Bitcoin investors who got in on the action in December may be feeling the pain due to the crypto’s mighty price fall, but they aren’t the only ones in the crypto community who are hurting.
So are miners who are right at the brink of no longer making a profit from their work. Observers have pegged the price at which they will begin to stop being profitable from their efforts at less than $8,000.
Let’s discuss.
Mining
As you may recall, miners receive rewards for successfully solving the mathematical puzzles that create a bitcoin. The process entails the use of high computing power, and the electricity costs can be exorbitant.
Miners used to find it worth it when Bitcoin’s price was above $10,000 and especially when it was approaching the $20,000 high in December.
Once they solve the puzzle or equation, the miner gets Bitcoin as a reward. So if the cost to create bitcoin exceeds the reward, the miner loses the incentive.
The breaking point
At the time of writing Wednesday afternoon (New York time), Bitcoin’s price was $8,120.
Most observers agree that the tipping point for most miners trying to profit from creating the crypto is around $8,000. According to a report by Bloomberg, if the crypto’s price drops below $8,000 again for an extended period, “there will likely be a swifter consolidation to industrial-scale mining.”
The media outlet reported:
That could knock out the last guy-in-a-dorm-room operations and leave holders of the currency vulnerable to the dictates of the big miners.
For Bloomberg, venture capitalist Bill Tai compared this year’s mining environment to last year’s. He said:
“It’s totally different this year than last year. The bitcoin mining industry was this mysterious dark cottage industry, and it’s about to grow up and about to have elements of institutional scalability at all levels."
Pricing model
Fundstrat’s Tom Lee noted in a March report when Bitcoin was trading around $8,000 that it was essentially trading at the break-even cost of mining a bitcoin. Fundstrat had developed a mining model to track when mining would cost more to do than the amount of profits it would produce.
The model incorporates three factors: the cost of equipment, electricity and other overhead.
As noted above, these costs can be substantial to miners, especially electricity. Bloomberg found that smaller miners are trying to cut costs by relocating to cities with low electricity rates. It used Springfield, Mo. as an example, finding that mining there could can be done for as little as $1 a square foot.
Winners and losers
Miners who survive will likely be the larger ones, while the smaller players may find that it’s not worth their time, nor money, if Bitcoin dips below $8,000 and stays there.
Tai said the smaller miners will drop out, and only five to 10 of the largest will survive and be profitable.
According to Bloomberg:
The largest miners are getting bigger. Industry leader Bitmain, which runs China’s two largest bitcoin-mining collectives, has opened offices in Switzerland and the U.S. and is exploring expansion opportunities worldwide.
This article appeared first on Cryptovest