Cryptocurrencies have been struggling in recent weeks, but so far it's also been a very profitable roller coaster ride for investors – for those with strong nerves. Last year, digital currencies increased by a total of more than 3.300%, which is a return that would have taken the stock market decades to achieve. Even if crypto valuations have risen since hitting an all-time high on 7. January were cut in half, the combined market capitalization dropped by about 2.200% higher than at the beginning of 2017.
As it has since day one, Bitcoin continues to lead the pack as the world's most valuable cryptocurrency by market capitalization. Bitcoin is more likely to be accepted by merchants than any other virtual currency. Additionally, Bitcoin is the cryptocurrency that has brought blockchain technology into the spotlight.
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Bitcoin mining is very expensive
Bitcoin is also one of the most mined cryptocurrencies in the world due to its popularity and relatively high liquidity as a virtual asset. "Mining" refers to a process in which people or companies use powerful computers to solve complex mathematical equations to validate a group of transactions called a block. These compete with each other to be the first to solve these equations, as the first, receives a "block reward" paid out in crypto tokens. Here's how bitcoin miners solve complex equations paid for in fractions of bitcoin tokens.
This method of mining is known as "proof of work". It is a very intensive method of validating transactions to ensure the same token has not been issued twice. In the early years of Bitcoin, mining was done with powerful graphics cards from NVIDIA and Advanced Micro Devices. Today, however, bitcoin mining requires expensive ASIC (application specific integrated circuit chips), which has limited miners' options.
This also means that a lot of electricity is needed to mine bitcoin. Validating transactions can be very costly depending on where you live.
What it costs to mine a bitcoin in the United States
According to a recent analysis by Elite Fixtures that looked at the cost of electricity in 115 countries, the United States ranked as the 40th most. Cheapest country to mine a bitcoin in, with an average cost of 4.758 US dollars. However, by the fact that Bitcoin has lost more than 55% of its value of ca. 20.000 U.S. dollars per coin lost in December, the margin to mine bitcoin is from 15.000 U.S. dollars per coin to less than 4.000 US dollars per coin dropped in the U.S.
Of course, bitcoin miners in the U.S. are in a much better margin situation compared to some other countries. A total of 24 countries surveyed by Elite Fixtures have mining costs above 10.000 U.S. dollars, with South Korean electricity costs exceeding 26.000 US dollars per token reached. This is more than three times what a bitcoin is currently worth! As bitcoin has risen within the last week to about 7.800 U.S. dollars has dropped, miners in 41 of the 115 countries surveyed would likely lose money mining bitcoin.
The cost of mining is only expected to rise
The cost of mining a single bitcoin will increase over time, for several reasons. Electric utilities tend to have strong pricing power, which allows them to pass on inflation matching or price increases. In short, inflation virtually ensures that the cost of electricity will increase over time.
Bitcoin's regulatory environment is also a potential cost issue. Bitcoin and other cryptocurrencies are banned in about a half-dozen countries around the world, although the regulatory environment is getting tougher in other countries where it is not banned. In China, for example, cryptocurrency exchanges and ICOs have been shut down, while mining has seen a throttling of power consumption. An increasingly regulated environment does not bode well for the cost of bitcoin mining.
Finally, the difficulty of mining cannot be ignored as time goes on. There are more than 16.8 million bitcoins in circulation, leaving less than 4.1 million bitcoins to be mined. As these difficulties increase and rewards decrease, the profit margin for mining bitcoin will likely continue to decrease.
In other words, if the bitcoin price continues to fall or if the cost of mining continues to rise, mining activity will consolidate in only a handful of the most profitable countries in the coming months and years.
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The Motley Fool owns and recommends NVIDIA, but doesn't own any of the cryptocurrencies mentioned.
This article was written in English by Sean Williams and was published on 8.2.2018 on Fool.com published. It has been translated so that our German readers can participate in the discussion.
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