Retail miners are feeling miserable: Where is the promised decentralization?

This article comes from Cointelegraph, original author: Will Heasman

Odaily Planet Daily Translator | Nian Yin Si Tang

In the early days, Bitcoin was just a niche experiment for cypherpunks and hobbyists living in basements. It was easy to obtain, and all you needed was a CPU within your budget. Everyone knows the story that followed - the entire mining industry has since flourished, and a gold rush comparable to the 1850s swept the world.

The increase in Bitcoin mining difficulty and the decline in profitability of individual mining have directly led to the current mining industry being controlled by large corporate groups. On the surface, it is called the industrial revolution of Bitcoin, but the rise of cooperative mining has changed the rules of the game for everyone.

CPU mining quickly became obsolete in favor of more powerful GPU-based systems, and facing the threat of obsolescence, many old-school miners banded together to form the pioneering mining pools that are the norm today.

The two largest Bitcoin mining pools, Antpool and BTC.com, currently account for 29% of the entire market.

To be able to at least profitably mine, you need a large number of specialized, high-performance mining machines. These devices are so complex that the price of individual components is almost higher than that of ordinary retail mining machines. These improved devices no longer use GPUs, but ASIC chips.

Bitmain, which also owns Antpool and BTC.com, is undoubtedly one of the largest mining machine manufacturers. At the beginning of last month, the mining machine giant announced two new ASIC mining machines - s17+ and T17+. Bitmain co-founder Jihan Wu promised that these mining machines will bring higher power efficiency and overall computing power. According to Bitmain, the popularity of Bitcoin mining shows no signs of slowing down. A few weeks after the announcement, a British mining company called Argo Blockchain placed an order worth $9.51 million for 10,000 T17s, which directly increased the number of its mining machines by 240%. In an interview with Cointelegraph, Mike Edwards, CEO of Argo Blockchain, did not hesitate to praise the T17: "Overall, we are very satisfied with the performance and stability of the 17 series mining machines, and we think the T17 has the best price-performance ratio."

It’s no surprise that Argo is eager to expand its mining rigs. Over the past few years, the power of miners has become increasingly evident. Bitcoin’s hashrate has grown exponentially over the past decade, reaching a milestone of 100 EH/s more than two months ago.

As computing power increases, mining difficulty increases. Bitcoin network nodes adjust the difficulty every 2016 blocks to accommodate new computing power. This adjustment is mainly to combat inflation, but it has other consequences: the increased difficulty reduces the profit margins of miners, which requires more powerful mining machines to remain profitable, thus continuing the cycle.

Is Bitcoin Mining Still Profitable?

Mining profitability is not all about equipment; it also requires finding a delicate balance between mining difficulty, electricity costs, and Bitcoin price. The latter two are especially inseparable.

For example, the lower the electricity costs, the more profit can be made - even with less efficient equipment. On the other hand, with the right mining farm, miners can make up for the disadvantages of high electricity prices by maximizing their computing power and economies of scale.

However, one of the biggest obstacles to mining profitability is ultimately the ever-changing price of Bitcoin. This is a painful past for many miners, who were forced to shut down their machines during the 2018 bear market as the delicate balance between Bitcoin price and profitability broke down.

At that time, as Bitcoin gradually fell to a four-digit low, several mining companies were unable to make ends meet. Around November 2018, shortly after Bitcoin fell below $6,000 a month ago, there was a large-scale "capitulation" by miners.

At the time, an estimated 600,000 to 800,000 Bitcoin mining machines were shut down, causing the hash rate to drop by 46%, from about 58 EH/s in early November to about 31 EH/s in early December.

As can be seen, mining is often a double-edged sword. In a bull market, profitability is huge, depending on how high BTC can rise; in contrast, the bear market throughout 2018 could be disastrous. Bitcoin's volatility is both a curse and a blessing - for Edwards, the latter is more accurate:

“As a currency and asset class, Bitcoin is still very much in its infancy, having only been around for a little over 10 years. This makes valuation challenging. Volatility creates interesting opportunities in the short term, but we expect this to diminish significantly over the next few years.”

As for whether Bitcoin’s volatility will affect mining profitability, Philip Salter, operations director at mining company Genesis, did not comment: “Yes and no. Volatility means uncertainty, but it is possible to eliminate most of the risk through good planning and market analysis.”

Not everyone has emerged from the bear market unscathed. Bitmain, for example, has been hit hard. Despite achieving record profits from 2017 to early 2018, the company had to lay off 50% of its staff and close several offices to stay afloat. Then, shortly after Bitcoin’s hashrate stagnated in November last year, its network power and price recovered, a clear sign that miners were turning back on.

