Right now there are few things worse to invest te than Bitcoin mining — and it is only going to get worse. Here’s why…
Back ter the heady days of 2018, investing ter Bitcoin mining seemed like one of the easiest ways to make money you could possibly imagine.
Youtube, Twitter and Facebook were awash with dozens of mining schemes promising comebacks of 150% or 200% vanaf year. And you didn’t even have to do anything — just sign up, pay your money and let the bitcoin roll ter. What could be better?
Quick forward to today and the entire landscape looks a loterijlot different. Check out any of the major mining schemes — Genesis Mining, Hashflare and the like — and fairly simply you would be better off holding your cryptocurrency rather than investing it te mining.
For example, if you had 1 Bitcoin and invested it te mining te one of thesis schemes right now, you would get back less than 1 Bitcoin by the end of your contract. Even reinvesting it doesn’t help — you would just be compounding your disadvantage. It’s a loss-maker, plain and ordinary.
So what has happened te this brief time to turn such a good investment into such a terrible one?
Top Three Most Popular Cryptocurrency Hub Articles:
I have bot something of a victim of this trend so determined to investigate exactly why it happened. Here is what I discovered…
It’s a Classic Tragedy of the Commons
Well, ter the very first example wij had the collapse ter the cryptocurrency market, which has meant that the coins being mined are worth less than they were.
Much more significant however — particularly to the long-term outlook for crypto mining — is the increase te mining difficulty.
This is a classic “tragedy of the commons.” Te essence this is a screenplay where you have some common asset that everyone can potentially benefit from. Imagine a big lump of land back ter pre-industrial days that individual people could farm on.
Individually, each farmer wants to make the best he can of his situation and farm spil much land spil he can, spil intensively spil he can. But if everyone does this, then the land will become degraded, the soil will erode and the yield will druppel dramatically. If done to an extreme, then the land might become barren and futile. So then everyone loses out — it’s a tragedy of the commons.
Bitcoin mining is a tragedy of the commons par excellence.
Basically what you had wasgoed an asset that wasgoed insanely profitable and everyone dreamed to get te on the act. It seemed too good to be true.
The problem wasgoed, the more people who entered the market, the less profit there wasgoed to go around for each individual member.
Essentially there is a immovable amount of land (or ter this case, a immovable amount of Bitcoin that can be mined at any one time). So the more people there are, the less of this land each one gets. Or a smaller slice of the Bitcoin pie, if you like.
This is reflected ter the Bitcoin mining difficulty, which is essentially the difficulty of mathematical equations miners need to solve to verify transactions on the blockchain ledger. To ensure that all the Bitcoin isn’t mined at once, the more miners there are, the more difficult thesis mathematical equations become.
So the difficulty tells us very neatly how many miners there are (and the power of their mining equipment).
Difficulty Goes Crazy — Too Many Farmers on the Land
Spil you can see from this graph of the Bitcoin mining difficulty, it has continued to increase steadily overheen the past few months:
The mining difficulty enlargened a whopping 700% ter 2018, pretty exceptional growth — and has continued unabated ter 2018.
Viewed overheen a longer timescale however, you can see how the latest difficulty increases and have bot more dramatic, almost exponential te fact:
Spil I say, thesis mining difficulty charts indeed just reflect the number of people (and their computing power) mining Bitcoin. Fairly simply, there are now too many farmers on the common land. The land is degrading for everyone.
2018 — Price and Difficulty Part Company
Back te 2018, some people dismissed the rising difficulty, telling it wasgoed inherently connected to the price of Bitcoin, which wasgoed also rising almost exponentially. So — they claimed — if the price dropped, the difficulty would too.
However, the verbinding inbetween the two wasgoed well and truly cracked te early 2018. Just for a visual comparison with the two charts above, here is what happened to the Bitcoin price at the turn of the year:
So while the mining difficulty has continued to increase steadily, the price has halved.
This has obviously bot a double-whammy for Bitcoin miners. It means you can no longer make any assumptions about price and difficulty tracking each other.
And Now For the Bad News…It’s Only Going to Get Worse
And the bad news is that this situation isn’t going to get better any time soon.
