Any investor will tell you it has not been a good year for cryptocurrency.
After hitting a record high of almost $68,000 (£57,000) in November 2021, bitcoin has lost over two-thirds of that value, and other major coins have not fared any better.
Crypto is in a long-term bear market, and many investors have fled in search of safer investments.
However, there are plenty of experts who still believe one bitcoin could recover to one day be worth hundreds of thousands of dollars.
Here’s what you need to know about it.
How does bitcoin mining work?
Bitcoin mining is the process of verifying bitcoin transactions and recording them in the public blockchain ledger.
The blockchain ledger is essentially a digital recording of all transactions, made in chronological order.
Transactions made in real money are verified by banks and other regulatory bodies, but there are no such bodies for cryptocurrency.
Instead, verifications are made by users, by running complex mathematical equations through high-powered computers. Once they solve the equation, they can add the transaction to the blockchain.
This process is important because it stops people double spending – a process by which someone spends the same bitcoin twice.
This is obviously not possible with real cash, as one you pay someone in cash for a service, they have the money and you don’t.
However with digital currency, as Investopedia explains, “there is a risk that the holder could make a copy of the digital token and send it to a merchant or another party while retaining the original”.
Mining is also the only way to add new cryptocurrency into circulation.
Investopedia explains: “Aside from the coins minted via the genesis block (the very first block), every single one of those bitcoins came into being because of miners. In the absence of miners, bitcoin as a network would still exist and be usable, but there would never be any additional bitcoin.
“However, because the rate of bitcoin mined is reduced over time, the final bitcoin won’t be circulated until around the year 2140. This does not mean that transactions will cease to be verified. Miners will continue to verify transactions and will be paid fees for doing so in order to keep the integrity of bitcoin’s network.”
Miners who verify a transaction are rewarded in bitcoin, meaning they can earn bitcoin and make money from it without actually purchasing it. Miners are all constantly racing against each other to verify each transaction and earn the bitcoin reward.
As of July 2022, a miner receives a reward of 6.25 bitcoins for every transaction added to the blockchain. That’s the equivalent of around £143,000 at today’s price.
Is bitcoin mining legal?
Bitcoin mining is legal in most countries, including the UK. However, in the UK you will have to pay a customs fee when importing the miner and cover any government-related fees associated with setting up such a business in your location.
It is illegal in some countries, including China, Algeria, Egypt, Morocco, Bolivia, Ecuador, Nepal, Pakistan, Bangladesh, Dominican Republic, North Macedonia, Qatar, and Vietnam.
How bad is it for the environment?
Bitcoin is very difficult to mine. You need expensive hardware, large amounts of electricity, and specific software. Even highly-powered regular computers don’t stand a chance of being able to mine bitcoin.
The hardware required is called application-specific integrated circuits, or ASICs. These can consume as much electricity as 500,000 PlayStations, which explains why the profit margins for mining bitcoin aren’t quite as wide as you might initially think. To combat this, many miners team up to create pools sharing the electricity load as well as the profits.
The other consequence of this huge electricity usage, of course, is that it is very bad for the environment.
Around 70 per cent of the world’s bitcoin mining is carried out in China, according to data from the University of Cambridge’s Centre for Alternative Finance.
Miners tend to use renewable hydropower energy during the summer rainy season, but fossil fuels for the rest of the year.
This leads to bitcoin having a carbon footprint the size of one of China’s 10 largest cities, a fact that has long been one of the biggest concerns about its viability as a currency of the future.