Anyone who has purchased GPU video cards, participated in cloud mining or looked at Antminers knows that the difficulty needed to mine a cryptocurrency, power usage and product maintenance will limit your returns. Investors in cryptocurrency mining must use a mining calculator like the one on Cryptocompare: https://www.cryptocompare.com/mining/calculator/ to determine if they will embark on a mining-rig setup. A major factor in mining profitability is the difficulty increase over time. When Bitcoin fell in Q4 2017, the mining difficulty increased and cloud mining in particular was killed off. The implications of decreasing Bitcoin mining difficulty and decreasing prices is a potential intrinsic loss of value in Bitcoin and the cryptocurrency market as a whole.

Bitcoin’s blockchain works by processing a block consisting of 2,500 transactions every 10-minutes. A factor that gives Bitcoin its intrinsic value is the amount of money it takes to mine the cryptocurrency and the utility of Bitcoin as a medium of exchange/store of value. Currently, it takes an average of $4,500 to mine a single Bitcoin, and since Bitcoin is worth less than this, miners are abandoning their craft. Miners build rigs and compete to solve the Bitcoin algorithm, using GPU and ASIC processing technology. The key assumption is that as Bitcoin is adopted, its value will increase and the difficulty to mine the cryptocurrency will increase. When Bitcoin was $20,000/coin, it took 3-days large fees to transfer the currency.

The decreasing mining difficulty of Bitcoin seems to indicate that Bitcoin’s value has been decreasing intrinsically. We learned from the oil crash of 2015-2018 that when the price of a commodity, be it oil or Bitcoin falls, producers will abandon their craft and firms will go bankrupt. If producers are deeply indebted, they may fail catastrophically. Since CPU and GPU mining are no longer profitable for individuals, we are in thrall to large centralized companies (many in China) to process our Bitcoin transactions. If Bitcoin continues to freely fall, we may see individual miners return to profit and Bitcoin more closely align with its whitepaper.

Sources:

https://www.cryptocompare.com/mining/calculator/

https://www.ccn.com/bitcoin-mining-difficulty-just-saw-its-second-largest-drop-in-history/

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