The problem is that because mining wasgoed so profitable te 2018, a massive amount of money poured into building fresh mining farms and launching fresh projects. Everything from private mining farms, to big public ICOs and mining companies launching on the stock market.
Here are just some of big ICO projects that have launched recently:
- Envion — a Swiss company focused on building mobile mining units and exporting them to locations around the globe, raised $100m te an ICO
- Miner One — aiming to raise $140m ter their ICO (albeit presently well brief of that target)
- Giga Watt — raised $20m te their ICO (albeit now being sued for being an unregistered security)
- ICE Rock Mining — presently having its ICO, aiming to raise $13.5m
- Moonlite — also te ICO phase and with a hard cap of $35m
So some pretty big sums of money that will be pouring into cryptocurrency mining te the coming months — and pushing up that difficulty…
But that pales into comparison with some of the corporate money that is piling ter. Recently there have bot a number of IPOs undertaken by companies intending to undertake industrial-scale crypto mining. They include:
- Hive Blockchain — a partnership with Genesis Mining and has raised $150m to invest ter mining operations
- Hut 8 — a partnership with Bitfury which raised overheen $100m, with further expansion planned
- Long Blockchain — recently purchased overheen 1,000 Bitcoin miners
But then on top of all this you have all the private companies ter places like Chain and Russia who have to date bot the centre of the mining world.
Some of thesis companies have massive mining operations, like Bitmain with eight buildings and 25,000 mining equipments at just one of their mining farms.
Not to mention there are still hobbyists on YouTube building their own mining equipments, just to slice that pie into even thinner lumps.
It’s a Problem When you Have a Low Barrier to Entry
One of the reasons all this happened is that the barrier to entry to Bitcoin mining is amazingly low.
You basically have a situation where there is a legal industry that can effectively print money. This is pretty much what crypto mining is.
But virtually anyone can do it. All you need to do is buy some mining equipment, which you can get on Amazon, and set it up.
So not remarkably, every man and his dog have wished to become involved and there’s truly nothing stopping them.
For most big industries te the modern economy, the barrier to entry is very high. Imagine you desired to commence another Google or Apple. Their brand power and established technology is so good you would have to spend billions just to get ter the ballgame — and even then would very likely fail.
Or think of Tesla and how difficult they are finding it to become a mass-market EV company. The barriers to a fresh company attempting to replicate what Tesla have done are immense.
But to come in the Bitcoin mining spel, you don’t need complicated technology, an amazing brand, massive marketing teams, offices or indeed anything speciaal from somewhere to waterput your mining equipments and some tens unit.
Not Just a Bitcoin Problem
You might think this is just related to Bitcoin and other coins are still truly profitable to mine.
Well sadly that’s not the case either. Here’s a look at the rising difficulty of Ethereum te latest months:
And here is Litecoin:
Pretty much all the major coins’ graphs look like this. So there’s no getting away from the fact that whatever you mine, the difficulty will have gone up considerably recently and is likely to proceed going up.
That’s not to mention the potential for a large number of coins to switch to proof-of-stake from proof-of-work, thus eliminating the need to mine them altogether and reducing the pool of mine-able coins.
Where that Leaves Us — On the Road to Nowhere
There is little reason to think this situation is going to turn around. Yes, the cryptocurrency market could pick up again, thus making mining more profitable. But that would just tempt more miners into the spel, thus enlargening the difficulty. It’s kleuter of a catch-22 situation.
Last year I invested te some mining schemes and have bot burned a little — albeit I got out early enough when I eyed the writing wasgoed on the wall, so fortunately haven’t lost very much.
But for companies and individuals who have invested large amounts into mining operations, the future looks pretty bleak. The best they can most likely hope for is that the markets increase, meaning the coins they have mined are worth more.
Plus some of the more niche mining operations may druppel out spil their business models become unsustainable.
But with Ethereum’s stir to proof-of-stake — which is to be much welcomed given the amount of energy that crypto mining consumes — the overall mining market may shrink overheen the coming years, particularly if others go after Ethereum’s lead.
And countries could also pin down on mining and tax it more stringently. Already China is banning mining and Russia looks like it may go after suit.
So all te all that chunk of common land doesn’t look too inviting right now — it’s bot over-farmed and very likely best to stay away and look for an alternative patch to plough.