The Fate Of Mining In The Energy Crisis

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Today, the world is facing an energy crisis that has driven up the price of electricity, the most crucial resource for mining. Since the beginning of 2021, they have jumped several times, according to the International Energy Agency.

The recovery of industrial production after the pandemic, the crisis of alternative energy in the course of climate change, the geopolitical conflict between Russia and the West, and many local factors have sharply increased the demand for traditional energy sources. As a result, scarce energy resources and the electricity generated from them have risen in price.

But how has the energy crisis affected mining and its prospects?

Table of Contents

High Costs

Miners are in poverty, and this is a fact. The rise in the price of electricity increases their costs for performing mathematical operations and finding the hash of the block. The Proof-of-Work (PoW) algorithm that miners work on involves increasing production capacity in fierce competition for new blocks: the more energy you spend, the more powerful your equipment is, and the closer the probability of creating a block being the first to get a profit.

The need for high-quality equipment (ASIC) and huge energy costs has become more relevant. According to Blockchain.com, the difficulty of mining cryptocurrencies has nearly doubled since November 2021.

This is due to the increased number of mining participants, who have increased the network’s total computing power (hash rate). For example, the graph shows a twofold increase in the Bitcoin hash rate.

The growing number of miners reduces the size of the profit, and the falling rates of cryptocurrencies depreciate it. The graph shows mining profitability has declined by about 80 percent over the past year.

The only plus in the current realities is the reduced cost of ASIC equipment (according to the Hashrate Index ). It is explained by low profitability, which deters crypto addicts from buying.

As a result, the miners have three exits. First, look for additional funds to cover their expenses, including through the sale of bitcoins, which will strengthen the downtrend in the cryptocurrency market. Secondly, switch to mining other cryptocurrencies with lower energy costs and, at the same time, face security risks that will be pretty high with a small network hashrate. Thirdly, to leave mining altogether.

Legal Restrictions

Political players have increasingly begun to interfere in the cryptocurrency sphere. At the end of last year, China banned all transactions with cryptocurrency and mining itself.

In October, the industry was also under threat on the European continent. A week ago, mining was banned in Moldova amid the energy crisis. The EU is also preparing to ban it, if necessary, to reduce the load on the region’s energy system.

According to Web Coin Market: Even in the US, doubts have arisen about the usefulness of the PoW algorithm. So, in early June, the New York State Senate approved a moratorium on mining cryptocurrencies using carbon energy.

The cure for the crisis

It seems that mining is threatened not only by the energy crisis but also by its solution. On September 15, the Ethereum blockchain switched to the Proof-of-Stake algorithm: new blocks are generated not due to the computing power of the equipment but due to the share of tokens owned by the staker. Energy costs are practically leveled, and the environmental effect is positive. However, the mining procedure was questioned, and many began to switch to other cryptocurrencies, particularly Ethereum Classic and Ravencoin.