Bitcoin Miners Fried in Game of Chicken

Bitcoin miners who've decided to stay in the game amid plunging prices may soon find that the well has run dry.

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

Big Dip

Bitcoin has fallen as much as 70 percent since its December high

Source: Bloomberg

Unless you're an outfit running the fastest rigs bought at wholesale prices -- -- 67 percent of all mining power is in the hands of four pools -- chances are you're losing money. The arms race among participants has brought 40 percent more mining power online since Bitcoin prices went above $19,000 on Dec. 18. That's resulted in the rebalancing system built into the digital currency making it 51 percent 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. 

Escalation

Bitcoin computational difficulty and the amount of processing power brought online have climbed

Source: Blockchain.info, Bloomberg Gadfly

Had Bitcoin stayed at its 50-day moving average of $13,200, then the average miner could expect to print $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 $2,320), one of the most advanced systems available, and the set-up is in China at wholesale prices. Older equipment will have lower returns, and a lot of those mines are still online.

Knife Edge

Even the most advanced Bitcoin rigs risk losing money as prices slump and miners stay connected

Source: Calculations made using Coinwarz.com, cryptocompare.com, Blockchain.info; analysis by Bloomberg Gadfly

If the price doesn't rise, then the average miner is set to lose $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 percent 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's 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 doesn't, then expect a lot to drive off the cliff together.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net

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