By Landon Manning
Amid a bear period for bitcoin, the hash rate and difficulty of mining new coins has reached an all-time high, presenting interesting new challenges and opportunities as mining companies, pools and individual miners look into the future.
New data from Coin Metrics has shown a sudden spike in the hash rate of Bitcoin, mere weeks after a two-month period of subdued activity. This period included a trend of miner capitulation, as more individual and smaller firms began to take such measures as selling off all their mined coins for dollars, dipping into cold storage bitcoin reserves for cash and ceasing operations altogether. However, compared to the beginning of this period in the beginning of the summer, the price of bitcoin has remained relatively stagnant as the hash rate has increased dramatically. Companies have felt the heat across the industry, especially those with razor-thin profit margins.
Bitcoin runs on proof-of-work, which is the underpinning for many of its most attractive features. Its trustless, decentralized blockchain can operate without a central authority governing it, only because transactions are included through an immense amount of hashing functions, performed by actors all over the world. Miners use computer equipment to solve puzzles, which ensures the ledger of all previously mined bitcoin and is itself the source of new bitcoin. As more miners contribute computing power to the network and therefore increase the hash rate, individual rewards drop off dramatically.
The days when a hobbyist could make a tidy profit from running the mining algorithm in the background of their computer’s ordinary functioning are long gone, and many smaller miners are being pushed by the combination of fewer bitcoin mined and the bitcoin mined being worth less. Thus, differentiating the failures and successes in the industry moving forward will largely depend on the concentration and organization of capital. As Fred Thiel, CEO of mining firm Marathon Digital Holdings said in an interview with Bitcoin Magazine, “Those miners who are well positioned, well capitalized and can operate from a position of strength are going to benefit from this.”
Thiel’s company, he claimed, had planned for this eventuality, focusing on a “very significant” buildup in capacity over the past several months, adding that “we’re actually one of the companies contributing to that growth in hash rate.” For those firms that find sufficient electricity sources and are well positioned to outlast spikes like this, the continued capitulation of smaller miners could lead to a much larger share of the pie. In other words, when bitcoin’s price balloons upwards again, these enduring operations will find themselves in a lucrative position.
Nevertheless, it is possible that further outside factors could end up making the situation more untenable, even for the high-capital mining firms like Marathon. Although the usage of bitcoin in China has recovered from the government’s 2021 ban on mining, and China continues in spite of the ban to be one of the top-producing countries, it has gone from the highest to the 10th spot. And the government is still very willing to prosecute what mining operations do exist. The shadow of this ban looms large over the bitcoin mining companies, as legal initiatives against Bitcoin are being considered in the United States.
Following attempts to assess the net contribution that the Bitcoin industry has on the environment, President Joe Biden’s White House has been signaling a belief that future carbon emissions goals may be at odds with the very existence of bitcoin mining in the country. Pushing aside the contentious issue of whether or not these claims are even founded, it is clear that a warning shot has been fired. Yet, most notably, concerned Bitcoiners should take heart in one simple fact: compared to China, the United States government is currently much less equipped to take any sort of authoritarian and unilateral action, especially against an asset that enjoys support among private businesses and from within the state itself.
A spokesperson for the White House was interviewed by The Verge on September 16, 2022, to explain the executive branch’s position, and was pointedly vague on the topic of specific actions. Emphasizing a need to promote information and cooperation, one of the few specific moves that was name-dropped was the use of federal agencies to assist state and local governments in their own “local impact” initiatives. When directly asked about the possibility of executive action, the only clear answer was that “there’s no outlined timetable.”
In other words, even if a top-down campaign against bitcoin mining was initiated — and it’s not clear if anyone in government has a clear plan of what such a campaign would look like — it does not seem likely that broad-sweeping changes could be organized or executed in the current political environment. Bipartisan support among legislators would only compound the existing deadlock in Congress, and executive orders alone are not enough to attack a multi-billion dollar industry.
From a legal standpoint, a catastrophic scenario for miners seems very unlikely, but it’s important to consider potential concerns like this alongside more pressing ones, such as production levels and profitability. Bitcoin and its mining industry have managed to weather an unbelievable array of storms since its release, and plenty of miners are already enacting a vision of how to weather this one. When the clouds do break, the spirit of innovation and adaptability will be as strong as ever.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.