Crypto miners have been taking a beating lately. As token prices have crashed, the economics for miners has become increasingly grim, and now popular mining tool WhatToMine.com lists everything as losing money to mine.
Why is Crypto Mining Unprofitable?
With the recent Ethereum Merge moving the chain to Proof of Stake, eliminating all mining, one of the most lucrative cryptocurrencies to mine is now off the table. The primary Ethereum mining alternative is a blockchain called RavenCoin, but if we’re being honest, the biggest use case of RavenCoin so far has been mining it when Ethereum is too expensive to mine.
If you include the ecosystem-wide price crash, it’s not a big surprise that all mining has tipped negative. Mining ebbs and flows, largely due to the wide range of cost inputs and value of outputs. In some regions, energy costs, one of the biggest expenses for miners, aren’t very stable. Over the past few years we’ve seen GPU costs and availability become a big concern. We all know cryptocurrency prices are highly volatile, making miner revenue hard to predict, but that hasn’t stopped more competition from coming into the market, ultimately driving down miner revenue.
Unless you have extremely low energy costs, mining has become a money sink. Even then, profitability is extremely low. So what are the downstream effects of that?
The Effects of Unprofitable Mining
Well, all proof of work cryptocurrencies live in this weird economic tension. Miners provide security and functionality for the blockchains, allowing them to provide value. Without miners, Proof of Work chains would be worthless. But at the same time, miners are forced to sell the tokens they earn regularly to pay for the expenses their businesses incur (energy, hardware replacements, staff to maintain these things, etc).
As miners turn off their mining rigs, there will be fewer people selling coins. This should result in price appreciation, though that doesn’t account for the macroeconomic situation which has largely been the driving factor pushing prices down.
On a larger scale, fewer miners generally means more centralization. Locations that have far lower energy costs will be able to operate at a profit, or at least less of a loss, for longer than high energy cost areas. Miner centralization is a risk for the crypto ecosystem overall. For example, when Bitcoin mining was banned in China we saw nearly half of the hash rate go away overnight. Those miners went all over the world, many coming to the US. We may see a movement out of high cost energy areas, and a doubling down in lost cost centers.