network nodes verify it. 

The Bitcoin network leverages proof of work (PoW) to determine the majority consensus. In PoW consensus, the Bitcoin nodes perform numerous hashing by modifying a random component of the block content. However, this is until, by chance, someone finds a “valid” hash that is smaller than a given target to determine majority consensus.  

Finding a “valid” hash by modifying a random component on the block is called Bitcoin mining. The network incentivizes users to participate in the block validation process by assigning newly mined Bitcoins to the first user who randomly finds a hash with a value smaller than the threshold. Currently, there are over 18 million mined Bitcoin out of a possible 21 million. Following the recent halving, it reduced the block rewards to 6.25 Bitcoins per mined block. 

Bitcoin mining is quite costly, coming with several limitations requiring much computing power, time, and energy from the miners to solve the computational problems. The reason behind this is to identify the block of transactions. Below, we explore the limitations of mining Bitcoin. 

Overview of Bitcoin Mining 

As described above, Bitcoin mining involves adding blocks to the blockchain by solving complex mathematical problems. Bitcoin mining required enormous computational and electric power, and it’s incredibly competitive. Miners compete to validate transactions by approving and adding blocks to the blockchain. The network rewards the first miner who randomly finds a hash with a value smaller than the threshold and adds the block to the blockchain.

Currently, miners are rewarded 6.25 BTC for every successfully mined block. The Bitcoin network allows a block to be mined after every 10 minutes. To maintain this 10-minute pace, the difficulty of the mathematical problem adjusts automatically. When more miners and more computing power are attempting to mine, the level of mining difficulty increases. When there are fewer miners and less computing power, the level of difficulty will decrease. 

Following the growth of the Bitcoin network and an increase in the number of miners, the difficulty level of Bitcoin mining got intense. To maximize mining profits, Bitcoin miners seek low-cost electricity and permissive environments. Besides, most miners accumulate their computing powers by joining mining pools and farms to keep up with increased mining competition. A mining pool and farm facilitate mining on a bigger scale and enhanced mining profitability due to members’ joint resources and computing power. 

Evolution of Bitcoin Mining 

Bitcoin mining could be done on a personal computer without any specialized hardware requirements in Bitcoin’s early days. However, as its popularity increased with increased value, so did the mining competition and difficulty increase. 

To support the growing mining difficulty, more computer processing power was required. Miners started using processing-intensive computers to mine Bitcoin. But Bitcoins still increased in popularity and value, increasing the mining difficulty and computing power.

Eventually, specialized mining equipment, i.e., FPGA and ASIC, were created for the sole purpose of mining Bitcoin. Today, Bitcoin mining is done on potent, specialized computer hardware with strong computing abilities plus energy efficiency. Despite being energy-efficient, a Bitcoin mining rig requires an enormous amount of power. As such, keeping power consumption low is necessary to make Bitcoin mining profitable and sustainable. 

Evolution of Block Reward 

Block reward refers to the number of Bitcoin rewarded for each block that is solved and added to the blockchain. The block reward is reduced by half for every 2 016 blocks mined or approximately every four years. It is called the Bitcoin halving.

The most recent Bitcoin halving happened in May 2020, where Bitcoin rewards were reduced by half to 6.25 BTC. Below are the historical block rewards dating back to 2012. 

  • 2012: 25.00 BTC 
  • 2016: 12.50 BTC 
  • 2020: 6.25 BTC 

The next Bitcoin halving will happen in 2024, where the block rewards will reduce to 3.125 BTC. The Bitcoin halving will continue until the last block and coins are mined. With each Bitcoin block being mined in 10 minutes, the last coin is mined in 2140. 

 

Limitations of Bitcoin Mining 

  • Environmental Degradation 

Bitcoin mining is a highly energy-intensive process, with some mining rigs depending on dirty energy sources, such as coal. The University of Cambridge estimated that Bitcoin mining consumes more than 120 Terawatt Hours (Twh) per year. However, this means that Bitcoin mining uses more electricity annually than countries such as Malaysia, Argentina, or Sweden. The report also established that Bitcoin mining could rank in the top 30 energy consumers globally if it would be a country.

A recent report by CoinShares estimates that approximately 77.6% of crypto-mining facilities are consuming electricity derived from renewable resources. The other 22.4% are obtained from fossil and nuclear products. What’s more, large-scale Bitcoin mining companies are located in China- a country that falls among the world’s largest producers and consumers of coal energy.  By consuming a significant amount of unclean energy, Bitcoin mining produces 3-15 million tons of global carbon emissions, extensively damaging the environment.   

The growing energy consumption and associated carbon emission of Bitcoin mining have significantly undermined global environmental conservation efforts. By 2024, it’s projected that Bitcoin mining would be producing 130.50 million metric tons of carbon emission annually-more than the annual greenhouse gas emission output of Qatar and the Czech Republic.   

  • High Cost of Mining 

The cost of Bitcoin mining is dependent on three key elements: the energy mining cost, the cost of purchasing and renewing the mining hardware, and the overheads for farm maintenance. Although, this includes the infrastructure costs as well as the cooling facilities. The electricity cost of mining a single Bitcoin falls between $12 000 to $15 000, which is really expensive. However, this is without factoring in the cost of computing hardware such as the ASIC mining rigs. They can cost over $1 500 per computer and become obsolete with time, thanks to the rapid rate of evolution in the industry. To achieve faster hash rates and higher energy efficiency, you’ll need newer mining hardware which is also pretty expensive. 

