Introduction:
The cryptocurrency market has made major news headlines in recent months. Investors, both individuals, and companies have increasingly been putting their money into the ever-expanding list of coins and tokens out there, betting on where they will go next.
But what happens to coins and tokens when the price goes below the cost to mine? What does that say about the health of the coin or token? And what does it mean for investors who have already bought into these markets? Let’s take a look at these questions and more below as we unpack what happens to cryptocurrencies when the price goes below the cost to mine.
Mining cryptocurrencies
In order to incentivize miners to continue verifying and adding transactions, most cryptocurrencies have a block reward. This is a set amount of cryptocurrency that miners receive for each block they add to the blockchain.
The block reward is halved every few years as an inflationary measure. When the price of a cryptocurrency falls below the cost to mine it, miners will start to leave the network. This can lead to a death spiral, where the decreasing number of miners leads to even lower prices, which leads to even fewer miners, and so on.
The cost to mine cryptocurrencies
As the price of Bitcoin falls, so does the profitability of mining. This has caused some miners to sell their machines and get out of the business altogether. Bitmain, one of the largest manufacturers of cryptocurrency mining hardware, has been hit particularly hard.
The company has laid off employees and is struggling to keep up with the demand for its products. So what happens when a cryptocurrency's price falls below the cost of mining? For many miners, it simply isn't worth it anymore and they will abandon the coin. This can lead to even further declines in price as there is less demand for the coin. In some cases, a cryptocurrency may die completely if enough miners leave and there is no one left to support it.
The Bitmain Antminer S9
One of the most popular Bitcoin mining machines on the market is the Bitmain Antminer S9. This device can cost upwards of $1,000, but is it worth it?
In short, yes. The Antminer S9 has a hash rate of 13.5 TH/s and an efficiency of 0.098 W/GH. This means that it can mine a block every 10 minutes (on average) and will use about 1,400 watts of power when doing so. With electricity prices around $0.10 per kWh, this means that each Antminer S9 will cost about $140 per month to operate.
The current price of Bitcoin
As of July 2019, the price of Bitcoin is $11, 191.87. The cost to mine one Bitcoin is $5, 031.79, meaning that it is currently profitable to mine Bitcoin. However, if the price of Bitcoin falls below $5, 031.79, it will no longer be profitable to mine Bitcoin. When this happens, miners will likely stop mining Bitcoin, causing the cryptocurrency to die.
Is mining still profitable when the cost to mine is higher than the current value of the coin mined?
For most miners, the answer is typically no. If the cost of mining a cryptocurrency is higher than the current value of the coin, then it's not profitable to mine that currency. First, the price of cryptocurrency can be volatile, so what might not be profitable today could be profitable tomorrow.
Second, some miners are willing to operate at a loss for a period of time in order to gain a larger share of the total mining pool (which can increase their chances of finding more blocks and earning more coins in the future). Finally, some miners may have access to cheaper electricity or other resources that allow them to profitably mine even when the price is below the cost to mine.
If mining no longer makes sense, what happens next with Bitmain and their other mining products
As the cost of mining cryptocurrency goes up, so does the price of the coin. This is because miners need to cover their costs in order to make a profit. If the price of a coin goes below the cost of mining, then miners will stop mining that coin and look for another one that is more profitable.
This can cause a cryptocurrency to die. Bitmain, one of the largest manufacturers of cryptocurrency mining equipment, has said that they will continue to produce equipment even if there is no profit in it. They believe that crypto is here to stay and that eventually, the market will rebound.
Conclusion
If the price of a cryptocurrency goes below the cost to mine, it essentially becomes unprofitable for miners to continue mining. In turn, this could lead to a decrease in hash rate, and potentially, the death of the cryptocurrency. However, there are several other factors that come into play when considering whether or not a cryptocurrency will die.
For example, if there is enough demand for the coin, even if it is unprofitable to mine, miners may continue mining simply because they believe the price will eventually rebound. Ultimately, it is impossible to say for certain what will happen to a cryptocurrency when the price goes below the cost of mining.
