The high cost of mining bitcoin has been sighted as the impetus for one of the largest cloud mining operators to exit the space of bitcoin mining. Fortune reported that Hashflare had encountered 28 consecutive days of unprofitable mining before terminating investor contracts. The move has led to an uproar of investors crying foul.
Miners incur costs associated with the purchase of mining rigs, warehousing, and most notably electricity. The incentive to invest is the reward – in bitcoin – that is payed out for securing the network. However, as of late – that incentive has shrunk considerably. Every 10 minutes the bitcoin network pays 12.5 bitcoins to the miner that adds a block of validated transactions to the blockchain. Because miners generally operate in pools, the money is divided between the participants of a pool. In December 2017 12.5 bitcoins were worth about $240,000; today it is closer to $95,000. The bitcoin protocol cuts the block reward in half every four years; reducing the reward for a growing number of miners. Without an appreciation in the price of bitcoin, we may be reaching a saturation point where new entrants who are not able to deploy the most efficient mining rigs, and operate in low electricity cost jurisdictions – will be unable to compete profitably.
The picture is somewhat more grim when we consider the second revenue stream for miners – transaction fees. In addition to block rewards, miners collect all of the fees associated with transactions in the blocks that they add to the blockchain. More transactions generally translate into greater reward for miners. While in December 2017, transactions in a block added around $70,000 to the miner’s reward. A glance at recent transactions reveal a staggering decline to 0.06 BTC or about $500.
Blockchain.com’s miners revenue chart reveals a substantial pullback in revenue over a period that has experienced significant gains in new miners joining the ecosystem. The shrinking pie is servicing a growing population of miners, and it appears to be pushing some operators to the brink.
There is a silver lining
Some market observers have called for a change in bitcoin’s code to migrate away from the resource intensive proof of work, but let us not discount how this arrangement has served to secure bitcoin for the past 9 years. Bitcoin’s blockchain has never been compromised. There are a couple of very important pillars that secure the integrity of Bitcoin; one based on math, and the other based on economics. First, is the low mathematical probability that is ensured through encryption. Many other cryptocurrencies share this characteristic, however with enough computing power we have witnessed cracks in the armour of some smaller scale cryptocurrencies. What truly sets bitcoin apart from the crowded space of crypto – is the sheer size of it’s network which not only makes it hard to compete, but more importantly – cost prohibitive to compromise. Simply put, our current understanding of bitcoin’s network sets the cost of compromising the network so high that an attacker would be much greater rewarded by putting resources into supporting the network.
The tightening of competition within the mining community is not causing harm. Market forces will drive out inefficiencies, and we will establish a new equilibrium. If we can continue to stave off centralization in mining, I do not see these developments impacting the sustainability of bitcoin.