A privately published report by J.P. Morgan reveals that the average bitcoin miner no longer finds mining the cryptocurrency profitable. Recently made public by Bloomberg News, the report reveals the per-bitcoin mining electricity cost to average $4060 globally (excluding equipment), far above its current market price $3413.
According to J.P. Morgan analysts, Chinese miners remain the exception to this rule. They’ve been able to contract with aluminum smelters and other industries that produce excess electricity. These miners can mine a single bitcoin for as low as $2400.
While J.P. Morgan has always been remarkably bearish about cryptocurrencies, their warnings about crypto-mining now appear prescient. In particular, concerns about Proof-of-Work (PoW) mining and its long-term sustainability are quickly becoming validated. Despite their report’s overwrought rhetoric, and belief that crypto’s utility rests solely with a “dystopian future,” events continue to reaffirm this analysis. Continuing miner consolidation and new concerns about a possible death spiral are also adding to these concerns, leaving many investors waiting on the sidelines.
Due to low or negative profit margins, roughly 600k miners have dropped out of the mining race. The resulting drop in total hashing power has lowered mining difficulty and helped renew profit margins. While this difficulty adjustment provides miners with additional mining incentivizes, it’s merely slowing down a continuing decline in hashing power. And since bitcoin’s block reward will be halved again next year, miners will have even less incentive to mine. Once miners mine all 21 million bitcoins, transaction fees will be the sole remaining incentive.
Dropping Hash Rate
Unfortunately, a dropping hash rate eventually affects the security of the entire blockchain. That’s because higher hash rates make 51% attacks economically unviable. These attacks become easier to conduct when renting hashing power costs decline. Smaller Proof-of-Work coins are especially vulnerable, as miners can easily afford majority hashing power over them. Not incidentally, most of these attacks go unnoticed or unpublicized, This nifty calculator reveals the current costs associated with carrying out such an attack.
A dropping hash rate also incentivizes miners to consolidate, as they can better achieve economies-of-scale (and regain profitability). As miners consolidate, their ability to conduct a 51% attack increases. Simply put, a mining pool with 31% hashing power over a network need only conspire with one that has 20% hashing power to launch an attack.
On smaller PoW blockchains that attract fewer miners, such attacks have already been successful. Ethereum Classic has been the most notable of these this year, Bitcoin Gold being the most notable last year (in which $20 million stolen). One wonders if a 51% attack will soon be executed on the Bitcoin blockchain as well, given that the hash rate continues to drop.
An Alternative Option
“The hard truth is that proof of work is an evolutionary dead end for all coins except bitcoin and maybe one or two others.” (the Finder)
Proof-of-Work algorithms are famously energy-intensive, consuming as much energy as Romania uses each year. They’re also increasingly vulnerable to attack, as the growing incidence of 51% attacks reveal. Consequently, this technology’s apparent shelf-life appears limited. Ethereum, the second largest (PoW) cryptocurrency, is gradually moving toward another consensus algorithm named Proof-of-Stake. However, Proof-of-Stake (PoS) also remains vulnerable to attack, as PoS miners are mining with nothing at stake.
Fortunately, XTRABYTES™ new Proof of Signature (PoSign) technology will soon prove itself a viable alternative. Unlike Proof-of-Work or Proof of Stake, PoSign is neither energy-intensive nor prone to attacks. Instead, their green technology is fully decentralized and independent of outside miners. In the near future, its many benefits will make current consensus algorithms appear obsolete.