How important is geographic location in today’s Bitcoin mining landscape?
Can miners still gain a competitive advantage depending on where they set up shop?
At this point in the year, miners have seen everything — from more than half the world’s hashrate changing location, to new pools taking over the rankings, to some of the world’s largest miners declaring bankruptcy overnight.
With the landscape still rearranging itself and miners’ margins getting thinner, geographic location is becoming an ever more influential factor in the mining industry. In this article, we’ll analyze how geography affects miners in different levels and the possible outcomes in the long term.
Why geography is playing a key role in the mining industry
Geographic location is a crucial factor in the profitability of Bitcoin mining operations. The cost of electricity, which is one of — if not the — main expenses for miners, can vary greatly depending on where a mining operation is located.
Generally, mining operations are set up in areas where electricity is cheap, as Bitcoin mining is a power-intensive process that requires a tremendous amount of electricity to run.
One of the main factors that determines the cost of electricity for a mining operation is the source of the electricity.
In some areas, electricity may be generated primarily from renewable sources, which can be cheaper than electricity generated from fossil fuels under certain circumstances. Also, the cost of electricity can vary depending on the local infrastructure and the availability of power.
In addition to the cost of electricity, the cost of cooling equipment is another important factor to consider in the profitability of a mining operation.
In that regard, the cost of cooling equipment may be lower in some locations due to natural factors such as lower ambient temperatures or greater supply of more efficient cooling technology.
Furthermore, the availability of land and space to set up a mining operation can also be an important element in determining its profitability.
This correlates directly to regional factors, as the cost of acquiring land or renting space may be lower, which can make it more cost-effective to set up a mining operation.
Finally, the local regulatory environment can also affect the profitability of a mining operation. Some countries or regions may have regulations that make it difficult or expensive to set up a mining operation, while others may be more welcoming to the industry.
The two sides of geography effects on mining
By carefully considering the above factors and choosing a location that is favorable for mining, operators can maximize their chances of success in a sector as competitive as Bitcoin mining. Yet, as good as it may be for profitability, it also carries negative consequences for the mining industry as well.
The more convenient a location is for miners to set up shop, the more likely they are to do it, which may lead to the concentration of large Bitcoin miners in these areas.
In turn, these miners gain a competitive advantage over the rest, which allows them to scale their operations faster and increase their share of the global hashrate. This leads to an increasing tendency of hashrate centralization.
On the other hand, miners located in less convenient areas and unable to relocate may be left out of the mining process, either because of regulatory prohibitions or unprofitableness.
With one side gaining too much advantage to the point it favors centralization, and the other being so impaired that mining becomes an impossibility, it’s clear that the industry needs to rebalance the effects of geography on Bitcoin mining. Then, the question remains: How?
Leveling the scale for Bitcoin miners worldwide
Logically, miners are free to set up shop wherever they want. It’s not possible — nor would it be compatible with Bitcoin’s core values — to force them to make certain decisions, like descaling their operations or moving someplace else.
Profitability is also important, as it’s the major driving factor behind most mining operations. In that regard, favorable locations that allow mining to be more profitable is necessary for Bitcoin to remain secure.
What are our options then?
If we take a closer look at the situation, we can tell that the issue is not about geographic areas, but about control of hashrate that derives from geographical factors.
Miners on favorable locations have a competitive advantage to acquire more control of hashrate, while those on less convenient places gradually lose control of it.
So, it would seem that the situation could improve if we managed to transfer control of hashpower from the former to the latter.
If we could transform Bitcoin mining hashpower into a tradable commodity, miners could sell it on the open market to the highest bidder, allowing them to enter the mining process regardless of their location.
More importantly, they would be incentivized to do so. First, because resigning control of hashrate — without resigning the revenue it generates — would improve the health of the Bitcoin network, which is in their best interest as their entire operation depends on it.
Secondly, because selling hashpower in the open market allows them to hedge against the most significant risks in the Bitcoin mining industry: volatility, difficulty, and luck.
By being able to set the terms of the sale themselves, miners can enjoy greater profitability and plan more effective business strategies in the long term.
At Lumerin, we’re developing a decentralized, peer-to-peer hashpower marketplace that will enable this new type of transaction by combining data stream routing through Internet protocols and smart contract functionality.
The combination of these two layers allows for hashrate — or any type of data stream — to be exchanged like any other asset through self-executing computer code.
Interested in learning more? Visit us at lumerin.io
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