Bitcoin Mining: Process and Implications

This assignment delves into the multifaceted world of Bitcoin mining. It examines the technical aspects of mining, including hardware requirements and the mining process itself. The analysis extends to the economic viability of mining, discussing profitability factors and the potential for return on investment. Furthermore, the assignment explores the environmental consequences of mining and its impact on energy consumption. Finally, it considers the broader implications of Bitcoin mining within the cryptocurrency landscape.

CRYPTOCURRENCIES –
STRATEGIC MANAGEMENT

Table of Contents
Introduction.......................................................................................................................3
Cryptocurrency..........................................................................................................................3
Bitcoin.......................................................................................................................................3
Satoshi Nakamoto’s paper on Bitcoin.................................................................................4
Resources and capabilities required to mine cryptocurrencies...........................................5
The cost and viability of mining cryptocurrencies...............................................................6
The threat of cryptocurrencies to hard currency banks.......................................................7
The criminal usage of cryptocurrencies..............................................................................7
Interest of the Chinese government in cryptocurrencies....................................................8
References.........................................................................................................................9

Introduction
Cryptocurrency
The globalisation of the business world has been bringing a tremendous change in the market
in terms of technology. Cryptocurrency is one such technological innovation that is paving
the way for online transactions. Cryptocurrencies have become a global phenomenon and a
lot of people are making heavy investment in mining and purchasing different types of
cryptocurrencies (Blockgeeks, n.d.).
A cryptocurrency is a digital asset that can be bought, sold and traded through online sources.
Cryptocurrencies are now being used for online transactions as many business organisations
have started accepting cryptocurrencies as a mode of online payment. In simple words,
cryptocurrency is defined as a form of digital money that is anonymous in most of the cases
and is designed to be secure (McGoogan & Field, 2017). There have been a number of
cryptocurrencies that have become famous with the passage of time. Some of them are
bitcoin, litecoin, ethereum, Zcash, Dash, Monero, etc. (Bajpai, 2017)
Bitcoin
Bitcoin is one of the most famous cryptocurrencies throughout the world and is paving the
way for the future of digital payment system. Bitcoin has also been called the first ever
decentralised digital currency as it works without the requirement of a central repository or a
single administrator. Bitcoin was developed by Satoshi Nakamoto and was released as an
open source software in 2009. Bitcoin acts as a peer-to-peer system as the transactions
between two users takes place without an intermediator. All the transactions occurring in
terms of bitcoins are verified by network nodes and are recorded in a blockchain, which is a
public distributed ledger.
The table given below shows the present value of 1 bitcoin in terms of USD and how this
value has been fluctuating since 2013.

The following graph shows the rise and fall in the values of some famous cryptocurrencies:
A table showing the prices of different cryptocurrencies, as of 2017, is given below:
Bitcoin (Price in
USD)
Ripple (Price in
USD)
Ethereum (Price in
USD)
June, 2017 2,420.7 0.24390 387.87
July, 2017 2,856.0 0.16300 156.03
August, 2017 4,718.2 0.25880 279.86
September, 2017 4,367.0 0.19903 254.32

October, 2017 5,639.8 0.27563 328.87
Satoshi Nakamoto’s paper on Bitcoin
The paper prepared by Satoshi Nakamoto provides an opportunity to understand the overall
working of bitcoin as a peer-to-peer electronic cash system. He talks about the need of a
system that would have allowed two parties to directly carry out transactions with each other,
without the need of a trusted their party to authenticate the transaction, which helped in the
invention of bitcoins. In his paper on bitcoin, he has discussed the working of a bitcoin
transaction and how it helped in achieving the desired goals.
To achieve his goals, Satoshi designed a system that could make transactions possible
without relying on trust, while the only problem in the system was the fear of double
spending. To deal with double spending, they designed a network that worked as a peer-to-
peer network while all the transactions were recorded in a public history. The transaction
quickly becomes computationally impractical for a hacker to solve if all the honest nodes
control a majority of CPU power. The system of nodes and bitcoin transactions was designed
in such a way that it would become difficult for hackers to steal payments. Further, the design
made it possible that the hackers are able to earn a profit only if they play by the rules and not
by undermining the systems or stealing from others. Further, the system of bitcoin
transactions designed in such a way that the probability of a hacker succeeding in his vicious
motives drops down exponentially with the addition of each honest node in the bitcoin
network. Therefore, bitcoin was designed as a system that would allow to build trust during
transactions between two parties without having to depend on a trusted third party for
authenticating the transaction.
Resources and capabilities required to mine
cryptocurrencies
Bitcoin mining is a process that is used to extract value from bitcoins. The people who mine
bitcoins are the backbone of the entire bitcoin network as they are the ones who secure the
network and assist in processing bitcoin transactions. Bitcoin miners achieve this by using a
set of complex hardware, which allows them to solve computational problems and chain
together blocks of transactions (Tuwiner, 2017).

