Cryptocurrencies may have hit their first real hiccup in more than a year in recent weeks, but it’s been one amazing ride for investors who’ve had the wherewithal and guts to stick it out. Last year, digital currencies rose by an aggregate of more than 3,300%, which is a return the stock market would have taken decades to deliver to investors. Even with crypto valuations being roughly halved since hitting an all-time high on Jan. 7, the combined market cap is up around 2,200% over where it began 2017.
As it has been since day one, bitcoin continues to lead the charge as the world’s most valuable cryptocurrency by market cap. It’s more likely to be accepted by merchants than any other virtual currency, and it’s the cryptocurrency responsible for bringing blockchain technology into the spotlight.
Bitcoin mining is highly intensive
Bitcoin also happens to be one of the most minable cryptocurrencies in the world as a result of its popularity and relatively high liquidity as a virtual asset. Mining refers to a process whereby people or businesses with high-powered computers solve complex mathematical equations, which are a result of the encryption found on blockchains, to validate a group of transactions, known as a block. These miners compete with one another to be the first to solve these equations, as the first to do so is given a “block reward,” which is paid out in crypto tokens. Thus, bitcoin miners are solving complex equations to be paid in fractions of bitcoin tokens.
That method of mining is known as “proof of work.” It’s a highly intensive method of validating transactions to ensure that the same token wasn’t spent twice. In bitcoin’s early years, mining could be done with high-powered graphics cards from the likes of NVIDIA and Advanced Micro Devices. Today, however, bitcoin mining requires expensive ASIC (application-specific integrated circuit) chips that have narrowed the prospective field of miners.
It also means it takes a lot of electricity to mine bitcoin. Validating transactions can be quite costly, depending on where you live.
The cost to mine one bitcoin
According to a recently published analysis conducted by Elite Fixtures, which examined the electricity costs of 115 countries, the United States ranked as the 40th cheapest to mine a single bitcoin, with an average cost of $4,758. But given that bitcoin has shed more than 55% of its value since nearing $20,000 per coin in December, the margin to mine bitcoin has tumbled from as much as $15,000 per coin to less than $4,000 per coin in the U.S.
Mining costs are only likely to increase
Making matters even worse, the cost to mine a single bitcoin is only likely to grow over time, for a couple of reasons. For starters, electricity is a basic-needs service for most everyone, and as such electric utilities tend to possess strong pricing power that allows them to pass along inflation-matching or –topping price increases. In short, inflation all but assures that electricity costs are going to move higher over time.
The bitcoin regulatory environment is also a potential issue for costs. Bitcoin and other cryptocurrencies are banned in around a half-dozen countries around the world, while the regulatory environment is growing more constrictive in other countries where it isn’t banned. In China, for example, cryptocurrency exchanges and initial coin offerings have been stamped out, while mining operations have had their electricity usage throttled back. An increasingly regulated environment doesn’t bode well for bitcoin mining costs.
Finally, it also can’t be overlooked that the difficulty of mining bitcoin is only going to increase over time. There are more than 16.8 million bitcoin tokens in circulation, leaving fewer than 4.1 million left to be mined. As that difficulty increases and block rewards decline, the margin for mining bitcoin is probably going to decrease.
In other words, if bitcoin’s price keeps falling, or if mining costs keep climbing, look for mining operations to become more consolidated in just a handful of the most profitable countries in the months and years to come.
1- Do not invest in every ICO – most of them are a scam.
2- Crypto is a heavily manipulated commodity and the price can change at any moment.
3- The creation cost of a coin represents the “wholesale” price – It is always better to buy when the price is close to the creation cost.
4- Crypto has a natural cash flow that dictates the selling pressure. Like, 1800 bitcoins are mine each day so 1800 bitcoin must be bought at the current price (“means market needs new $18 millions of investment every day if the price is $10,000 to maintain the current price“).
5- Patience and timing are key to making a profit:
Buy, when the price is close to the creation cost.
Sell, when the price is way high off the creation cost.