Bitcoin Mining and the Price Drop
Bitcoin is down to price levels not seen since Q4 of 2013. This is following today’s 16% price decline. The price, as of this article, stands at well below US$ 200 per bitcoin.
The price of bitcoin can turn on a dime and often seems completely detached from any objective standards or measurements. The decline comes at a time when non-digital commodities are also getting hit. By example, copper is down over 6% today alone.
Historically bitcoin prices moves with such rapid ferocity, in either direction, that it’s difficult to know what to make of this recent action. Huge price moves in any market affect all participants. Unique to the Bitcoin ecosystem is the mining sector. They have been, and will continue to be, affected heavily by this rapid depreciation.
This is worth more detailed analysis, as Bitcoin mining is essential to the network and overall health of the ecosystem.
Mining is the process of validating transactions on the network. New coins are ‘minted’ as a reward for performing this computationally intense and expensive work.
With a falling price we would expect existing miners to become unprofitable (given their fixed costs such as electricity). Continued losses will of course make these businesses non-viable, forcing them to close.
CEX.IO, one of the largest cloud miners in the ecosystem notes that they “need a Bitcoin Value of US$ 320 at current difficulty to make cloud mining profitable”. With their large economies of scale it can be presumed that smaller operations would require an even higher US$ / BTC price to remain profitable.
Bitcoin’s hash rate is most definitely falling, for the first time in a long time. This indicates miners are shutting up operations. But this has not always been the case. A steep price decline in 2014 occurred at the same time as a 30x increase in the hash rate. This may seem counter intuitive but must be examined in context.
Through 2013 Bitcoin appreciated many thousands of percent, moving all the way to US$ 1,200 per bitcoin by years end. The mining sector saw an opportunity to reap huge profits. Miners invested heavily in ASICs for their cloud mining operations. The cloud mining contracts locked miners into long-term contractual commitments with their counter parties and suppliers.
The heavy investment in equipment and operations put pressure on miners to sell their mined Bitcoin holdings to meet expenses. This all appears to be unravelling now and the hash rate is falling.
Of course, the Bitcoin network itself is self adjusting. As miners leave the network it becomes less computationally intensive to ‘mine’, finding a new equilibrium. So, the only real risk comes from the fact a potential 51% attack becomes easier with a lower network hash rate. The network itself will simply adjust. Currently the Bitcoin network hashing power is 13k times as powerful as the top 500 supercomputers combined….
Where is the bottom on this price action? Well that is anyone’s guess.