Bitcoin Miners Running Out of Business – Effects and Considerations
The recent crash of more than 40% in the price of Bitcoin caused a lot of uncertainty in the market. This was a huge hit to not only the investors, but also the miners. Dovey Wan, founding partner at Primitive, was one of the first ones who raised the awareness of what is happening in China and tweeted a video explaining that due to the crash it became unprofitable for the small miners to operate.
Miners are an essential part of Bitcoin’s ecosystem as they participate in a proof-of-work which is crucial for transacting Bitcoin. In a mining business just like in any other there are two main factors that affect the profitability: the revenue (the value of Bitcoin mined) and the costs of running the business (incl. the cost of electricity). There is a highly positive correlation between profitability, number of miners in the network, difficulty, hash rate and security of the network. Once the value of Bitcoin drops or the the price of electricity increases it become harder for small miners to profit or at least break-even (the chart bellow compares the price of electricity to mine 1 BTC all around the world).
Source: Elite Fixtures
The revenue of mining was increasing over time (graph bellow) so, it all depends on when they got in the business and how they managed their profits. Also, it might be a perfect time for miners to expand their position in the market by purchasing mining facilities at a discount or clearing the old and more wasteful technology.
Decrease in miners last week resulted in Bitcoin’s network hash rate drop. This means that the network became slower at processing transactions until the next difficulty adjustment comes. Difficulty adjusts every 2016 blocks and one block should take around 10 minutes. If hash rate drops 50%, the block will statistically be mined twice slower...