Bitcoin Mining is Too Expensive!

Uncategorized Apr 10, 2017

For all the fluctuation in bitcoin pricing, the year of 2014 is looked as a year when bitcoin started to shift past the proof-of-concept phase and towards mainstream markets. More than 6 million bitcoin wallets were set up in 2014, as stated by Coindesk, which is a huge increase over 2013, while around 75,000 merchants are now accepting digital currency, including Expedia, Dell and Overstock[2].

However, one area of the bitcoin economy is maturing much quicker than the others, even to the point where profits are getting increasingly difficult to come by and diversification and consolidation are already taking place: the bitcoin mining. For years, bitcoins had been mainly a far-flung network of the desktop hobbyists. However, a small group of businesses developing big data centers is ready for the sole task of mining the new bitcoins.

Though, mining is the throwback to the pre-digital period of gold pans and pickaxes, bitocins are mined in a different way, by leveraging computing power to confirm the transactions on a public ledger and high network security. Miners are competing not just to confirm transactions but also to solve the calculations that usually become harder with time. The details of this process can be insightful; however, the end outcome for miners is obvious: rewards in the transaction fees and newly mined bitcoins[3].

In the earliest years of bitcoin, mining could simply be managed by the desktop computers operating via CPU or some powerful graphics chip. As more and more miners emerged, businesses such as Cointerra, BitFury and KnCMiners started to sell ASIC chips developed for a single task: operating mining software. Bitcoin developers, speculators and hobbyists found mining a profitable and easy way to indulge in bitocoin economy. Soon, this started to change. By design, the reward obtained for each mined block reduced over time. At present, around 3,600 bitcoins are being mined every day and the competition for them has increased over the past year[4]. Since economies of scale started to emerge, some miners realized that they needed to continuously spend bitcoins they had been earning on the most modern and fastest hardware, just to be in the game. The hobbyists, on the other hand, became sidelined, while the typical bitcoin miners turned into industrial operator of the data centers that can use 10 or 20 megawatts of energy.

The higher priced bitcoin mining equipment can use 20-nanmeter chips, rivaling the speeds from AMD and Intel, and even faster 16-nanometer chips are in the pipeline.[5] More powerful processors are essential since the complexity of the math calculations needed to mine bitcoins is increasing in view of increasing competition. The complexity level can increase substantially in a matter of days or weeks, rendering the mining equipment obsolete between the time it is shipped and the time it is finally available.

Another issue that makes bitcoin mining more expensive, is increasing electricity rates across the world, such as 13 cents per kilowatt hour in the Unites States, while even higher in the countries such as Germany and the UK[6]. Some businesses have established industrial mines in Iceland, where they can find cheaper geothermal energy, and in the regions such as Central Washington, where public utility districts provide low industrial rates. These are the regions where Yahoo, Microsoft, and other giants have set up their data centers.

The dual pressures of increasing mining investments and declining bitcoin prices have pushed some of the smaller players out of the economy, since it has become a capital intensive business. The cost of bitcoin mining now surpasses the benefits for many miners, and so people are exiting[7]. The bitcoin mining industry is facing consolidation, since a few well capitalized and highly skilled vendors run the industry. The market players able to provide the most energy efficient equipment and having most cost efficient capital and operating expenditures will thrive, while small players having limited ability will either drop out or struggle in the race, resulting in a narrowed field with time. In spite of these concerns, consolidation among bitcoin miners seems to continue in 2017. Cloud mining businesses are merging, while businesses like Cointerra are expanding into various adjacent markets via acquisitions.

[1] TheBlockchainAcademy.com

[2] http://codinginmysleep.com/bitcoin-mining-in-plain-english/

[3] https://99bitcoins.com/bitcoin-mining-profitable-beginners-explanation/

[4] https://www.quora.com/What-happens-if-the-cost-of-mining-bitcoin-becomes-too-expensive-and-there-is-no-entity-incented-to-validate-the-blockchain

[5] https://99bitcoins.com/bitcoins-2016-halving-what-is-it-and-why-should-you-care/

[6] https://en.bitcoin.it/wiki/Is_bitcoin_mining_profitable

[7] https://www.quora.com/What-price-will-Bitcoin-have-to-be-for-miners-to-cease-mining-and-the-blockchain-dissolves


Copyright 2017 Bryant Nielson.

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