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Cryptocurrency mining becoming less attractive

5 Dec 2018 15:09|Bartosz Grejner

"Deteriorating prices of cryptocurrencies are becoming more and more problematic for their individual miners. At least 100 thousand cryptocurrency diggers had to stop their activity in the recent period," writes Bartosz Grejner, Conotoxia Analyst.

From September this year, about 1.4 million servers have been disconnected (data: Autonomous Research, Fundstrat Global Advisors). However, this trend is not surprising. A year ago, in mid-December, bitcoin's price was still 20 thousand USD. At that time, other larger cryptocurrencies also reached their highs.

This resulted in a strong increase in the interest of mining cryptocurrencies. However, already in the middle of this year, there was a strong change in this business. Demand for graphics cards used for mining has decreased significantly. This contributed to a fall in share prices of the world's largest graphics card manufacturer, nVidia, from about 800 to 400 USD in August.

The current drop in cryptocurrencies valuation results in another interesting effect. Malachi Salcido, the manager of one of the largest companies in North America operating in cryptocurrency digging (Salcido Enterprises), admitted to Bloomberg agency that the decrease in cryptocurrencies caused a simultaneous drop in the extraction margin (before taxes and depreciation) from about 40% to 20%. However, recent strong depreciation and faster breakdowns of much smaller competitors caused that margin to return to 40%.

The decrease in cryptocurrency digging, more precisely computational power, among a much smaller circle of miners, increases the risk of carrying out the so-called 51% attack. In case of such an attack, some or all transactions may be reversed. It is also possible to stop new transactions from being executed and to spend the cryptocurrency twice (double spending phenomenon), something that is practically impossible at present. In fact, this is not just a theoretical threat. This phenomenon has already occurred in the case of two cryptocurrencies: zencash and bitcoin gold, in the latter the market dropped about 18 million USD (in May of this year).

The current situation observed on the cryptocurrency market definitely supports the largest companies, which are able to reduce unit costs through the scale effect. In order to be more profitable to extract for smaller entities, virtual currency prices would have to increase permanently. For the majority of small entities, it is simply not worth mining cryptocurrencies at current price levels.

Meanwhile, prices continue to scratch the bottom. In many cases, rates remain at the lowest levels for more than a year. Bitcoin, which accounts for just over half of the entire market, costs around 4,000 USD. It is hard to say whether this is already the bottom or not. However, in addition to the combination of many factors unfavourable to virtual currencies, one additional factor becomes more important.

ICOs have been in the limelight of the US federal government for some time now. Throughout 2016, the ICO raised less than 100 million USD. According to the latest ICObench report, by the end of October this year, it was 22.8 billion USD. Stronger anti-fraud measures significantly reduce the enthusiasm for the new ICO. Therefore, a large part of the cryptocurrencies collected in this way, mainly ether and bitcoin, can be sold. The pressure ion their prices may, therefore, be prolonged for the first months of the new year.

5 Dec 2018 15:09|Bartosz Grejner

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