Opinion: Bloomberg Doesn't Understand Bitcoin Mining - Bitsonline

Opinion: Bloomberg Doesn’t Understand Bitcoin Mining

An article titled “Bitcoin’s Exorbitant Energy Costs May Prove to Be Biggest Risk” by author Sid Verma went live on Bloomberg Technology on Thursday. Bitcoin will soon become unprofitable to miners, due to electricity costs — unless it hits $1.5 million USD per BTC by 2022, according to an analyst at Citigroup. However it’s clear from the content of the article that the author does not fully understand how bitcoin mining works. Let’s break it down.

Also read: Realize the Truth, There Is No Fork – but What Happens Next?

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Mining Bitcoin Is Different to Mining Gold

Let’s imagine a gold mining operation. The operators would need to purchase drilling equipment, hire people, and pay for energy and fuel costs related to operating said equipment.

Bitcoin mining minerIn this scenario, as more and more gold is removed from the mine, it gets harder and harder to find. One must dig deeper and farther to get an increasingly small amount of gold. Eventually, enough of or all of the gold will be mined out, and it will no longer be profitable to mine at that location.

In a number of ways, this analogy is apt in explaining the basic concepts of Bitcoin mining to a layman. However, the analogy is incomplete, and Bloomberg seems to have missed the point. Bitcoin mining is not a zero-sum game with razor-thin profit margins for every person that attempts it.

As well, the analogy of going deeper and deeper into a mine does not in any way apply to how Bitcoin is mined. Bitcoin does have a hard cap limit, but that will likely have next to no impact on anyone alive today. That limit is not expected to be reached for more than a hundred years from now. More specifically, it is estimated that the last bitcoin will be mined on May 7th, 2140.

Now let’s imagine what this article suggests actually happens, and consider a few possible scenarios.

Scenario 1: Network Difficulty Equilibrium

The price of bitcoin does not keep pace with the costs associated with mining. As a result, it is no longer profitable for anyone, in any circumstance to mine. Miners big and small shut off their equipment one by one and the network goes quieter and quieter.

As more and more miners shut off their machines, the network difficulty will drop like a rock in a well. As the difficulty goes down, the costs associated with mining bitcoin will also drop. Within hours, mining becomes profitable again, and miners once again turn on their machines. A state of equilibrium will be found very shortly thereafter.

To put it simply, bitcoin is simply too valuable for miners to abandon entirely. Once enough of them stop, they will be replaced almost immediately by those looking to cash in on the suddenly lowered network difficulty. That will cause difficulty to rise, until Bloomberg‘s supposition becomes true again, and miners once again unplug… temporarily.

For our first scenario, bitcoin is saved by the non-static and ever-changing nature of network difficulty.

Scenario 2: Technological Innovation

Another aspect of Bitcoin mining that the Bloomberg piece seems to have missed is the simple concept of innovation and technological development.

Less than a decade ago, Bitcoin mining was feasible on any personal computer. Soon innovation struck and mining was moved to USB stick based ASICs and GPUs. Shortly after that, we were met with the current generation of standalone ASIC machines.

GPU miner miningIs it really fair for us to judge what future miners will do if we assume essentially nothing will change with mining technology?

Japanese internet conglomerate GMO is already deep in development of 7-nanometer ASIC chips. Such chips will greatly reduce energy consumption, as well as increase mining computation speeds. As the chips have yet to hit the market, the effect of such technology is still yet unknown in the mining community.

The GMO chips are just one example of what could be possible. Dozens or hundreds of other research and development projects could be working towards new bitcoin mining hardware at this very moment.

We would be highly foolish to assume that the current form of terahash range S9 style miners and their ilk represent not only the present but also the future of mining as well. Mining will get more efficient. Petahash and even exahash miners are inevitable.

So for our second scenario within Bloomberg‘s imagined world, Bitcoin mining is saved through regular development and innovation.

Scenario 3: $1.5 Million Bitcoin

Many commentators and analysts have come to the conclusion based on clear trends that bitcoin may very well meet or exceed the $1 million USD level within the next decade.

If BTC really becomes that valuable, and mining difficulty continues to climb, where exactly is the problem?

Bitcoin mining is a business and all businesses have expenses. The larger a company becomes, the larger their expenses will become. At the same time, a larger company will earn a larger income.

To put it simply, if it costs $1.45 million or even $1.49 million to mine a $1.5 million dollar bitcoin, miners will still mine it. That’s a profit of $10,000-$50,000 per bitcoin. If such a mining operation were to mine just 10 bitcoin in a year, that would still net them a profit of $100k-$500k annually.

Ask yourself this: would you spend $1.45 million if you knew you could get a $1.50 million return? Bloomberg is essentially saying no, miners would turn down that deal.

We also need to consider the future valuation of BTC. If it really hits $1.5 million, what’s to stop it from hitting $5 million, or $10 million? How will that affect long-term profits of professional miners who mine and hold a portfolio of bitcoin assets?

Proof of Stake and Comparisons With Ethereum

The Bloomberg piece closes with a few comments about proof-of-stake (POS). However, the author makes yet another critical mistake in their assumptions — that Bitcoin is a monolith, a company, a place with a headquarters and a CEO that makes coordinated decisions.

Ethereum LogoOnce again quoting the previously mentioned Citi analyst Christopher Chapman, the article includes a comment that if bitcoin were to move to POS, it would “not be uncontentious”. That’s putting it lightly, at best. The article asserts that if Ethereum switches, Bitcoin will follow suit.

The truth about Bitcoin is that there is no Bitcoin CEO, no Bitcoin headquarters, and no Bitcoin company. Such a decision, if it were ever to be made, would need to be done by the community of miners, node operators, and stakeholders. Said community is notorious for its contentious nature, and it’s great difficulty in coming to a consensus on how to change even arguably small aspects of the currency, such as the block size. Just look at the recent and ongoing SegWit2x debacle for proof.

Proof-of-stake may someday replace the current proof-of-work method of network consensus. There is no way to know at this point. However, a major change like that would alter Bitcoin in such a fundamental way that would likely result in something wholly different to the Bitcoin we know today.

Do you agree or disagree with these points? Let us know in the comments.


Images via Pixabay

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