Robert Steinadler, 5 months ago

Miner crisis: When will the market consolidation end?

Mining companies came under heavy pressure this year. There are three main reasons why this is happening and two of them are part of the crypto market. The third however is an external reason that is brand new and we don’t have any data points from the past that could hint how this scenario is going to play out. With more companies facing bankruptcy some even fear that the mining industry could collapse just like the CeFi lenders did.

Why are more companies getting wiped out and why is this not a problem for Bitcoin and proof of work?

Bitcoin’s network is healthy, miners are not

Bitcoin’s hash rate is growing constantly and even reached an all-time high while the price was pushing down further this year. This is a painful situation, since miners are competing for market shares in Bitcoin’s network. If a company has no or little liquidity to buy more equipment or equipment that is more efficient, it’s losing market shares to its competitors.

At the same time the price kept tanking this year and reached a low of about $17,600 which increased the pressure on the mining companies.

These market dynamics are not new. During the bear market of 2018 the hash rate grew while the price for Bitcoin kept falling. Eventually it stayed in a range at $6,000 for several month before finally dropping down to $3,300. The effects were the same back then. Many companies that ran out of liquidity went out of business.

Why is this environment more hostile than 2018?

This year the pressure is increasing because energy prices are going through the roof. Of course, there are regional differences. But there is still a threshold for mining companies that allows them to operate profitable. If energy prices rise above that level, they are practically burning money by losing market share and operating at a loss.

Most recently Core Scientific filed an “8-k” to the SEC stating that its most likely face bankruptcy in the near future. The company only held 24 BTC and $26 million in cash at the end of October. Another candidate is Iris Energy that is on the brink of defaulting on a $103 million loan. This would force the company to return mining equipment effectively lowering its market share and income.

What is the most likely outcome for Bitcoin?

The hash rate is rising which means that the most likely outcome is that Bitcoin will be more secure than ever. It is important to remember that a rising hash rate is only bad for weak miners trying to compete with other companies on an industrial level.

This competition keeps Bitcoin healthy, because with every increase there is less attack surface. At this point it would be a ridiculous idea trying to attack the Bitcoin network and an enormous waste of resources.

Only the fact that new players already need to bring in enough capital is concerning. Smaller miner will get washed out and only the biggest companies will take all. Tech monopolies are not a new thing, but they also bring other problems that harder to mitigate with more players being wiped out on the field. In conclusion, Bitcoin is not directly affected by the recent miner crisis, but it remains to be seen if the network stays healthy in the long-run with only the biggest companies surviving each bear market.

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