Due to the current collapse of the cryptocurrency market, thousands of miners are leaving the Bitcoin network. Thus, according to the mining pool F2Pool, since mid-November, about 600,000 to 800,000 miners have turned off their rigs and stopped mining the world’s first cryptocurrency. At the same time, as the head of the third-largest pool, Mao Shixing, noted that miners in China “are selling equipment by the kilograms.” At the same time, on November 22, the Norwegian government decided to abandon the program of subsidizing cryptocurrency mining enterprises. Today’s article by DeCenter will delve into the cause of the crisis and the consequences for cryptocurrency miners.
Miners who support the work of networks with the PoW (Proof-of-Work) consensus algorithm are responsible for confirming transactions and adding new blocks to the blockchain, for which they are rewarded in the internal cryptocurrency of the network. For miners, the critical role is played by the computing power of their machines, since the probability of receiving a block reward is equal to the ratio of the computing power of the miner node to the computing power of the entire network. In this connection, solo mining in networks of popular cryptocurrencies has become unprofitable in recent years. As a cryptocurrency grows in popularity, profitability decreases, and the mining process itself becomes more complex, which allows PoW blockchains to control the rate at which new coins appear.
Mining Crisis as a Global Problem
This is one of the key vulnerabilities of PoW networks, as the increasing complexity of mining requires increasingly powerful and modern equipment, while also increasing the energy consumption of mining. According to Shixing, it is for this reason that the miners in China are massively selling their mining farms: “The miners are selling equipment by the kilograms because they used outdated models that no longer fit the requirements. People are selling them for processing instead of further mining on these models.” Mao also noted that the miners of the F2Pool that had disconnected from the pool primarily used Antminer T9+ and Antminer S7 from Bitmain, as well as AvalonMiner 741 from Canaan.
This trend has been noted on other mining markets, including the Russian one. According to statistics from the free ad service Yula, due to a sharp drop in the Bitcoin rate on November 19 and 20, there was a 25% increase in the number of offers to sell mining equipment. Moreover, last week, the Russian holding Russian Mining Coin (RMC) announced the suspension of mining activities due to a “lack of economic reasons given the current conditions.” As Dmitry Marinichev, one of the founders of the RMC, explained, in the conditions of a sharp collapse of the crypto market, the cost of electricity exceeded the amount of income from the production of cryptocurrency.
The increased energy consumption of mining also led to the end of the electricity subsidy program for Bitcoin miners in Norway. According to the largest local publication Aftenposten, on November 21, the country’s tax regulator decided to increase taxes for cryptocurrency companies. If they are paying 0.48 øre ($0.056) per kilowatt now, then the miners will pay 16.58 øre ($1.93) from January next year. In a study of the mining company Northern Bitcoin, it is noted that about $7,700 is spent on mining one Bitcoin in Norway.
The Parliament representative Lars Haltbrekken stressed that “Norway cannot continue to provide such high tax breaks to such ‘polluting’ cryptocurrency production as Bitcoin mining. This requires huge amounts of energy, which, in turn, produces large greenhouse gas emissions.” In response to the abolition of subsidies, ICT Norway’s chief economist Roger Shierwa told Aftenposten that this was shocking news for the mining industry in the country, since such budgetary changes in conditions were accepted without any discussion, consultation, or dialog with industry representatives. As a result of the abolition of subsidies, cryptocurrency miners will be forced to operate in Sweden or Denmark.
Moreover, a study by American scientists from the Oak Ridge Institute for Science and Education showed that, on average, more mining is needed to mine cryptocurrencies using the PoW algorithm than it takes to extract raw materials. Scientists compared the indicators obtained in the extraction of coins, such as Bitcoin, Ether, Litecoin, and Monero, and the amount of energy consumed during the extraction of aluminum, copper, gold, platinum, and rare earth metals. It turned out that mining $1 worth of 1 unit requires: 19 MJ for Bitcoin, 15 MJ for Litecoin, 11 MJ for Monero, and 9 MJ for Ether. At the same time, the mining of raw materials for the same amount will require 122 MJ for aluminum, 9 MJ for rare earth metals, 6 MJ for platinum, 5 MJ for gold, and 4 MJ for copper. Thus, the extraction of all minerals, except aluminum, consumes less electricity than the mining of cryptocurrencies.
Overpriced Cryptocurrency Market
Manufacturers of specialized mining equipment also report significant losses. AMD and Nvidia, which are leaders among the manufacturers of video cards for mining, warned investors that as a result of the collapse of the cryptocurrency market, the demand for their products fell and the revenue for this quarter would be lower than expected.
In the financial report for the third quarter, the head of Nvidia, Jensen Huang, explained that the company overestimated the crypto market, as a result of which, the cost of excess inventories increased fivefold and exceeded $70 million. The reason was the fact that the prices of video cards that grew during the “crypto boom” did not have time to decline in the light of lower demand. As a result, the day after the publication of the report, Nvidia’s shares fell by almost 17%.
In August of this year, Nvidia noted a low yield from the sale of specialized equipment for mining. In this connection, the company’s management decided to stop focusing on the cryptocurrency mining market. A similar situation exists with the main competitor of Nvidia, AMD. According to the company’s financial report, the demand for cryptocurrency mining equipment in the third quarter of 2018 continued to fall, while total revenues declined by 14%.
Mitch Steves, an analyst at RBC Capital Markets, said that in the past quarter, high-performance mining graphics cards brought substantial profits to users, but now the market is entirely different. According to company estimates, the break-even point for Ether, the most profitable cryptocurrency for mining, is at the level of $175. But with the current rate of $115, network miners work at a loss. According to the expert, the adverse effects of the collapse of cryptocurrencies will also be observed not only in this quarter but also in the next one.
In such conditions, private mining becomes unprofitable since it brings profit only to those market participants who are ready to engage in mining cryptocurrencies on an industrial scale. This is evidenced by the head of the Enigma company and the co-founder of the ICG cryptocurrency fund Igor Zartdinov, who noted that the mining market is gradually crowding out “home miners” who are not able to compete with the capacities of large companies. According to the entrepreneur, the current state of the industry is an interim solution.