The latest bitcoin price crash has started a new debate on the long-term viability of many aspects of the mining industry.
Notably, one of the first segments to take a hit in the days leading up to the crash was cloud mining – services that lease out hashing power from usually large-scale mining enterprises based in data centres.
Number of bitcoin miners goes down
Over the weekend, Organ Ofcorti published a comprehensive analysis of weekly bitcoin network statistics.
The anonymous miner and blockchain data analyst pointed out that GHash.io reported a drop from 34,000 active user accounts to 6,000 user accounts on January 13th. The number then went down to 5,500 users. The drop was attributed to CEX.io’s decision to pull the plug on cloud mining operations.
As a result, the estimated number of bitcoin miners plummeted by almost 30,000 in a matter of days. However, this does not mean the hash rate went down. Following the crash, the hash rate recovered and returned to peak levels in less than a week, after hitting a low of 229,513,534 GH/s on 14th January.
Ofcorti shared his thoughts on the demise of CEX.io cloud mining with CoinDesk, concluding that the effect of the drop is negligible:
Ofcorti went on to explain that cloud mining tends to appeal to those who could not afford to invest a lot in order to purchase and run miners.
“Further, there are just too few cloud mining block makers and making too few blocks. If they were having a significant on the network, they'd have a larger share of it,” said Ofcorti.
Digital currency consultant and entrepreneur Jonathan Levin described cloud mining as a good concept with some drawbacks:
Hash rate to plateau or decrease at current prices
While the hash rate recovered shortly after the crash, long-term projections are difficult to make at this point. Four months ago CoinDesk examined a number of problems facing the mining industry in the long run, concluding that growth rates at the time were unsustainable. Assumptions were based on substantially higher miner revenues and bitcoin prices.
Since then, things have taken a turn for the worse. Although difficulty and hash rate have continued to go up, the price of bitcoin has more than halved. The cost of ASIC development, tape-outs and manufacturing is bound to go up as chipmakers transition to new FinFET manufacturing nodes.
“Assuming no significant [order of magnitude] improvements in chip cost and efficiency, at the current price the hash rate will either plateau or decrease slowly. Most of the smaller players and those without low-cost electricity will leave the network once it's clear they won't recoup any losses,” said Ofcorti.
Ofcorti shares Levin's concerns about the possible centralisation of hash power:
While the question of centralisation looms over the industry, there are a number of influential industry leaders who consider the matter overblown. Gavin Andresen, the Bitcoin Foundation’s chief scientist, downplayed the risks at the annual Web Summit three months ago.
Andresen argued that centralisation is likely to occur in waves and therefore can be rolled back. He said economies of scale are currently forcing companies to create huge mining farms, but as mining ASICs become commoditised, the trend could reverse and the industry could decentralise again.
Mining companies remain bullish
However, a number of mining companies remain bullish and see a lot of potential in cloud mining. The pre-order business model is all but gone – as the market for individual and hobbyist sales dries up, cloud mining may be the only way for mining companies to move forward.
At the same time, some companies are exiting the cloud mining market, with CEX.io being the biggest player to pull out so far. Last week cloud mining service ZeroHash also announced that it may be forced to shut down its service due to unprofitability.
Hardware makers are feeling the pinch too. CoinTerra is the latest bitcoin mining hardware company to default. Earlier this year, the company found itself unable to service its debts and last week it was forced to default on roughly $4.25m of secured notes. CoinTerra CEO Ravi Iyengar said the industry downturn was unpredictable, both in terms of price and mining difficulty.
On the opposite side of the spectrum, some mining companies are still expanding, attracting investors and clients. They are not bucking the trend – they are simply doing what has to be done to maintain competitiveness at a time of crisis.
Hash rate charts via Organ Ofcorti
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.