Table of Contents
Main conclusions
The cost of mining one bitcoin has dropped to $13,000 from $24,000 in early June first quarter compared to the same quarter last year This means miners’ costs (electricity) are rising and their revenue (Bitcoin) is falling Miners are therefore fleeing the network As miners flee, the difficulty of mining drops – now at a 5-month low – explaining why the cost to mine a bitcoin has dropped Lower mining difficulty reduces network security as it means attackers need fewer resources to manipulate and take control of the system Lower resources needed to validate transactions also favor small-scale miners, allowing them to better compete with larger miners Last month, JP Morgan published a report. paper describing that the cost of mining a bitcoin had dropped to $13,000 – a sharp decline of 46% since early June, when a bitcoin cost $24,000 to mine. But how is this true, when the geopolitical climate is causing electricity prices to rise, in line with the inflation seen in general?
Electricity costs are rising
The European Power Benchmark recorded an average of €201/MWh in the first quarter of 2022 – an increase of 281% compared to the same quarter of 2021. Spain and Portugal rose by 411%, while prices in France rose by 336%. Italy was not far behind, up 318% and is now the highest price in the EU at €249 per MWh. This means that the operational costs to mine Bitcoin are increasing, hurting miners and causing many to give up on the activity.
Mining
This is where it gets interesting. To give a super quick explanation of mining, Bitcoin miners look to solve a complex mathematical puzzle. Any miner who solves the puzzle first earns the right to “validate” that block of the blockchain and therefore receives a reward in bitcoin. The block is added to the blockchain and then the process repeats, with miners competing in the next math puzzle for the next block. The amazing thing is that the mysterious creator of Bitcoin, Satoshi Nakamoto, coded an adjustment mechanism into Bitcoin. This means that as more miners join the network and compete to solve the math puzzles, the puzzles become more difficult. That way, the blockchain works as it should, targeting the same average blocks per hour. Indeed, Satoshi’s quote below the Bitcoin whitepaper highlights that he anticipated that computers would become more powerful and interest in mining would increase over time: nodes over time, the proof-of-work difficulty is determined by a moving average targeting an average number of blocks per hour. If they spawn too fast, the difficulty increases.”
what does it mean today
This rise in the price of electricity combined with a drop in the price of Bitcoin is the worst thing that can happen to miners. Your costs (electricity) are increasing while your revenue (Bitcoin) is simultaneously decreasing. And they are running away. The chart below shows the network mining difficulty. It’s clear that miners are feeling the pinch, along with the rest of the market. The average difficulty hit its lowest level since March. This is often seen as a negative for the Bitcoin network as a whole as it reduces the security of the blockchain. The greater the difficulty of the cryptocurrency, the more processing power is required to verify transactions and the greater the complexity. In this case, attackers need more resources to manipulate and take control of the system. A second possible consequence is that lower mining difficulty could be good news for small-scale Bitcoin miners. This is because it allows transactions to be confirmed using fewer resources, allowing the small to compete with larger miners. If electricity costs continue to rise and Bitcoin lags behind its current level (or falls further), that won’t change anytime soon. On the other hand, if Bitcoin goes up, we could see more miners dust off their gear to get back in the game, with the difficulty going up again as a result.
Sources
JP Morgan / Decrypt Europa.eu IntoTheBlock
