Falling Bitcoin Price Is The Perfect Storm for Centralization Of Bitcoin Mining

cloud bitcoin miningThe backbone of the Bitcoin network is miners and full nodes. We have already seen a decrease in the amount of full nodes over the last 24 months as Bitcoin ASIC miners came on the scene in greater numbers. Bitcoin ASIC miners brought Bitcoin mining to more people as they were lower power than GPU rigs that had been the norm for quite some time prior.

[divider]CCN[/divider]

As the value of Bitcoin has risen over the last two years, we have seen more and more money invested into mining from both small home miners to large farms and even huge industrial multi megawatt installations. The current price drop has put a tight squeeze on miners big and small. It is most noticeable to smaller and medium sized mining operations that do not have the reserves to keep running miners that could in some cases cost more to run in power than they now generate in income. With each Bitcoin mined, there is at a lesser value for the miners to exchange to fiat to pay their bills: the pressure to stay profitable increases. Smaller miners that cannot afford it have been getting out, and new miners are more apprehensive and less likely to invest and start mining. The network difficulty that is also rising fast while further cutting into profit margins are causing a contraction in the mining scene while the hash rate continues its explosive growth.

Centralization of a Decentralized Network
Centralization of a Decentralized Network

The big news in mining is all the new mega bitcoin and cryptocurrency mining farms that are opening up. Many of them, like BitFury, have 20 to 30 mega watts of power as well as undisclosed facilities with 60 mega watts of power being setup for Bitcoin mining operations. Where does this leave the home miner and the smaller players in the game? That is difficult to tell at this point. Many of the large farms such as GAWMiners Hashlet miners or Bitmains Hashnest are selling hosting or cloud hashing contracts.

Home mining is still achievable but at a diminishing rate. Manufacturers are still trying to get miners into the hands of medium to small miners, as well as home miners,  in the belief that Satoshi's vision of a decentralized network should remain just that. Rockminer, Spondoolies-Tech, Bitmain, BitCrane and others are still actively working towards that vision. Bitmain has even taken the step of putting most of the hash rate from HashNest on P2Pool.

Juan Garavaglia of 112bit.com and official Bitmain distributor was able to give CCN his view of the current situation.

With the recent downward trend in Bitcoin Value how do you see it affecting mining both physical and virtual mining as smaller miners pull out due to being unable to compete?

This is the perfect case to show why Virtual mining is at least for me not a good option, anyway miners that require to sell the production to pay the expenses (or survive) will not be able to compete, unless you have very strong financials you can’t compete is not only the size of the mining farm is more related with the financial situation of each operation.

Do you feel this could cause further centralization of mining in a departure from the decentralized system that Bitcoin miners and users trust more?

Since we are mining in pools decentralization has gone, 99% of mining is pool or very large miners all in few hands

What do you see as a solution for the centralization of Bitcoin and CryptoCurrency mining?

The system will self adapt; I have no worries. The high difficulty and low price with no huge improvements on hardware efficiency and cost are a problem. The Bitcoin Mining industry has faced these three issues before but never at the same time and to such extremes. Low Bitcoin value with big difficulty jumps, combined with the hardware scene, both combined are dynamite.

Josh Garza of GAWMiners also gave CCN his views on what is happening and where he sees it going.

Josh, With the recent downward trend in Bitcoin Value how do you see it affecting mining both physical and virtual mining as smaller miners pullout due to being unable to compete? And do you feel this could cause further centralization of mining in a departure from the decentralized system that Bitcoin miners and users trust more?

Bitcoin Network Difficulty Chart
Bitcoin Network Difficulty Chart

Let me make something clear. The trend of small-scale miners is slowly stepping down while large mining data centers step up has nothing to do with the price of bitcoin. Sure, it may speed things up, but you'd still see the same trend if the bitcoin's price were flat as a pancake.

What you see is happening for a simple reason. Investment is flowing into bitcoin, and with more investment comes increased economies of scale. Naturally, that raises difficulty. And the higher the difficulty goes, the more need there is for large, hyper-efficient mining operations. Profitability is shifting to the cloud. This is something I've been saying for a long time.

What do you see as a solution for the centralization of Bitcoin and CryptoCurrency mining?

I don't see it as "centralization". Bitcoin is and will remain decentralized as long as there's an incentive to mine.

Bitcoin Network: Total Computation Speed
Bitcoin Network: Total Computation Speed

Think of it this way. What is the solution for the centralization of the internet? After all, a centralized internet is vulnerable to attack and manipulation.

The vast majority of websites are stored on large server farms owned by a relative small number of companies. Amazon and GoDaddy alone I think host more than 30% of the world's websites.

That doesn't make the internet "centralized." It's still an incredibly decentralized network. Bitcoin's the same way. Bitcoin is still and will remain decentralized. That's the genius behind its design. Just because its network shifts from tens of millions of miners to tens of thousands doesn't change that : )

[divider]CCN[/divider]

The future is bright for Bitcoin despite the waves of up and down values. We need to remember that Bitcoin is not even a teenager yet and as time goes by it will continue to mature and the growing pains will be felt and forgotten. As for where this leaves mining... It is still a conflicting puzzle. As the control of the total hash rate centralizes further, moving it farther and farther from Satoshi's vision of a decentralized network, the future becomes more muddled. People will worry that abuse such as fees that are controlled and set by a few as opposed to the many, just like the banks, will happen. Or that these few entities will grow larger and larger, further pushing out others to the point where they can make demands of entire nations (If a nation ever uses Bitcoin as its currency, which some hope for). A current example is how HSBC and RBS forced the Capital Treasury Services on the Isle of Man to scramble to find new banking partners. This move happened because the Isle of Man is Bitcoin and cryptocurrency friendly, so banks no longer wanted to work with them. Imagine if just a few entities have total control of the hash rate like the banking system has on fiat currencies. The abuse can and will happen eventually if the network becomes too centralized.

Decentralized Bitcoin
Decentralized Bitcoin

The other side of the coin is this: higher power requirements and heat dissipation are both factors that are getting more and more burdensome for home miners and even smaller to medium miners to manage. Coupled with the still-high cost per gh/s for physical miners, there is a high barrier for most people. If more and more cloud services and hosting companies come online, and competition drives the costs down and ROI and actual gains are achievable... That could be a new way for people to get into mining. They will not have to contend with the heat and power costs. Also, more centralized mining can spur larger investment into the network, which can have positive effects. New cooling techniques will be developed that are less wasteful and power intensive; there will be more investment in clean, renewable power.

There are many pros and cons and ultimately the people world-wide will decide how it ends up. It is as always an interesting time in this fast moving industry of Bitcoin and Cryptocurrency Mining. The last year has seen a large shift in the mining dynamic and increases in hash rates and difficulties. This next year is going to have big changes in the mining industry and more evolution, for sure.

Images from Shutterstock.

This article is protected by copyright laws and is owned by CCN Markets.

About the author

Avatar
Scott Fargo

I am a disabled former Systems Admin, computer tech, business manager enjoying crytpo currencies.
I am deeply involved in the mining ecosystem and physical coins,
It fascinates me how it has brought people from all over the world together into a tight knit supportive community with commerce and tech.

Do NOT follow this link or you will be banned from the site!