As Bitcoin Searches for Bottom, Miners Lose Profitability
For miners, bitcoin’s profitability has been called into question as plunging price points and rising energy costs make rig operations more expensive to maintain. As bitcoin’s bear market deepens, the mining ecosystem will struggle just to break even.
Bitcoin Mining in Perspective
The arms race for hash power has intensified since early 2017 as the blockchain ecosystem grew larger and more competitive. But as prices depreciate, miners are finding it more difficult to maintain their operations.
For mining operations to remain profitable, bitcoin prices need to be $8,600 or higher, according to U.S. mega bank JPMorgan Chase. That figure is expected to rise as more hash power is needed to sustain a steady rate of creation. In order to reduce costs, miners need to search for efficiencies – something the market is sorely lacking today. That’s because cryptocurrency mining is expected to consume 0.5% of the world’s energy by the end of the year, according to research carried out by Alex de Vries.
“The industry is currently in a hash rate arms race, as the current bitcoin price is incentivizing the addition of more and more mining capacity,” JPMorgan said in a report on mining issued back in February. “If this growth in hash rate continues (as it likely will if margins stay positive) without an offsetting increase in energy efficiency of miners, average costs globally will continue to rise.”
Morgan’s outlook compelled TSMC, the Taiwan Semiconductor Manufacturing Company, to lower its 2018 revenue guidance to reflect growth of only 10% from 15% initially.
Companies in the market for specialized ASIC chips used for bitcoin mining are also facing cost pressures, though their profit cycle is longer than that of mining operations. ASIC providers are likely to break even as long as bitcoin holds above $5,000 for the next two years.
Bitcoin Has Yet to Bottom: Analyst
Bitcoin holders hoping for a reprieve from the recent selloff are unlikely to find it anytime soon, according to one of CNBC’s leading cryptocurrency analysts.
In a Monday interview with Fast Money, cryptocurrency trader Ran Neu-Ner said bitcoin still has a long way to go before reaching bottom. His price forecast suggests the coin will fall to $6,250, possibly opening the door to a deeper correction that tests $6,000 and, possibly, the $5,000 threshold.
“We’re the internet before you had a real browser,” Neu-Ner said. “And people are talking about a few exchange hacks. Those are to be expected from an industry that’s got a market capitalization of $300 billion; when we expect that one day this thing is going to have $20 trillion.”
Neu-Ner concluded that bitcoin is in a protracted bear market that will be difficult to break out of in the short term. In his view, a convincing break above $8,500 – the level needed to sustain profitability for miners – will prove elusive as volumes continue to decline.
Bitcoin recently traded near $6,770 following a double-digit decline over the weekend.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
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