At What Price Will Bitcoin Miners Lose Money?

Earlier in 2018, the prices of computer graphics cards and other mining related hardware began to surge because of the new interest in bitcoin mining. In order to be paid for a block reward a node must contribute computational energy to the bitcoin network. Miners get paid based on the time and amount of computational energy they contribute. This is what keeps most blockchains secure.

Many new bitcoin miners joined the network during December and January of last year. This was primarily due to the irrational exuberance surrounding bitcoin during this particular time. Unfortunately, bitcoin miners are becoming less profitable due to the cryptocurrency bear market. The current state of the market has created an imbalance in the number of miners and the number of transactions executed. The overall resources of the network are not efficiently allocated.

During December and January of last year the number of bitcoin transactions reached an all-time high. At this time, there were a lower concentration of miners on the network. Therefore, transaction fees went to an all-time high as well. However, one of the most fundamental aspects of crypto economics is how the bitcoin blockchain incentive structure works. Assuming the rate of transactions is fixed, when more miners join the network block rewards should theoretically become lower. This is ideally how the system is designed to balance itself and incentivize miners to join and leave the network resulting in an equilibrium.

Miners have costs, the bulk of the amount being electricity, investing in GPUs, ASIC miners, and maintaining hardware. The majority of bitcoin miners are located in China were they consume electricity at the cost of 4 cents or less per kilowatt hour. In the US, the cost of electricity for most bitcoin miners will be around 6 cents per kilowatt hour. According to Fundstrat’s bitcoin model, miners will break even at $8,038. This model assumes prices of 6 cents per kilowatt hour and projected costs of replacing old hardware.

Fundstrat’s model is only one perspective, nevertheless at bitcoin’s current price of$5,912  one can only imagine how mining companies must be hurting. This has forced some mining companies to turn off their hardware until a price increase occurs. Others continue to mine hoping to see a future price increase.

Above all, how could this effect the bitcoin network? Although the mining system is designed to create a point of equilibrium, some mining companies will be able to continue operating longer than others. This could presumably force out smaller decentralized miners and allow a centralized mining company to survive and dominate the network. Ultimately, creating even more centralization within the bitcoin mining network.

Disclaimer: I am not a financial advisor, this is not financial advice. Please do your own research and make objective decisions. This article is intended to educate readers on the mining profitability of Bitcoin. The author of the article owns cryptocurrency.