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What Is Bitcoin Mining?
The process of cryptocurrency mining is an energy-intensive endeavor, driven by raw processing power and is tantalizingly profitable for those with the means to pursue it.
At present, Bitcoin still represents one of the best mining models due to its high prioritization of security, decentralized nature, large market cap, and hard asset qualities.
Cryptocurrency mining is a computational process in which computers compete to solve complex algorithms and in return, are rewarded with cryptocurrency. In Bitcoin’s case, each block is added to the blockchain every 10 minutes, and miners first need to confirm, verify and store the transaction data within that block before it can get added to the blockchain.
The participants who successfully add a block to the blockchain are rewarded with a predetermined number of Bitcoin.
Due to Bitcoin’s hard cap of 21 million Bitcoin, no more than 21 million Bitcoin can ever exist and thus initiates a digital scarcity. Every four years, an event known as the halving takes place which cuts the miner block rewards in half. This inflation cut is an essential part of the stock-to-flow aspect of Bitcoin, which compares the relatively newly minted supply to the usability and production costs of mining.
Many rely on the stock-to-flow model as an integral property in determining Bitcoin’s future valuation as this concept is widely accepted and utilized through other commodities such as precious metals. In addition, this preset inflation decrease will continue until the block reward eventually reaches 0, approximately in the year 2140.
A predictable inflation rate limits the new supply of Bitcoin added to the market, incentivizing individuals to store it as a form of wealth. And to ensure flexibility, a difficulty adjustment system prebuilt into the blockchain ensures that whether there is an abundance of miners or a shortage, blocks will continue to be added at an average of 10 minutes to prevent stagnation.
Is Bitcoin Mining Legal?
While Bitcoin mining is a legal endeavor in most countries with Russia being the main exception, it is still a relatively difficult operation to pursue. Bitcoin mining requires highly specialized computers often utilizing ASIC chips whose sole purpose is to mine cryptocurrency with efficiency and exuberance. In addition to the upfront purchasing fees, electricity bills, storage room, and cooling units are added expenses that could make it very difficult for new and inexperienced miners to approach profitability.
Is Bitcoin Mining Worth It?
The early days of mining Bitcoin from home on your PC are over as it has turned into a highly specialized task and one where those who can’t keep up are ruthlessly wiped out.
Bitcoin mining and its deterministic nature on how supply increases occur is an intrinsic factor in determining Bitcoin’s success. By assuming a predetermined stock-to-flow model that is extremely scarce, the inflation rate sits near gold and will drop lower at the next halving in 2024. For this reason, many speculate that due to the fact Bitcoin shares many of the same qualities as gold in addition to increased transportability, decentralization, and divisibility, it can be used in the long term as a hedge against inflation and as a storage of wealth.
Many who aim to protect their wealth are likely incentivized to store it in deflationary assets during periods of uncertainty and chaos, which is why you see investors flock to gold during times of crisis.
The Future Of Bitcoin Mining
However, the question on everyone’s mind is if Bitcoin can fulfill its use case as an alternative hard asset or crumble in the face of adversity. Legendary hedge fund manager Paul Tudor Jones has already started to break the notion that Bitcoin is “fools’ money” and has publicly announced he has positioned a portion of his portfolio into Bitcoin as a hedge against inflation. Other institutions have already started to follow suit, and they will likely make holders of Bitcoin as well as miners immensely profitable in the years to come.
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