To profit from Bitcoin mining, miners need more powerful computer hardware, faster internet connection, and cheaper supporting services such as electricity. Without doing such, Bitcoin mining may never be profitable. 

  • Geographical Impacts 

To maximize profits, Bitcoin miners often target regions with low-cost electricity and permissive policy environments. Bitcoin mining is immensely geographically bound, with miners considering regions with a combination of cheap energy and a permissive policy environment. For instance, China’s low energy cost makes it a fertile ground for enormous Bitcoin mining companies. 

Several regions in China, including Sichuan, Yunnan, Xinjiang, and Inner Mongolia, offer cheap energy owing to the high surplus. They are beautiful to Bitcoin mining companies looking to keep the cost of energy low. The country hosts Bitcoin mining companies that account for approximately 85% of Bitcoin trading transactions. Evidently, this is the reason why China has been a dominant force in the crypto space, accounting for approximately 85% of the world’s Bitcoin trading transactions.    

The high concentration of Bitcoin mining companies creates enormous environmental hazards, impacting the local communities without benefiting them. While Bitcoin mining companies often claim that the established facilities will attract development and bring other opportunities to benefit the community, this is not usually the case. Bitcoin mining is a principally automated process and therefore offers few long-term benefits for the communities they’re based.

In essence, other than covering the cost of energy used, Bitcoin miners contribute little to the communities they operate in despite achieving high economic benefits.   

  • Unstable bitcoin Prices 

The profitability of Bitcoin mining is dependent on the coin’s market value in concurrence with the energy cost. If Bitcoin’s market value drops below its mining costs, then it becomes unprofitable to mine it. 

Currently, the Bitcoin block reward is 6.25 coins, and you’ll want those coins to be worth as high as possible. For instance, if you receive 6.25 coins and the price of Bitcoin is $20 000, your mining operation will likely be unprofitable. However, if Bitcoin’s price is $50 000, you’ll be certain of sufficient returns even to cover the operation cost. 

However, Bitcoin is highly volatile, meaning that miners aren’t always guaranteed profits. The fact that the value of bitcoins can fluctuate means that miners may sometimes have to bear heavy losses. 

  • Bitcoin Mining Pools 

Bitcoin mining has been made more challenging and competitive with the emergence of large mining pools such as Slush Pool and Pooling. A Bitcoin mining pool is a joint group of Bitcoin miners who combine their individual computational resources to enhance their computer processing power and consequently enhance mining Bitcoin.  

Mining pools harm the Bitcoin network. To begin with, mining pools highly centralize Bitcoin operations and mining, making the network susceptible to 51% Attacks. The top four mining pools together control more than 51% of all mining power on the Bitcoin network. Clearly, this means that individual miners are highly unlikely to mine Bitcoin, thanks to intense competition.  As such, Bitcoin mining pools centralize the network to manipulate the market price to their own benefit. 

In summary, while Bitcoin mining pools offer several advantages, including faster block processing, they centralize the network providing unfair competition to individual miners and exposing the network to 51% attacks. 

  • Hefty Regulations 

Bitcoin mining is faced with hefty regulations that threaten to make it less profitable by cracking down. The legality of Bitcoin mining is highly dependent on geographical location. While some countries have allowed their citizens to use and trade bitcoin, they have banned or restricted its mining. 

Following China’s high Bitcoin mining rate attributed to cheap energy leading to the prominence of mining companies, China initiated a regulatory crackdown targeting Bitcoin mining companies. The country has consistently attempted to enact financial regulations on cryptocurrencies exerting regulatory pressure on provincial governments to encourage the closure of crypto-mines. 

The People’s Bank of China and China’s central bank have implemented several measures prohibiting domestic Bitcoin exchanges and burning ICO. China’s regulatory crackdowns have often caused a drop in Bitcoin’s value, making mining less profitable. For instance, in 2014, Bitcoin lost more than 50% of its value following China’s 2013 Bitcoin Notice release.  

  • Low Adoption 

Despite widespread popularity, Bitcoin’s mainstream adoption is still low. There are currently over 29 million Bitcoin addresses, but it’s difficult to estimate the exact number of users considering that anyone can open multiple addresses on the Bitcoin Blockchain. However, one thing is for sure; mainstream adoption is still low. Bitcoin has a long way to go for mainstream adoption hampered by slow transaction validation, high transaction cost, and mining pool centralization. 

Bitcoin’s low adoption limits mining making it less profitable. The extremely high mining cost and low adoption make it sometimes unfeasible to mine Bitcoin. What’s more, low adoption coupled with regulatory concerns significantly limits mining profitability. 

Closing Words 

While it may be quite profitable, Bitcoin mining comes with its own fair share of limitations. From the high cost of mining to enormous competition from mining pools and regulation hurdles, mining Bitcoin can be pretty challenging. Bitcoin mining profitability depends on several factors, including mining equipment, electricity, general operating costs, and the prevailing market price.

It shouldn’t overlook that Bitcoin mining has an enormous impact on the environment and political geography. It’s essential to mitigate Bitcoin mining activities’ impact on the environment and local communities by developing an environmental framework that reduces the environmental impact. In addition, Bitcoin mining will become more sustainable with minimal effects on the environment and the local communities. 

avatar
Wayne is a Blockchain enthusiast and expert in crypto trading. Currently, he covers trendy issues on digital currencies.