Bitcoin mining: the problems are not over

A few days ago, there was a sharp drop in the difficulty of Bitcoin mining. 

This drop reduced the cost of mining because it reduced the volume of calculations required on average to mine individual blocks. 

However, according to what was revealed in the recent State Of The Mining Industry by Dylan LeClair and Sam Rule, this may only lead to “temporary relief.”

The problem with Bitcoin mining costs

The problem that is plaguing the crypto mining sector, but also all other energy-intensive industries, is the rising cost of energy. 

Due to various factors, including the post-pandemic recovery, the very expansive monetary policies of central banks in recent years, and especially the war in Ukraine with the resulting sanctions on Russia, fossil fuel prices have risen a lot. 

Unfortunately, Bitcoin mining still uses fossil sources on a large scale, and in addition, the rising cost of fossil-generated electricity has inevitably generated greater buying pressure on other sources as well, causing electricity prices to rise across the board. 

This problem is likely to continue for several more months, so it is impossible to imagine that Bitcoin miners will be able to breathe a sigh of relief against the high cost of their raw material anytime soon. 

The fact is that if they reduce consumption, so as to reduce costs, they would also reduce their chances of succeeding in mining a block, since mining is a competition in which for each block there is always only one winner who cashes in the entire prize. 

The reduction in consumption

To be fair, a reduction in mining consumption has occurred, since as LeClair and Rule explain at the end of November there was a 13.1% drop in hashrate from the all-time highs at the beginning of the month. 

Hashrate, or computing power committed to mining, is a good litmus test of consumption, because inevitably for the same efficiency more hashrate means more consumption, and vice versa. 

However, as of 29 November, hashrate has returned slightly, indicating that miners at this time are not actually particularly intent on reducing consumption. 

On the contrary, with the reduction in difficulty a few days ago, which actually also increases efficiency as well as profitability, it is possible that they have decided to increase hashrate due to the slight reduction in costs. 

This means that the drop in Bitcoin mining consumption has been minimal, with the current level of just under 260 Eh/s globally averaging only 6% lower than at the beginning of November. It is enough to recall that at the end of September, or just over two months ago, that level was just over 220 Eh/s, and a year ago it was 180 Eh/s. 

The problems continue

In light of this, it is all too easy to predict that the problems that are currently plaguing Bitcoin mining are set to continue in the coming months. 

The only quick way out would seem to be an eventual sharp increase in the value of BTC, because the alternative is to shut down the less efficient, and therefore less profitable, machines. 

Indeed, at this time it is possible that there are several mining machines around the world that are operating at a loss, and are kept on only in the hope that the BTC cashed in can be sold in the future at a higher price than at present. 

It is worth mentioning, however, that the Bitcoin protocol does not require such a high hashrate at all. Bitcoin can function just fine with far lower levels of hashrate, and it is only an arbitrary choice of individual miners to commit so much of it. 

LeClair and Rule report that in 2016, for example, there were several periods of more than 15% declines in hashrate, while this year so far has seen only one significant one, following the highs of early November, and it was only 13%. 

So not only is it possible that the continuation of such low values of the price of BTC could cause other reductions in hashrate during 2023 but it should also be said that this will not cause problems for Bitcoin, just as it did not cause them in 2016. 

Bitcoin’s price and mining

The fact is that all the earnings of Bitcoin miners are in BTC. The miners only collect the reward, which right now is 6.25 BTC for each individual block mined, and the fees paid by the senders of the transactions, which are also in BTC. 

However, they pay for the electricity in fiat currency, which implies that they have to sell the mined BTC at market price in order to pay for the electricity. Since the receipts in BTC do not change much, because the reward is fixed for about 4 years and the fee collection is much less, a decrease in the market value of Bitcoin inevitably generates a decrease in the miners’ real earnings. 

Of course, the reverse is also true, and it is possible that the miners are still keeping most of the machines on precisely because they hope to resell the collected BTC in the future at a higher price than at present. 

Therefore, the future of the miners is closely linked to the price trend of Bitcoin, while the future of the Bitcoin protocol is independent of this trend. 

Source: https://en.cryptonomist.ch/2022/12/09/bitcoin-mining-problems-over/