Why We Mine

Why We Mine

Why We Mine

As the cryptocurrency winter draws to a close and the first signs of a new spring begin to appear, we think it’s fitting to offer a retrospective. We’d like to address a topic asked of us and our clients throughout the last year and a half, “Why are you still mining cryptocurrency”? In fact, we believe the response to this question helps promote a fundamental understanding of the paradigm of cryptocurrency.

Don’t Kid Yourself, It’s Not Your Decision

It’s important to point out that a person’s initial decision to mine may not have human beginnings. We like to think of it as the network willing itself into existence. Let’s explain what we mean.

As network participation grows – i.e. as more and more people begin to acquire and transact Bitcoin (for brevity’s sake, Bitcoin will hereafter be interchangeable with any Proof of Work cryptocurrency) – the need for security grows. Said another way, as the price increases due to increased demand of additional market participants (since by definition the supply is fixed forever at ~<21 million coins) it becomes a more attractive target for those who would wish to steal them. Absent of changes or halvenings in the block reward, this makes mining cryptocurrency with the same hash rate more lucrative thereby making the prospect of mining cryptocurrency more attractive. Simply put, the number of people looking to get into mining cryptocurrency is extremely correlated with increases in price. As an example, the number of emails we get here at the Miners’ Union asking how to start mining tracks pretty closely to the price of Bitcoin. [1]

should I get into mining?
“Should I get into cryptocurrency mining?”

Since people tend to be profit-seeking animals, this opportunity brings in more hash power from people looking to mine cryptocurrency at a profit. This leads to a larger network hash rate, increased network security (much harder/more expensive to 51% attack) and trends toward an equilibrium. For blockchains with capped block size like Bitcoin, additional participants also bring in more transaction fees which also increase the attractiveness of mining for entrepreneurial individuals.

Another interesting side effect of this feedback loop is the natural tendency toward network efficiency without any centralized planning. When prices and adoption are booming, people can be a bit sloppy with how they mine. Some may mine in places with extremely high electric costs or unreliable power or internet, as the profits can still overcome these inefficiencies. A figurative spotlight is shown on less sustainable setups when prices plummet, often forcing those who cannot afford to continue to shutter their equipment and reduce the overall network hash rate. Miners will consolidate in the places with the cheapest power.

In an unrestricted free market the drive toward the cheapest power might otherwise result in an entirely centralized network in order to recognize the ultimate economies of scale. You’d expect the cheapest rate to come from running the most miners due to a sort of bulk discount. In practice, there are real world barriers to complete centralization. Governments may restrict the use of public resources (power & internet) for a cause they don’t believe in or one that they think promotes a currency not issued by them. Perhaps regions with subsidized power intended to bring in industry to a region may be restricted for use cases that bring in zero [human] jobs. What we see today is that there just isn’t enough power available in one location to power the current network, forcing miners to find excess, available, and therefore affordable power wherever on earth [2] its available.

So while you think you may be clever looking at mining profitability calculators and spotting a lucrative opportunity, that’s just the network telling you it needs some additional security. The network is asking you – its counterpart with access to a voice, arms, legs, and idle capital – to “go acquire some hardware and add it to the network”. It’s hiring you for the job. Will you answer the call?

Participation in the world’s first decentralized monetary architecture

money-money-money

While profitability is often the most compelling reason to mine cryptocurrency, it’s not the only reason. Many of us miners have mined at a loss over the last 18 months. If you agree with everything above and take it to its logical conclusion, mining rewards would trend toward being exactly breakeven (“rent-taking” in economics parlance). So if there’s no profits to be made, why bother? 

In short, it’s about participation. Mining democratizes access to those wanting to participate in what’s sure to be the financial infrastructure of tomorrow. Perhaps one day banks and financial institutions will crowdsource their computing and back-office resources to make their process more efficient, but until then the process today is almost entirely opaque. Mining cryptocurrency offers a paradigm where the network supporting the global transfer of resources is not gated by a for-profit institution. Through cryptocurrency, the ability for people transfer funds is not managed by any centralized institution, but instead exists as a ubiquitous capability available to anyone.

People often misconstrue the innovation that is cryptocurrency. It’s not [always] about anonymity [3]; in fact it makes tracing transactions easier and more efficient as it replaces the need to reach into a filing cabinet for paper records with bloom filter algorithms. It’s also not [always] about skirting the desires of governments or institutions, though that’s a bit closer to the truth. It does allow you to transfer resources that belong to you without an intermediary’s ability to say “no” [4]. It’s about removing a non-digital middleman that might otherwise be a point of failure. Perhaps most strikingly, it allows such a network to operate with no [individual] human supervision, such that the use case can march on regardless of the will of a subset of its participants.

So while short term profits may not be guaranteed, the network can’t exist without the support of its miners. Proof of work itself has inflationary tendencies baked into it. The harder or riskier the work is to do earlier in the networks’ life, the more that work will be valued in the future, just like a dollar invested early.

There’s also something to be said about earning cryptocurrency instead of buying it. It may not be rational, but there is a component of additional value you get from participating in a revolutionary process rather than buying it from someone who did, even if the profitability of mining any given day/week/month is in the red. To counter the narrative with an analogy, you could always buy a company’s stock after an IPO instead of working there and getting stock options. But if everyone did this, there would be no company IPOing and the stock would have no value.

Someone still has to mine the chain.

To distill the above into a nice tl;dr:

  • The network recruits people to mine. If you see an opportunity to mine profitability, it means the network needs additional security.
  • A coin mined often has additional, intangible value to the individual over a coin purchased.
  • Someone has to mine the chain.


[1] *Note: It actually correlates much more closely with changes, or the first mathematical derivative, in the price of Bitcoin. In other words, large jumps in price leads to increases in mining demand.

[2] … and eventually off-earth…

[3] Unless you’re a fan of Monero. SHUM!

[4] While the current powers-that-be lose the ability to prevent you from making transfers that are illegal, unethical, or otherwise unwarranted, it does not shield you from the eventual repercussions of making such a transfer

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