Is it Viable to Mine Bitcoins in India?

What are Bitcoins?

Bitcoin – A digital currency which was worth nothing in 2008 is now costing $17,772 per unit to every investor today. A mystery that remains unsolved is the name of the person/group or company that invented bitcoin in 2008. It is said that a man named Santoshi Nakamoto was behind the concept of cryptocurrency. However, he disappeared in 2011 and hasn’t been found yet. The currency was known to a very small demographic until it gained global recognition as a currency that is not government regulated, doesn’t have a central authority controlling it and can be used in every corner of the world.

As bitcoins became more popular, its price grew exponentially between 2009 and 2018 because its supply was limited to 21 million units. However, it experienced a drastic fall due to the introduction of hundreds of other cryptocurrencies in the market which could be mined easily and had a relatively less transactional time. The trust in the currency also faltered owing to rumours of cryptocurrency being used as a mean of the transactions for illicit businesses as crypto-transactions are untraceable by any official body. Nevertheless, bitcoin’s rate has normalized and it still remains the most popular cryptocurrency.

Indian Legislature on Bitcoins

About 18 million bitcoins have been extracted until now. Massive investments have recently been made in setting up mines to extract and trade bitcoins all around the world. However, is it really possible to mine cryptocurrency in India? As far as the legislature is concerned, RBI was in consultation with various ministries of the government in order to build a framework that restricts the trading of cryptocurrency in India. Although cryptocurrency isn’t under the ambit of any regulatory body of the government, organisations that deal in cryptocurrency can be banned by the government. In 2018, RBI issued a notice to all financial institutions asking them to not use any digital currency for their transactions. Many cryptocurrency exchanges challenged this ban and in March 2020, the Supreme Court removed all restrictions on bitcoin in India.

However, even if the government does not have any restrictions on the extraction, trade and use of bitcoins, India lacks the infrastructure that is required for crypto-mining. To understand why, we need to understand what data mining is and the economics behind it. As stated earlier, bitcoins are a decentralised alternative to the banking system which means that the system can transfer funds without the involvement of a central authority. In case of a banking system, you request a bank to transfer money from your account to a recipient account. The bank has the sole power of updating the ledger that holds the balances of the system. Considering bitcoins do not involve a bank, how do you create a system that has a decentralised ledger? How do you give someone the power to update the ledger without giving them the right to use your digital assets? The answer to these intriguing questions is bitcoin mining.

What is Crypto-Mining?

Anyone who wishes to facilitate these transactions can act as a banker for the same. In order to do so, you need to use your computer in guessing a random number or solving a complex mathematical equation. This could be understood by considering a situation where you’ve forgotten your password and you use every permutation and combination in cracking what your password is. Your computer does a similar thing in order to mine bitcoins and if you crack the code, you receive bitcoins and are granted the right to update the Bitcoin transaction ledger known as the ‘Blockchain’. The efficiency of your ability to guess the code is directly proportional to how powerful your computer is. Take note that the term ‘mining’ might be misleading as bitcoin mining refers to the by-product of the transaction verification process and not to the extraction of bitcoins from the world-wide-web.

The goal of mining is to maintain the bitcoin transaction ledger (Blockchain) in a decentralised manner.

How does Cryptocurrency avoid Inflation?

That brings us to the question of the feasibility of mining bitcoins. The framework of cryptocurrency has been designed in a manner such that the difficulty of mining is directly proportional to the mining power. This means that if the configuration of the computers being used for mining upgrades, then the difficulty of the problems to be solved increase too. If more miners join the business, it will be more difficult to solve problems while if miners drop off, it’ll become significantly easy. The difficulty is manipulated such that a new block comes ever ten minutes on average. Thus, if 2 blocks are added in two minutes, then the third block can take an hour. In the end, this will even out to ten minutes on average. This standardisation algorithm keeps inflation in check.

Evolution of Mining

Bitcoins were initially mined using the Computer Processing Units (CPUs) of personal computers. Later, people moved to the Graphics Processing Unit (GPU) mining. The mining power of 1 GPU is equivalent to that of 30 CPUs. GPUs were initially used for gaming, but later got used for mining as well. Another revolution came with the field-programmable gate array (FPGA) Mining. FPGA in an external component that can be connected to the computer to solve complex problems just like GPUs. The difference is that they are 3-100 times faster than GPUs. However, FPGAs were harder to configure. Thus, the most popular option for the miners were the GPUs. Finally, in 2013, Application Specific Integrated Circuit (ASIC) mining was introduced.

The race didn’t end in 2013. Newer and more advanced technologies kept coming until 2016 when we finally reached a technological barrier. The reason why this is talked about here is for you to understand the competitive nature of the market. Even if you own the most advanced mining tool, you will be competing with large-scale mining farms. These farms are a pool of different miners collaborating with their equipment and sharing profits proportional to the power of their equipment. Today, there are over 20 large pools that collectively mine bitcoins and update the ledger.

Can India mine bitcoins?

Firstly, India does not have the infrastructure to support mining. Importing cutting edge technology in order to compete with the world would imply spending heavily on taxes which makes the cost and maintenance of equipment very expensive. The cost of electricity plays a very vital role in understanding the profitability of mining in a particular region. BBC states “Bitcoin is using around seven gigawatts of electricity, equal to 0.21% of the world's supply. That is as much power as would be generated by seven Dungeness nuclear power plants at once. Over the course of a year, this equates to roughly the same power consumption as Switzerland.” According to a new study, mining Bitcoin consumes more than twice the energy consumed by mining Gold and Copper combined. Thus, the answer to the question of India’s ability to mine bitcoins is that although people might try mining independently, it seems impossible to expect India to have a mining farm that competes in the international market of mining.

It costs $26,000 to mine one bitcoin in South Korea — and just $530 in Venezuela

Mining cryptocurrencies not only consumes a lot of energy, but it also leads to a worse carbon footprint. The electricity used for mining Bitcoins produces about 22 megatons of Carbon Di Oxide annually. Thus, the viability of the cryptocurrencies in the market will significantly depend on the impact of mining them on the environment.

Should India trade in bitcoins?

The 2016 Indian Bank Note Demonetization is a prime example of the authority that the government and the central regulatory body has over your money. Any note can be considered null and void if the government demonetizes it. In the case of cryptocurrency, as the governments have no control over the currency, they cannot abolish it.

When a private bank fails due to the increase of Non-Performing Assets (NPAs), the government prints more money to bail them out. As more money is printed, the value of each unit decreased. Thus, causing inflation. If not by printing money, then the money deposited by the citizens in nationalised banks is used to bail out such banks as well. If your money is not under the regulation of the government, it will neither get devalued due to inflation nor would it be used for any other purpose. The crypto-mining algorithms are developed while keeping into consideration the possibility of inflation need to be minimized.

However, the only mean of certification for your ownership of bitcoins is your ‘private key’. In 2013, an investor lost $7500 by throwing a hard drive while cleaning his desk which had his private key. The private key can be compared to your UPI id. In case you lose your UPI id, you can contact your bank to provide you with the same. However, there is no such provision for the loss of your private key. 25% of the bitcoins in the world have been lost and can never be used.

Payments using bitcoins usually take 10 minutes which is very high compared to the payments using conventional banking methods. Although bitcoins are easily available and tradable, not many vendors accept it. Additionally, although governments cannot declare cryptocurrency illegal, they can bring restrictions on their trade, sale or extraction which has caused a lot of ambiguity in the market for investors.

This unending debate on cryptocurrency does not have a clear conclusion. However, using all the information you have, the legitimacy and viability of mining and trading cryptocurrency are subject to your perspective.

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