Bitcoin Miners Turn 'Hash' into Bitcoins—and Fortunes

If you were traumatized by a decimal point in elementary school, you probably don't want to sit down to a tantalizing hexadecimal before breakfast.

That's a number based on 16 rather than the familiar 10. A hexadecimal uses digits 0 to 9 and the letters A, B, C, D, E and F in place of decimal numbers 10 to 15.

Bitcoin miners solve hexadecimal-based puzzles for the challenge—and to have a shot at earning new Bitcoin as reward for their efforts.

Bitcoin miners earned about $1.5 billion in March, CoinDesk reported.

"Bitcoin mining is an elegant combination of distributed computing and economic incentives," Dr. Xinxin Fan, founding member and head of cryptography at IoTex in Menlo Park, California, told Newsweek.

Bitcoin mining operation
A worker walks through a Bitcoin mining facility in Saint Hyacinthe, Quebec, on March 19, 2018. Bitcoin mining can be big business, but there is a lot of competition and the process consumes a lot of energy, generating environmental concern. Lars Hagberg/AFP/Getty

Here's why mining is important:

"Bitcoin is powered by blockchain technology, which distributes network maintenance—that is consensus—across a number of distributed 'nodes' instead of a single centralized entity," he said.

"The primary role of these nodes is to verify transactions and mint them into a 'block' where one block holds 1 megabyte of transactions," he said. "Once a block is finalized, it is permanently added to the sequenced chain of blocks that preceded it, which is where the term 'blockchain' comes from."

The mining enigmas aren't a test of knowledge like a crossword puzzle, a chess problem or even a logic conundrum.

"No advanced math or computation is involved; in fact, it is pretty much a guessing game," Fan said. "What miners are actually doing is trying to guess a 64-digit hexadecimal number—a 'hash'—that is less than or equal to a 'target hash' defined by the Bitcoin protocol."

That's why Bitcoin miners crank up their computers.

"To perform this guessing game, miners set up many 'mining machines' that each have a certain amount of 'hashpower'—that is computational guessing power, measured in gigahashes per second," Fan said.

"The more hashpower a miner has, the higher probability of winning the guessing game," he said. This is why organizations set up massive mining facilities with hundreds of specialized mining machines, where expensive machines have more hashpower."

So, how does a Bitcoin miner strike gold?

"The mining process is all about establishing 'consensus' across the entire network," Fan said. "Once a puzzle is solved, it is easy for all other miners to verify that someone has come up with the right answer. But solving the puzzle is the hard part. This method of global consensus is called 'proof of work' and is extremely energy-intensive, but is a fair and decentralized method of establishing consensus."

On average, a new block is created every 10 minutes.

"It's not time-based but rather size-based, whenever there is 1 megabyte of new transactions—that is, transfers of Bitcoin between different users—a new puzzle is issued," Fan said. "It is not a question of if a puzzle can be solved but when and how fast a puzzle is solved due to the 'guess until you get the correct answer' method that proof of work consensus utilizes."

Last week, Bitcoin plunged nearly 20% after reaching a record high as automatic sell orders kicked in, deepening the downturn and underscoring the crypto's volatility. The "flash crash" was attributed to a power outage in the Xinjiang region of China where a significant percentage of Bitcoin mining takes place.

The power outage caused a sudden dip in the global hash rate. A strong "hash rate" indicates vigorous Bitcoin mining activity and that's needed to maintain the blockchain ledger, an unbreakable record of all transactions in the cryptocurrency.

The sudden drop did no lasting harm and Bitcoin's price recovered although it remains well below its previous high.

Cambridge University estimates that Bitcoin miners use about 130 terawatt hours of electricity a day, or about 0.6% of the world's consumption. A terawatt is equal to 1 trillion watts.

The electricity wasted by plugged in but inactive home appliances such as stereos, TVs, computers, microwaves and washing machines could power Bitcoin mining for 1.8 years, the researchers said.

ARK Investment Management said the entire Bitcoin system including trading platforms consumes less than 10% of the energy needed by the world's traditional banking system.

"ARK believes that Bitcoin has a unique ability to provide settlement assurances in a decentralized, or trust-minimized, manner because specialized, dedicated hardware proves transparently that the computer has executed a costly computation," analyst Yassine Elmandjra said in a research report.

"Bitcoin makes the tradeoff explicit: by allocating significant real-world resources to mining, we believe the network guarantees settlement like none other," Elmandjra said.

The overall environmental impact, while frequently said to exceed the daily power usage in a small nation like Finland or even Argentina, is impossible to determine because miners around the world draw power generated from different sources— coal, natural gas, nuclear, hydro, wind and solar.

In mid-day trading Wednesday, Bitcoin changed hands at $54,330.82. The intraday high is $55,798.66. The all-time high is $64,829.14. The cryptocurrency is up 89.92% for the year, CoinDesk reported.

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The top 1% of U.S. households don't report as much as 21% of their income, the Internal Revenue Service estimates. Of the total, about 6 percentage points are attributed to intricate strategies that random audits typically don't detect.

IRS building in Washington, D.C. 2020
Signage at the Internal Revenue Service headquarters building in Washington, D.C., pictured on April 27, 2020. Chip Somodevilla/Getty Images

The Inspector General concluded that taxpayers with average annual incomes of $1.6 million owed as much as $2.5 billion in uncollected taxes. A one percentage point increase in voluntary tax compliance would boost tax receipts about $30 billion a year, the IRS said.

The IRS estimated the average gross tax gap at $441 billion a year for 2011, 2012 and 2013. After late payments and enforcement efforts, the gap narrowed to an estimated $381 billion for those years.

IRS Commissioner Charles Rettig, appointed by former President Donald Trump, has sought billions to upgrade the IRS. Rettig, whose term expires in November 2022, has said as much as $1 trillion a year in taxes may go uncollected. That's more than the annual defense budget.

In short, the scope of the problem isn't completely known.

Boosting tax revenue is a key element in President Joe Biden's ambitious spending plan and like others before him, he's trying to upgrade the IRS. To close the gap, Biden hopes to increase IRS funding by $80 billion to recover an additional $780 billion in taxes over 10 years.

That means more agents and more intrusive enforcement—and that's likely to be good news for tax lawyers and accountants who seek to legally limit the amount their clients owe Uncle Sam. Boosting tax collections will be a slog for the IRS, which is burdened with antiquated computers and high turnover.

Democrats hold a slim majority in the House and have effective control of the evenly split Senate. This suggests ample funding for the IRS will be on the way.

But a turnaround is likely to require more than just money. Better management is also needed. Services lag. Some taxpayers complain about longer waits to get phone inquiries answered—if they get an answer at all.

Last year, paper tax returns stacked up and the agency is still digging through the backlog. The IRS mistakenly sent out hundreds of thousands of warning letters to people whose returns languished in storage.

In addition to its duty as tax collector, the IRS is an enforcement agency, law firm, call center and high-security information storage company. This complicates operations and drives up cost.