Bitcoin Miners Are Facing a Shakeout and Risk Turning Unprofitable

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Even with bitcoin’s price going strong above $8,000, most of the miners performing the complex calculations to create the digital currency are risking unprofitability. If bitcoin’s price drops again for an extended period, then there will likely be a faster consolidation to industrial-scale mining. This could knock out small-time miners and leave bitcoin holders vulnerable to the big-time miners.

“It’s totally different this year than last year,” Bill Tai, a Silicon Valley venture capitalist said in an interview. “The bitcoin mining industry was this mysterious dark cottage industry, and it’s about to grow up and about to have elements of institutional scalability at all levels,” he added.

Tai predicts that smaller miners will drop out and only 5 to 10 of the largest miners will survive and remain profitable. Tai also serves as chairman to Hut 8 Mining Corp., the financial arm in North America for Bitfury Group Ltd., one of the biggest makers of crypto-mining equipment. When bitcoin’s price went up to $19,000 last year, Bitfury had to turn away some customers as orders reached up to $1.9 billion.

Miners own between 20-30% of all Bitcoins according to Lucas Nuzzi, senior analyst at Digital Asset Research. Bitfury, for example, has mined more than 1 million bitcoins according to Tai. Bitfury has already sold coins to reduce operating expenses. If miners are pressured into selling more, this could depress bitcoin’s price.

With mining power, also called “hashrate” accumulated in fewer hands, the risk of miners grouping together to execute a so-called 51-percent attack  (where they take control of the transactions to command alterations in the development of the blockchain to suit their tastes) also increases!

“It has the potential of being dangerous from a security standpoint, since a single entity could use its power in terms of hashrate to disrupt the network,” said Nuzzi.

The largest miners continue to get bigger. Bitmain, which controls China’s two largest bitcoin-mining collectives, recently opened offices in Switzerand and the U.S.  and is still exploring more expansion opportunities worldwide.

Meanwhile, Bitfury will be raising over $100 million in the next 6 months for the production and marketing of portable mining server farms that sell for at least $2 million each.

According to Tai, Bitfury will also be opening its own additional farms in Africa and the Middle East, and expand in Canada.

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