Note: Wu Jihan recently said at an employee meeting that the layoffs at the end of 2018 caused serious divisions within the company and panicked Bitmain's trading partners, and the crypto market was at a low point at the time. Wu Jihan recalled: "That day, we received a call from a supplier asking the company to settle accounts payable. The loan amount that Bank of Beijing had agreed to give us was cut the next day." Speaking of this, Wu Jihan couldn't help but sigh: "If it weren't for the rebound in the price of Bitcoin in the following months... The company might not have been able to survive last winter."

For now, mining profitability seems to be fairly stable for some, even after a long bear market cycle. Edwards confirmed this, noting that Bitcoin mining has been quite profitable this year, “We found Bitcoin mining to be very profitable in 2019 and expect this to continue into 2020.”

Life is tough for retail miners

While the future looks bright for large mining companies, the outlook for smaller mining companies is not optimistic. According to data from bitinfochart, overall mining profitability has shrunk by 64% from its peak in June. This may be a direct result of the increase in mining difficulty - in the same time period, mining difficulty has increased by 85%.

Obviously, as hashrate increases, the rising difficulty will squeeze retail miners out of the market. Edwards highlighted this phenomenon, pointing out several market advantages that large miners have over small miners, saying, “It has become extremely difficult for individuals and small miners to remain profitable because the current mining system favors large-scale mining.”

Salter agrees: “Small miners generally don’t get lower electricity prices and don’t benefit from economies of scale like larger miners do. While it’s still possible for small miners to make money, depending on local conditions, the big miners will eventually take up more and more market share.”

85% of Bitcoin has been mined

On October 18, 2019, the 18 millionth Bitcoin was mined, which means that there are only 3 million Bitcoins left to be mined out of a total of 21 million. What does this mean for the profitability of mining?

It may not seem good, but the fact that 85% of Bitcoin has been mined actually has no effect on miners - at least not directly. While 15% may not seem like much, according to the quasi-monetary policy proposed by Bitcoin creator Satoshi Nakamoto, it may take more than 100 years to mine the remaining Bitcoins, and it's all thanks to Bitcoin's halving. Simply put, every 210,000 Bitcoin blocks mined, the block reward will be halved. This is done to avoid hyperinflation by controlling the circulating supply.

Bitcoin has experienced two halvings. The first was in 2012, when the mining reward was reduced from 50 BTC to 25 BTC; the second was further reduced to 12.5 BTC. The next Bitcoin halving will come in May 2020, when the block reward will be reduced to 6.25 BTC.

While the idea of ​​halving rewards is genius in terms of supply and demand economics, the effect on miners is less positive. As rewards are cut in half, so too will miners’ profits — unless the price of Bitcoin meets some lofty expectations.

Edwards believes that, judging by past events, these expectations are bound to come true. “The increased scarcity due to the halving will be a catalyst for BTC’s price to rise,” he explained. However, there are many other factors at play. He also believes that the least efficient miners, some of whom may still be using five-year-old S9 Antminers, will eventually be squeezed out of the market.

Salters believes that the only way Bitcoin mining could become "unsustainable" is if Bitcoin itself becomes worthless. However, he quickly added that this risk is close to zero due to Bitcoin's decentralized nature. Salters pointed out that the transaction fees that grow with the increase in the number of transactions will make up for the low rewards for validating blocks.

He added: “Mining revenue is determined by the number of bitcoins mined multiplied by the price of bitcoin. So both factors need to be considered together to see the result.”

Is the end near?

Of course, profitability is subjective and based on a wide range of variables. However, for many retail miners, facing the halving without a significant increase in the price of Bitcoin is undoubtedly "winter is coming."

Imagine that if the price of Bitcoin remains relatively stable or even falls before May 2020, many retail investors will be forced to exit. Only large mining companies and mining pools will be left to compete, which will inevitably bring the risk of Bitcoin centralization.

Still, thanks to Satoshi’s brilliant design, small miners won’t really lose everything. A mass exodus of retail miners will undoubtedly trigger a readjustment of difficulty, so that smaller miners can become profitable again. However, as Edwards points out, this won’t last forever, and miners will be forced to turn to a new incentive: “Over time, the market will drive out the least efficient miners, and the diminishing block rewards will be replaced by fees collected from user transactions.”

So, while the road ahead will be tough, it looks like mining is here to stay and will continue to be lucrative. However, for retail miners, their days appear to be numbered.