Investment bank and financial services giant Morgan Stanley has claimed that most Bitcoin miners will be losing real money unless the cryptocurrencies’ real-world value significantly increases.
The bank’s analysts have suggested that the current state of the market means that many miners are wasting their time, and that this will have a depressive effect on hardware prices.
But are they right?
The relationship between cryptocurrencies, hard currency, and elementary physics has long been a vexed one. Some amateur miners appear to believe that purchasing some GPUs from NVIDIA or AMD – or a crypto-mining heater from Qarnot – and then putting their feet up is all it takes to strike it rich as virtual coins appear in their crypto-wallets.
But for many miners outside of the early adopters that did make a fortune – or others who have access to cheap power or others’ processing resources – the reality is often messier and more complex.
The cost per watt of mining is often unknown (or not even considered), and many amateur miners may simply be spending large sums of money on hardware and energy, and getting only a percentage of that investment back.
Electricity costs rapidly mount up, while hardware is expensive and rapidly depreciates. Other costs to the environment and to human beings, in terms of global manufacturing and shipping, add another dimension entirely to the notional value of a currency.
In short, cryptocurrencies are inextricably linked to the real world that is governed by elementary physics, and nothing can be done to break that relationship – short of committing crimes, such as stealing electricity or MIPs to slash processing costs.
The hard physics of currency
As an earlier Internet of Business report revealed, many crypto-miners would have done better by buying shares in hardware giant NVIDIA four years ago than by mining for Bitcoin.
Meanwhile, our own report on the Qarnot room heater/currency miner revealed that buyers of the device would have to run it constantly for nearly three years before it mined enough Ether to pay for itself, at current prices. But factor in the cost of electricity over that same period, and we calculated that buyers would actually be losing $45 a month on the deal – unless Ether’s value significantly increased. If it did, they could indeed rake in a profit.
In the background, many banks have been pouring cold water on both cryptocurrencies and the underlying distributed ledger technologies, such as blockchain, with Bank of England governor Mark Carney leading the assault.
That’s hardly surprising. While banks can make money from cryptocurrencies themselves via their vast processing systems, some aspects of the technology pose an existential crisis to traditional retail banking. Meanwhile, as a distributed ledger system, blockchain is admittedly far too slow, complex, and resource intensive for daily retail banking transactions.
At the same time, Carney has pushed the idea that trust is central to the banking system, and suggested that crypto and blockchain are not to be trusted in comparison. In some senses he is right – for the time being, at least. Despite widespread fraud and market rigging by many banks in recent years, any financial system encourages crime (crypto is certainly no exception), while trust is core to the idea of what a currency – real money – is: a trusted means of exchange.
Morgan Stanley adds its voice
It is in this context that Morgan Stanley this week added its own voice to the debate. According to the bank’s analysts, at current prices Bitcoin miners will be losing money if they keep creating the currency.
At the core of their claims is – once again – the concept of the cost per watt of mining. Unless Bitcoin recovers to a valuation of more than $8,600, miners will find it unprofitable to keep mining, because their costs will outrun their income over a two-year payback period.
“We estimate the break-even point for big mining pools should be [a valuation of] $8,600, even if we assume a very low electricity cost, $0.03 kW/h,” equity analyst Charlie Chan and his team said in a note yesterday. For hardware retailers, the two-year break-even point would be a valuation of $10,200, they suggested.
As a result, his team predicted that Bitcoin mining hardware demand and prices will decline.
Bitcoin mining typically uses the processing power of high-end GPUs to crack crypto equations. These are logged on the currency’s blockchain, for which miners rewarded with a Bitcoin token for the work.
“We think the injection of new mining capacity will further increase the mining difficulty in 2H18,” added the analysts. “Even if the Bitcoin price stays the same in 2H18, we believe mining profits would drop rapidly, according to our simulation.”
Internet of Business says
Whatever your views on cryptocurrencies and blockchain might be – and on traditional banking in the wake of the 2008-09 recession and trillion-dollar bank bailouts – Morgan Stanley is right to put the cost per watt of mining on the table and compare it with a cryptocurrency’s real-world financial value.
This is the critical element in whether any currency can succeed as money (see our article on Mark Carney’s recent speech for a detailed explanation of this), together with establishing what it is backed by (aka what is the gold?).
And it is also right to discuss the issue of how many miners are in the system. With a finite amount of Bitcoin ultimately available, it stands to reason that the fewer people who participate in the system, the more Bitcoins there are for those miners to share. In a sense, this is an in-built regulation mechanism, given that price would appear to be intrinsically linked to participant numbers – unless there is another bubble.
And as we explored in our article on NVIDIA, as GPUs become more and more in demand, those prices tend to rise. As ever, the relationship with the physical world is impossible to break.