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As a decentralised, uncensorable and permissionless payments network, Bitcoin functions efficiently for payments even as the cryptocurrency’s prices have dropped below two-year lows.
However, with the rise and fall of Bitcoin’s price, the surrounding ecosystem of Bitcoin takes a huge and sometimes unsustainable, beating. Companies looking to build their fortune on cryptocurrencies come down like rocks upon the market crashing. No one can provide better examples to this than Bitcoin miners, an industry that relies on the price of Bitcoin as it’s only ploy to stay alive.
What Is Mining?
As Bitcoin functions on a blockchain — a distributed ledger, all participants are required to have a shared history of all the transactions. Transactions have an element of randomness, as they can occur between any two nodes at any time. Blockchain as a whole must decide on one way of ordering these transactions, as not doing so would cause issues with user balances. To achieve this unified vision of transaction ordering, known as consensus, Bitcoin utilises a system known as Proof-of-Work.
Proof-of-Work requires parties with large amounts of computing power, known as ‘miners’, to solve complex mathematical puzzles. Doing so will achieve consensus, with new transactions added to new blocks and connected to the rest of the chain. Creating new blocks results in the minting of new Bitcoins, 12.5 for every block. This is the primary source of income for miners.
The Bitcoin blockchain utilises a feature known as mining difficulty adjustment, which changes the difficulty of miners to find a block depending on the number of miners on the network. If there is a higher number of miners, it will be more difficult to mine a block and vice versa. This leads to the industry’s biggest players adding more and more computing power to the blockchain in an effort to get slice of the Bitcoin pie.
The computing power comes in the form of Application Specific Integrated Circuits, which are specialised machines made to compute the calculations for mining Bitcoins. These consume a large amount of electricity, and produce a large amount of heat as well. However, they can be deployed en masse, as seen by Bitcoin’s 800-pound gorilla, Bitmain. At the height of a ‘hash war’ in September of 2018, they deployed over 90,000 ASICs to a region in China.
Power Hungry Internet Money
Bitcoin’s power usage has long been the target of multiple mainstream media outlets, but it is important to note that all money spent to secure the network is used in pursuit of a bubble. The highly volatile nature of Bitcoin’s price creates a lot of negatives in a network that is secured by a revolutionary algorithm.
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Some facilities alone utilise as much electricity as much as minor cities, such as Hut 8’s facilities near Medicine Hat in Canada. The city has a population of more than 60,000 and is home to industrial plants, but the mining operation consumers over 60 MW of power, which is 10 times more than any other facility in the city.
Towards the end of 2017, it was predicted that miners were utilising about 7.5 GigaWatts of power. This is more than the electricity consumed by Ireland, Austria, the Czech Republic, and the Netherlands. Such rampant adoption of mining was also predicted to highly boost the advent of global warming, pushing up the temperature by 2C in just two decades. According to an analysis published in 2017, the cumulative emissions from Bitcoin would be enough to push global warming beyond 2C in 22 years.
However, it is worth noting that many miners look for cheap electricity in cold places, which are usually fuelled by renewable energy sources. This is due to the fact that electricity is the single-most biggest expense for miners.
This combination of factors has made China one of the most suitable places for mining Bitcoin, so much so that upwards of 80% of the computing power on Bitcoin comes from China.
Market Slump Hits Hard
The price of Bitcoin took a turn for the worse late last year, when it dropped below the level of $6000. This led to many miners turning off their mining machines, as they ceased to be profitable. The total computing power on the network dropped about 24 percent from an all-time high at the end of August through November.
This hit the hardest in Chinese regions of Xinjiang and Inner Mongolia, as many mining operations were centered there. This was due to a low cost of electricity due to an abundance of hydroelectric power. Even as electricity was cheap, there was simply no way for the miners to continue to make a profit, or even break even. This was due to the fact that the newly minted coins could not be sold for as much as before, leading to a widespread selloff of mining equipment.
In November, reports emerged regarding prominent miners selling off some of the newest hardware for just under 5% of their original value. Bitmain’s AntMiner S9. the fastest mining rig on the market, were sold for a value of 500 yuan per unit, down from their retail price of 3000 yuan per unit.
Multiple units were also thrown away as scrap, as seen by this video posted by an executive at a Chinese cryptocurrency VC fund. This presents a look into the amount of e-waste generated by downturns in the mining industry.
Prominent mining pool F2Pool released an infographic detailing the ‘turn-off’ price for various mining rigs. As Bitcoin’s price neared about 79,258 yuan, which amounts to $11,500, older machines such as the AntMiner S7 would become unprofitable. For newer machines, the price was set at 36,792 yuan, or about $5,370. The price of Bitcoin dipped well below these limits, as a prices of $4300 and $3500 began to occur.
While Bitcoin’s effect on the environment is undoubtedly bad, it can be offset by miners using renewable power. The reports of it’s consuming all the electricity in the world are exaggerated, with the worst case scenario being governments shutting down power grids to deny electricity to miners.
However, a more pressing issue is the creation and destruction of hype cycles in the manufacture of ASICs. Miners throw away not only electricity, but also stand to make a loss on the money contributed towards buying miners. It is left to see how Bitcoin’s recovery can influence the state of the mining market.
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