Bitcoin mining is a process where the miners compete with all the other miners involved in
the network, while their competitiveness is based on the hardware capabilities of their
computer systems. The hardware requirements for a mining bitcoins can largely vary for
small home users and large factory users.
First of all, large factory users as well as small home users require a hi-tech computer system
with some top notch hardware to assemble a mining rig. Three of the most important
hardware required to build a mining rig are a graphic card, a power supply and a mother
board while the rest of the hardware includes a CPU, RAM, Hard Drive and a computer case
(Cryptosource, n.d.).
The different between small home usage and large factory requirements are experienced once
a mining rig is installed. For a large factory, where there are multiple rigs, it is important to
monitor the electricity costs whereas for small home users, electricity cost is not that big a
deal. Hence, large factories are more likely to use alternate sources of energy, such as
hydropower or geothermal power. Further, large factories also have to bear additional cost in
acquiring racks for multiple machines and connectors, which are required to tether all the
machines together. Further, factories also have to employ additional staff members to take
care of maintain of all their machines because the rigs can get very hot while mining and can
malfunction (Redman, 2017).
The cost and viability of mining cryptocurrencies
A lot of people argue that mining cryptocurrencies is not cost effective as it requires heavy
investment and operational cost while the return on investment is not generally that high. On
an average, building a mining rig or even purchasing a branded mining rig can involve an
investment of US $2000, which is just the beginning. In order to increase the chances of
success, cryptocurrency miners have to use highly powerful machines, which can involve
even more cost.
In technical terms, the mining power of a mining rig is measured in terms of hash rate, which
is also defines as the rate at which a PC can solve a problem. More are the miners in the
cryptocurrency network, higher is the complexity and higher is the hash rate required. Thus,

miners have to continuously upgrade their hardware to increase the hash rate of their
machines. In a recent research conducted by Tomaso Aste, a professor of complexity
sciences, it was discovered that the cost of completing a block in the blockchain is around
$10,000, which is far less than the amount earned for discovering a block (Higgins, 2016).
Cryptocurrency mining was immensely profitable in its early days but the growth of miners
in the bitcoin network have scaled up the complexity and at present, only those miners that
have large setups and super powerful PCs, can actually extract cryptocurrencies. On the other
hand, for the miners with limited power resources and small setups, the expenses on
electricity are much more than what they can earn from cryptocurrency mining (Tuwiner,
2017). Furthermore, with the completion of every block and with every new miner in the
network, the cost of cryptocurrency mining will increase because of the increase in
complexity. Therefore, the viability of mining bitcoins is largely dependent on the cost of
electricity consumed in the mining process.
The threat of cryptocurrencies to hard currency banks
A number of people who have invested heavily in cryptocurrencies are of the view that
cryptocurrencies are the future of currency and will outdate hard currencies sooner or later.
People are eagerly waiting for cryptocurrencies to be accepted by governments throughout
the world but it will not come easy.
For the entire globe to accept cryptocurrencies as a legal currency or a centralised system, a
cryptocurrency would need to be a potential reserve currency. For any cryptocurrency to pose
a real threat to the hard currency banks or the US Dollar, it would first have to be held by the
central banks of all countries so that it can be used by them to pay off their international
debts. Furthermore, it will also be important that certain assets and commodities, like crude
oil, are priced in a particular cryptocurrency (Mannarino, 2017)
. For a cryptocurrency to become a reserve currency, it would require a large scale revolution
that will have an impact on the entire globe, which seems to be impossible as of now.
Further, the use of cryptocurrencies by cyber criminals and hackers is also alarming the
policy makers and cyber security experts. Cryptocurrencies are being used to accept ransoms
and to carry out illegal online activities because payments made through cryptocurrencies do

not leave a trail behind them and are more like black money. Therefore, a lot of countries are
not in the favour of using cryptocurrencies and are opposing its use as a reserved currency.
Thus, the threat of cryptocurrencies to hard bank currencies is not that severe for the time
being.
The criminal usage of cryptocurrencies
The rate at which cryptocurrencies are grabbing attention in the global market is creating an
alarming situation for cybersecurity organisations. Virtual money can be stolen by hackers
and thieves, which they can use to fund criminal businesses or other illegal activities. A
number of reports also suggest that even though stealing cryptocurrencies can be easy for the
criminals, but spending them is hard.
One of the biggest advantage of using cryptocurrencies is that they allow users to carry out
anonymous transactions and as there are millions of transactions taking place every day, it
becomes difficult to identify the users most of the time. There is an opportunity for hackers
and criminals to steal cryptocurrency and even demand a ransom in term of cryptocurrencies.
For example, a group of hackers was able to hack into the HBO network and systems and
started leaking their classified information online. In order to stop the menace, they asked for
a ransom in the form of bitcoins (FP Staff, 2017).
In the recent times, some hackers have also been able to alter the destination addresses of
several transactions, which resulted into the cryptocurrencies being mysteriously
disappearing and getting deposited into mystery wallets being controlled by them (Reiff,
2017). Even though it is difficult for certain organisations to steal cryptocurrencies as it
required a lot of technical capabilities, the threat of criminal activities resulting due to
cryptocurrency theft is real and increasing.
Interest of the Chinese government in cryptocurrencies
China is one country where the trading \and usage of cryptocurrencies was booming like
anything. Some people are also of the view that China and Japan are largely the reasons
behind the worldwide success of cryptocurrencies.

