In recent weeks the value of the cryptocurrency market has dropped significantly. It was reported that an imminent advert ban connected to digital currencies on Google, pending regulatory pressure and a substantial selloff of bitcoins from Mt Gox were the key factors responsible for the fluctuation in the market prices. As a result, bitcoin price has fallen considerably.
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Speaking on the recent slump in prices, the managing partner and head of Research at Fundstrat Global advisors Thomas Lee suggested that it may no longer be cost effective to mine bitcoin. He pointed out that Bitcoin currently trades at the break-even cost of mining a bitcoin; hence the present cost of bitcoin mining may not be cost-effective. Usually, once the selling price of bitcoin slumps, miners discontinue mining till the fluctuation in price stabilizes. The current price of bitcoin has reduced to the extent that, the market price of Bitcoin is now almost the same as the cost incurred in mining. Elite Fixtures conducted a research to reveal the cost of mining bitcoin in different countries. The research reported that mining bitcoin in South Korea is the most expensive, costing $26,170 while Venezuela is the least expensive country to mine bitcoin with an average price of $531.
Fundstrat’s model outlines three factors that is responsible for the high cost of mining: the cost of mining equipment, electricity, and additional costs incurred in maintaining cooling facilities.
Just as it is true for every other type of business, the ultimate aim of mining bitcoin is to make profit. If the money expended on mining becomes more than the profits generated, then the miners will lose money. Bitcoin mining is an expensive process, in fact, the hardware required for the mining process can run from several hundreds of dollars to a few thousand. If you combine this with the increasing costs of electricity, you will arrive at almost the current price of bitcoin, which means miners aren’t making profits – they’re simply “getting their money back.” With the current situation, many miners may eventually lose the incentive to continue mining, and simply turn off their equipment till the price comes back a bit.
Furthermore, miner’s earning seems to have dropped in recent months compared to the previous year. According to the CEO of Industry data site, there has been an increase in the interest rate of mining bitcoin. To compound the problem, transaction fees have also plunged. Data from bitinfocharts estimated that transaction fee was around $34 but right now it is estimated to be about 30 cents.
The cost of mining Bitcoin tends to vary from one country to another especially since the cost of machinery and electricity differs from country to country. In the United States, for example, the cost of electricity is generally higher compared to other countries like China for instance. A major challenge to cheap bitcoin mining in China is that the government is now trying to reduce mining operations by limiting miners’ access to cheap electricity. With all these developments, it is difficult to predict accurately when miners will be able to start mining profitably again.