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Digital currencies

As bitcoin prices fall, mining cryptocurrencies is no longer profitable for many

  • Bitcoin prices fell nearly 30 per cent over the past week, hitting a 13-month low of about US$4,500
  • Loss-making cryptocurrency miners are dumping plenty of their mining rigs
PUBLISHED : Thursday, 22 November, 2018, 7:45am
UPDATED : Thursday, 22 November, 2018, 9:10am

When the price of gold tanks, miners get hurt. It is the same story in the wild world of cryptocurrencies.

Prices of bitcoin, the world’s leading digital currency, have tumbled nearly 30 per cent in the past week and hit a 13-month low of about US$4,500, according to data from CoinMarketCap. The total market value of cryptocurrencies has slumped to US$148 billion, which is less than one-fifth of its worth during the market’s peak in January.

A clash among supporters of bitcoin cash, the most successful bitcoin offshoot, was largely blamed for the market meltdown. The world’s fourth largest cryptocurrency split into two distinct entities on November 16 amid long-standing, fundamental disagreements in the community.

A day before that split, Hong Kong-based cryptocurrency exchange OKEx forced early settlement of bitcoin cash futures contracts on its platform, which is widely thought to have triggered the sell-off.

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The price drop has left miners – those who process transactions in return for new units of cryptocurrency as reward – in a vulnerable position. It has become unprofitable for these enterprises and individuals to run at least four models of bitcoin mining machines, if they consume power at a rate of 0.4 yuan (6 US cents) per kilowatt-hour (kWh), according to the latest estimates of Beijing-based F2Pool, one of the world’s biggest bitcoin mining pools.

Cryptocurrency mining has evolved from a bedroom activity to mass-scale production, undertaken by enterprises that use specialised rigs with application-specific integrated circuits.

These miners typically agree to combine their computing power in so-called mining pools to increase their odds of winning new digital currency. They take into account various factors, including mining difficulty – the total amount of computing power in the network – and costs like electricity and rental fees to decide which coins to mine and where to house their rigs.

The cryptocurrency sell-off has now forced miners to remove at least four models of bitcoin mining machines, including the Antminer S7 and Antminer S9 from Bitmain Technologies as well as Canaan Creative’s AvalonMiner 741, because these have become too expensive to operate under present market conditions, according to estimates by F2Pool on Wednesday.

Beijing-based Bitmain and Canaan, headquartered in the eastern coastal city of Hangzhou, are the world’s two biggest suppliers of cryptocurrency mining rigs. These two companies, along with smaller rival Ebang International, have separately announced plans for an initial public offering in Hong Kong.

Their prospects to float shares in the city now look grim amid the prolonged bear market, which has wiped out more than US$700 billion in the total value of cryptocurrencies since early January. Last week, Canaan let its six-month IPO application lapse.

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The latest dive in cryptocurrency prices has started to claim more casualties. Suanlitou, a Hong Kong-based mining platform that allows users to mine bitcoin on a contract basis, said in a statement on Monday that it has suspended all contracts involving Bitmain’s Antminer T9, which was the most in-demand rig in the market. Suanlitou said it was unable to cover management and electricity fees incurred by use of those machines for a 10-day period from November 7.

China is home to some of the world’s biggest cryptocurrency mining facilities, thanks to the country’s cheap coal-fired power in areas like the Xinjiang Uygur and Inner Mongolia autonomous regions. Cryptocurrency miners on the mainland have also taken advantage of the power glut and cheaper rates provided by small hydropower stations, which sparked a government crackdown at the start of this year.

Mining bitcoin uses more energy than what’s needed to excavate gold, platinum or copper: study

A group of Chinese cryptocurrency miners, who declined to be named for fear of government reprisal, said they have already shut down 20,000 rigs, or about 10 per cent of the total number of machines they operate at an average power cost of 0.4 yuan per kWh.

Their struggles, however, represent an opportunity to others. Jack Liao, who runs Shenzhen-based bitcoin mining firm Lightning Asic, said he bought about 50,000 pre-owned bitcoin mining rigs that were put up for sale in the market over the past few days. About 70 per cent of the machines he bought were the Antminer S9 model, which cost him around 500 yuan per unit. A new Antminer S9 goes for up to 3,000 yuan.

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Liao said he plans to ship these used rigs to countries with cheaper electricity, such as Russia and Venezuela, so that he can turn a profit selling them there.

He expected the bear market for cryptocurrencies to stretch till next year, with bitcoin prices sinking to as low as US$2,000. “Many people won’t survive,” he said.