The current state of the Bitcoin mining industry
Introduction
The largest 50 Bitcoin mining companies control over 50% of hashrate (the total amount of mining computational power connected to the network). The industry is quickly following the same centralized path as the gold mining industry, which transformed from the gold rush in the mid 19th Century with around 300,000 gold seekers arriving in California to hunt for gold, to the modern-day with large companies dominating the gold mining market share.
In the 19th Century, Californian goldfields were primarily on public land, with no legal rules or enforcement mechanisms in place. The gold was seen as free for the taking, and equipment requirements were minimal. Californian gravel beds were so rich in gold that people could retrieve loose gold flakes and nuggets with their hands and they simply panned for gold in rivers. Anyone could and did participate.
Fast forward just over 150 years, machinery and large industrial-scale operations dominate gold mining. Although some small-scale mining is still popular, without machinery small miners cannot scale and their upside is capped. As a result of these scalability issues, in 2020 the top 10 gold mining companies produced 27.5 million ounces (worth $48 billion) — 22% of the total market share! This centralization of market share will likely increase over time due to mergers and acquisitions.
How has BTC mining accessibility changed?
Much is the same with Bitcoin mining, in its infancy Bitcoin could be mined on a home computer and barriers to entry were very low. To start mining all you needed was a computer (or less than $1,000 to buy one if you didn’t already have one). From this, hundreds of bitcoin could be mined in a week. Nowadays, you will need to find $8,000-$10,000 to buy a Bitcoin mining rig. As mining difficulty increased so did the cost, complexity, and computational power of mining. After computers, GPUs (graphics processing units) were used — they had the same computing power as dozens of computers, but those too were eventually inadequate. 2013 saw major innovation with the creation of ASICs (application-specific integrated circuit) mining rigs. These are more energy-efficient than GPUs because their sole purpose is mining cryptocurrency, whereas GPUs have other applications such as gaming and computer display which reduce mining optimization. ASICs are still used and their efficiency and computing power have been increased over time.
Nowadays, if you don’t have $8,000 you can’t buy your own mining rig. Even with $8,000, you have to take physical delivery of it, store it at home, manage and maintain it — not to mention the high electricity cost you will pay. If you want to scale and buy another rig you will need another $8,000 and if you are fortunate enough to have enough money be able to start off with 100 mining rigs — how many can you fit in your bedroom before you need to rent your own facility? Small and large participants have issues with access and scaling.
These issues with costs, storage, and scalability are the high barriers to entry that have led to an industry that has become inaccessible to most retail participants. Bitcoin mining has slowly gone away from Satoshi’s decentralized vision in that the largest 50 Bitcoin mining companies control the majority of the hashrate due to these high barriers to entry.
Miners are heavily dependent on electricity costs being low in order to maintain profitability. Not only that but as hashrate increases, the difficulty of mining also increases because there is more competition within each block. Also, miners have the added issue of Bitcoin rewards being cut in half roughly every 4 years. Therefore, keeping costs as low as possible and increasing the computational power and efficiency of miners are key to long-term profitability. These low costs not only give miners a very low Bitcoin breakeven price so that they can remain profitable in bear markets but they can also result in a huge ROI if Bitcoin’s price increases in the medium term.
As we can see in the table below comparing a more recent 2021 S19J Pro mining rig with an older 2018 S9 model gives drastic differences in profitability across varying electricity prices. Bearing in mind that the average cost of electricity for a European household is $0.20 per kWh, anyone looking to mine at home is at a large disadvantage, and in fact, will only make a profit using the most recent and most expensive mining rigs. $0.03 kWh is achievable in some countries and with hydroelectric power in a few others. As a result, the ROI is 3x higher when compared to the ROI when using electricity in a European household. Low electricity cost is vital for profitability because it makes up the majority of a mining rig’s running costs.
Even with the older model, mining is very profitable with extremely cheap electricity which is why there are still S9 mining rigs running in Kazakstan and some other low electricity cost countries. However, there can be problems with older models like this; they can break down very easily resulting in more downtime and lower than expected returns, and they will need more regular maintenance. Also, they will have roughly 2–3% electricity loss, so slightly more electricity will be used than expected. Furthermore, scaling an older model will require larger-scale maintenance and a lot more storage space due to the huge amount of mining rigs needed when compared to the S19J Pro. Whereas S19J Pro miners will always be profitable even with high electricity costs and will require much less maintenance, this still doesn’t solve the high barrier to entry with the cost being $8,800.
Centralization risks
Centralization of Bitcoin mining farm ownership is a risk and it creates a single point of failure. When China banned Bitcoin mining it had a huge impact on hashrate because the majority of mining was operated in China and it took time for those miners to set up overseas. If mining was spread globally there would have been a far smaller drop in hashrate. With the centralization of ownership, there is also have the risk of a “51% attack” where a group of miners, if they collectively controlled over 50% of the hashrate, could hypothetical collaborate to halt transactions on the network or even reverse transactions that were completed while they were in control of the network, meaning they could double-spend coins. The decentralization of mining is important in mitigating these risks.
Sesterce has been working on solutions to make low-cost mining much more accessible and scalable, helping to reduce the risk of a 51% attack. We will share more about this in later articles!
