Bitcoin miners fried in game of chicken

This article first appeared in The Edge Financial Daily, on February 7, 2018.
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BITCOIN miners who have decided to stay in the game amid plunging prices may soon find that the well has run dry.

A 70% price drop since the heady days of mid-December has cut profitability to the bone. With the cryptocurrency hitting US$6,000 yesterday, only the biggest and most efficient can stay above water, but even these are balancing on a knife edge, according to a Bloomberg analysis.

Unless you are an outfit running the fastest rigs bought at wholesale prices — 67% of all mining power is in the hands of four pools — chances are you are losing money. The arms race among participants has brought 40% more mining power online since Bitcoin prices went above US$19,000 on Dec 18. 

That has resulted in the rebalancing system built into the digital currency making it 51% more difficult to complete a block, according to data from Blockchain.info.

Miners forced to work ever harder for each Bitcoin have shrugged off this escalating requirement for computational power — up 18-fold in two years — because a 21-fold price increase over the same period made the cost worth the investment. 

Had Bitcoin stayed at its 50-day moving average of US$13,200, then the average miner could expect to print US$80 per week in profit at current levels of computation (hash rate) and difficulty. 

This is based on the very generous assumption that a miner is running Bitmain Technologies Ltd’s Antminer S9 at 13.5 TH/s (retail price US$2,320), one of the most advanced systems available, and the set-up is in China at wholesale prices (1). 

Older equipment will have lower returns, and a lot of those mines are still online.

If the price does not rise, then the average miner is set to lose US$3 per week at current levels. Mining syndicates such as Antpool — which are probably buying their mines at less than the retail price — may still be making money, but will be getting returns 90% lower than they would at that 50-day moving average.

The only way for miners to return to sustained profits is if Bitcoin prices rise, or some miners turn off the lights, lowering competition. History shows that while the latter is possible, it is unlikely. 

In fact, those who have plunked down millions of dollars to build their Bitcoin mining operations seem to be playing chicken in the hope that competitors will flinch.

If that happens, they reason, then the bravest miners will be left alone to enjoy the spoils. If it does not, then expect a lot to drive off the cliff together. — Bloomberg

1. While China has sought to force out Bitcoin mines, it is the largest base for them at present.