Cryptocurrencies gained popularity in China because of the stringent control of the yuan that
the Chinese government exercised. The government frequently devaluates its currency for
trading purposes. As the private wealth in China grew, individuals found it a better
proposition to invest their money in cryptocurrencies as they are more stable and would not
receive fluctuations as does their paper currency. Further, China offers cheap electricity and
hardware, which is actually an obvious competitive edge in the cryptocurrency mining
process (Ward, 2017). In China, majority of the citizens do not have access to banking
services, which motivates the use of cryptocurrencies even more. The government of China
finds cryptocurrency as an efficiency proposition because the transactions can be traced and
can be used to fight corruption in the country (Reiff, 2017). The interest of the Chinese
government and people is creating an alarming situation throughout the world. If sources are
to be believed, then the Wall Street is taking steps to implement usage of cryptocurrency
systems by next year. On the other hand, a town is Switzerland has already begun to accept
payments in terms of bitcoins.

References
Blockgeeks, n.d. What is Cryptocurrency: Everything You Need To Know [Ultimate Guide].
[Online] Available at: https://blockgeeks.com/guides/what-is-cryptocurrency/
[Accessed 4 October 2017].
McGoogan, C. & Field, M., 2017. What is cryptocurrency, how does it work and why do we
use it?. [Online] Available at: http://www.telegraph.co.uk/technology/0/cryptocurrency/
[Accessed 4 October 2017].
Bajpai, P., 2017. The 6 Most Important Cryptocurrencies Other Than Bitcoin. [Online]
Available at: http://www.investopedia.com/tech/6-most-important-cryptocurrencies-other-
bitcoin/[Accessed 4 October 2017].
Tuwiner, J., 2017. What is Bitcoin Mining?. [Online] Available at:
https://www.buybitcoinworldwide.com/mining/[Accessed 4 October 2017].
Cryptosource, n.d. Part 1: Hardware Requirements. [Online] Available at:
http://cryptosource.org/mining/hardware-requirements/[Accessed 4 October 2017].
Redman, J., 2017. Things to consider when starting a bitcoin mining operation. [Online]
Available at: https://news.bitcoin.com/things-consider-starting-bitcoin-mining-operation/
[Accessed 4 October 2017].
Higgins, S., 2016. At $400 Million a Year, Academic Argues Bitcoin Mining Worth the Cost.
[Online] Available at: https://www.coindesk.com/400-million-year-researcher-argues-
bitcoin-mining-worth-cost/[Accessed 4 October 2017].
Tuwiner, J., 2017. Is Bitcoin Mining Profitable or Worth it in 2017?. [Online]
Available at: https://www.buybitcoinworldwide.com/mining/profitability/
[Accessed 4 October 2017].

Mannarino, G., 2017. Are Cryptocurrencies Really a Threat To The US Dollar?. [Online]
Available at: https://steemit.com/bitcoin/@marketreport/are-cryptocurrencies-really-a-threat-
to-the-us-dollar-by-gregory-mannarino[Accessed 4 October 2017].
FP Staff, 2017. HBO hack: Studio won't bow down to ransom demand or engage with
hackers. [Online] Available at: http://www.firstpost.com/entertainment/hbo-hack-studio-
wont-bow-down-to-ransom-demand-or-engage-with-hackers-3933591.html[Accessed 4
October 2017].
Reiff, N., 2017. Criminals Are Too Stupid to Use Cryptocurrency: EU Report. [Online]
Available at: http://www.investopedia.com/news/criminals-are-too-stupid-use-
cryptocurrency-eu-report/[Accessed 4 October 2017].
Ward, T., 2017. China and Japan are largely responsible for cryptocurrency's success.
[Online] Available at: http://www.businessinsider.com/cryptocurrency-china-japan-bitcoin-
ethereum-2017-7?IR=T[Accessed 4 October 2017].
Reiff, N., 2017. Chinese Government is Developing its Own Cryptocurrency. [Online]
Available at: http://www.investopedia.com/news/chinese-government-developing-its-own-
cryptocurrency/[Accessed 4 October 2017].