Running a business is supposed to be a simple process – keep revenues rising and keep costs from increasing. But what do you do when both sides of the equation are working against you in the marketplace, through no fault of your own? You either get better, faster, and more efficient or you face options you would rather not have to face, i.e., being acquired or closing your doors for good and calling it quits. Sadly, crypto mining companies, often called the backbone of the industry, are having to face hard financial circumstances and decide which of the latter options works for them.
Crypto Winter, the long and drawn out meltdown of cryptocurrency valuations during 2018, has financial consequences for every participant in the crypto ecosphere. The bright promise of blockchain development ICOs (“Initial Coin Offerings”) has yet to be realized in true benefits in the marketplace. Recent reports have revealed that nearly 1,000 of these development companies failed in 2018. For those tokens that required mining reconciliations, the need disappeared like snow in the desert. The available revenue “pie” for miners, however, has gotten smaller for other reasons, as well.
The primary reasons for reduced revenue streams are twofold. First, a Bitcoin is not worth nearly $20,000 anymore. It languishes around $3,500, a good bit higher than the $500 figure from a few years back, but mining back then was less competitive. There were more fees and rewards to go around, and besides this fact, miners were “hodlers” at heart. They hoarded their coin rewards for that future day when valuations would finally reach for the stars. The “Buy-and-Hold” attitude, however, came to an abrupt end when Crypto Winter took its toll. Miners have had to cash in to stay alive.
The elimination of the weaker hands in the mining profession seemed to take hold in the latter half of 2018. Headlines such as these were startling: “600K Bitcoin Miners Shut Down in Last 2 Weeks.” Yes, that is 600,000 with five zeros, and it may be low. 800,000 may have been a better estimate, but the figure may have more to do with the number of jobs that disappeared, primarily in China, than actual companies. In any event, the mining profession is under financial pressure, and something has got to give.
Mao Shixing, founder of F2pool, a multicurrency Chinese mining pool, has prepared estimates in the past by reviewing the network “hash rate”, a measure of system computing power, and then correlating it with nodes present from time to time. His take on these estimates: “It’s hard to calculate a precise number of miners connected to us that had unplugged. But we saw over tens of thousands of them [shut down] in the past several days based on conversations we had with larger farms that we are in regular contact with. This is what’s happening among miners in China.”
The revenue side of the equation is one thing, but costs have been escalating, too. Industry competition has forced miners to upgrade their equipment on an ongoing basis. The need for faster processing speeds and more efficient software and hardware has made many mining operations obsolete overnight. Utility costs are next. If the local PUD (“Public Utility District”) is not pressing for higher rates for miners, then the normal doubling of rates for the Winter months will push costs beyond acceptable limits.
When you consider all pieces of the financial situation, miners, just as with oil drilling operations, need an average price in the marketplace to remain profitable. For miners, the general rule is that Bitcoin prices must be at the $4,500 price point, a level that Bitcoin has not traversed since early last November. This figure is an average and subject to question. Other figures as high as $7,000 have been cited, but the fact is that mining today is uneconomical for many companies, especially the ones with old equipment and escalating utility bills.
The big shakeout of miners and their employees does not stop at their door. There are a notable number of firms that supply the mining industry, like Bitmain Technologies, Nvidia, and Taiwan Semiconductor. Any hiccups in the mining sector will also send shockwaves through these companies, too. Bitmain is a vast Chinese mining empire with some $2.5 billion in annual revenues. It is into every aspect of the business, including the hardware components and actual mining operations housed in Mongolia. Word on the street is that Bitmain had to layoff 80% of its staff in one mining related division in order to bring finances back in line.
According to Mao, there is a silver lining in these cutbacks, at least for the ones that survive the “cleansing” and go on about their mining activities. Precipitous drops in the hash rate, some 22% in a matter of weeks as depicted in the above diagram, actually make the task of mining a bit less difficult. Mao explained: “Bitcoin mining is always a dynamically adjusted process. The change of Bitcoin’s mining difficulty normally has a lag of about 14 days [following hash rate change]. After this wave of shutdowns, those players who opted to stay in may have a better life.”
The times are tough in the crypto mining sector. Weak hands are departing the scene, as profit margins shrink and inefficient programs sink into oblivion. The herd is being culled, so to speak, a healthy exercise in any industry. For the ones that survive the “cull”, hopefully, the fittest of the group, the road may be a bit less difficult to master. There remains the environmental issue of extremely high rates of power consumption that will have to be addressed by technology at some point.
The existing “Proof-of-Work” concept that drives the mining process today may have to give way to alternative methods of updating the blockchain, as new developments provide solutions for going forward. Terms such as “Proof-of-“ Burn, Stake, Capacity, and Elapsed Time are all being tested in various outlets, some in real time with existing coin systems.
The message is that technology is searching for an acceptable solution to what could be called the “Achilles Heel” of the crypto industry. The sooner, the better!