The mining ecosystem in Bitcoin relies on the price of each Bitcoin for its profitability. Since they don’t sell coins right away, they don’t suffer during times of short term crashes – in fact, they see them as opportunities to mine cheap coins. But if the price stays down for a long time, the viability and profitability of mining come into question, and miners may be forced to capitulate. With a global recession almost confirmed, Bitcoin miners will need to weather the storm of the decade.
Miner’s sensitivity to price becomes fairly obvious after you look at how they generate revenue. A miner is nothing more than a speculator that also provides a valuable service. They mine data using their computational power and are rewarded in fees and block reward. This data mining helps secure the Bitcoin network and validate transactions.
The costs they incur must be lower than the price of the Bitcoin they’ve earned in order for them to be profitable. But in reality, the price they sell at needs to be higher than the cost of mining a coin. Miners can afford to go through mid-term losses and mine cheap, but they also need to be able to sell it higher at some point in the future.
When the Bitcoin price was at $3,000 in 2019, we saw capacity get added and hash rate increase all the way up to $13,800. This was a sign of miners seeing some positivity for the long-term prospects of Bitcoin after a year-long bear market.
Things have now taken a turn for the worse as miners are facing an indefinite price range near or below their cost of production. Unfortunately, the global economy had put miners in an unprecedented predicament. If price continues below the average cost of production, Bitcoin’s hash rate could seriously decline until things pick up.
A hard, long road lies ahead for Bitcoin miners. Power contracts and hash rate contracts are in place for them to do their job, but in the event of a sustained economic depression, lasting a year or more, they may need to evaluate their long-term strategy.
Without miners, it is difficult for Bitcoin to go on as it is. They provide one of, if not the single most, valuable service to Bitcoin along with protocol development and maintenance. The loss of a significant amount of miners could result in very subdued usage until things pick up.
Some analysts believe this bear rally could take price below the $3,000 bottom set early last year. If this is the case, miners will almost certainly take some capacity off the network; at the very least.
Whatever it may be, strategy becomes paramount in these times as miners are forced to make tough decisions. The outcome is unknown, as we cannot ascertain how long this global pandemic will rage on for. But it’s safe to say the validators of the Bitcoin network are facing difficult circumstances, as is most of the world.