Bitcoin miners are feeling the heat and the pain’s rippling downstream to pressure prices.
The cryptocurrency’s spectacular rally last year drew thousands of entrants into mining or producing new coin.
As a result the hashrate, or combined computational power used by bitcoin miners globally, has roughly quadrupled over the past six months to blow past 200 million “terahashes” per second.
Photo: Reuters
A rising hashrate makes it harder for miners to earn coins and cover their costs of hardware, electricity and staff, so many are more likely to sell, rather than hold, their newly minted cryptocurrency, exerting a bearish force on the market.
“Running costs are a major factor in miners’ decision to hold or sell newly acquired coins. They are the first and most natural sellers in the cryptospace and so definitely impact prices,” said Justin d’Anethan, institutional sales director at cryptofinancial services firm Amber Group.
The total value of coins held in miners’ wallets has fallen to about US$75 billion from US$114 billion at the start of November last year, as their profitability has been squeezed by the rising hashrate as well as falling prices, Oslo-based cryptoresearch firm Arcane Research said.
Miners have been transferring more coins to exchanges than adding to reserves, cryptoindustry analytics firms said, a sign of selling or intent to sell.
Such flows are adding to pressures facing bitcoin, whose drift toward the mainstream has seen it caught up in a selloff in global markets driven by tensions on the Ukraine border and the US Federal Reserve’s policy tightening.
The world’s dominant cryptocurrency is trading at about US$37,400, which is 40 percent below its high of US$62,000 on Nov. 10 last year.
Bitcoin mining, in simple terms, is the process by which a network of computers checks and validates a block of transactions that then get added to the blockchain. Miners get rewarded for completing a block.
However, it is an expensive business, requiring not just sophisticated and fast “rigs” costing upward of US$10,000, but also a huge amount of power.
And it is getting pricier.
The seven-day average of total mining cost per transaction validated has fallen to US$176.8 from a record US$235.57 hit in May last year, data from blockchain.com show.
“As more miners join the network, each individually earns fewer bitcoin. This is because network difficulty increases in order to slow the issuance of new bitcoin,” Blockware Solutions analyst Joe Burnett said.
Waning mining profitability is also hitting the broader market, because some institutional investors, who are unable or unwilling to invest directly in cryptocurrencies, instead buy shares of listed miners or Exchange-traded funds (ETF) that track miners as an alternative way to gain access to the industry.
Shares of US-listed cryptominers Marathon Digital Holdings Inc and Riot Blockchain Inc have plunged 66 percent and 52 percent respectively since early November last year.
The Valkyrie Bitcoin Miners ETF is meanwhile trading at a roughly 5 percent discount to its net asset value since the fund’s launch early this month and the Viridi Clean Energy Crypto-Mining & Semiconductor ETF has lost 23 percent since the beginning of the year.
Some of the pressures on miners flow from bitcoin’s inherent structure. The decentralized blockchain was created anonymously with a final limit of 21 million coins, of which nearly 19 million have already been minted, although the final bitcoin is expected to be mined in about 2140.
It takes about 10 minutes to mine one block and the reward for miners — who currently get 6.25 bitcoin per block — is halved about every four years.
“There could be one miner or a million, it doesn’t change anything. There’s only one block and a set number of bitcoins issued,” d’Anethan said.
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