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The evolution and professionalization of the Bitcoin mining market

Cryptocurrency

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Imagine turning on your computer, opening a program and receiving 50 Bitcoins every 10 minutes? This was the reality of many people who arrived in the bitcoin market early on. Bitcoin was treated only as a hobby or collectible on the internet.

However, the evolution of Bitcoin mining has evolved from home computers to industrial-scale factories.

Today, there is no more space for adventurers. The market became highly efficient and qualified, where only the best survive. In this market, the economic concept of Game Theory by the brilliant mathematician John Nash reigns. Each targets your interest and acts based on what the other will do.

The evolution of this market, the concept of efficiency and the economic concept of Game Theory will be explained throughout the text.

A brief review of Bitcoin mining

Mining Bitcoin, in a nutshell, is lending your computer to verify the authenticity of all transactions on the network. You use processing power, spend energy and receive a reward in Bitcoins as an economic incentive.

Transactions are organized into a set, known as a block. Every 10 minutes, a new block is checked by miners through a competition process. There is a race to verify this block. Whoever wins, wins the reward in Bitcoins.

Mining is the foundation of the entire Bitcoin system. Without it, there would be no security in transactions, which would compromise the trust of the entire network. After all, without verification the system would be susceptible to fraud and would not be much different from a World of Warcraft coin.

Most interesting is the economic concept behind it. Nobody mines Bitcoin out of benevolence, everyone wants to mine the largest amount in the most efficient way possible. This caused a major evolution in mining equipment.

From laptops to supercomputers

In the beginning, it was possible to mine Bitcoin on a simple laptop with a Pentium 4 or any processor with more than two cores. Only onlookers and cryptographers managed to mine in the first few months. The program was a little inaccessible for those who did not understand programming.

One notebook was enough to mine Bitcoin in the beginning.

Bitcoin mining was for hobbyists, as it was difficult to earn relevant money to live off it. However, the price of Bitcoin has been rising and attracting more interested people, increasing competition from the activity. As a result, some people used slightly more powerful computers.

After using computer processors, miners started using GPUs, or Video Cards, to mine. There is a reason for this: a GPU is better at processing data than a computer processor. From then on, what was a hobby or “joke”, became serious.

It got serious now, right?

As of June 2011, the first FPGA cards (Field Programmable Gate Array), which consisted of processing chips integrated into a circuit. The main advantage was the processing power along with a low energy cost. After all, maintaining a computer with a connected video card costs money.

This, in practice, was the first Bitcoin Asics.

FPGAs were a kind of embryo of a chip circuit that became known as ASICs. At that moment, there was a concern to become more energy efficient compared to potential competitors.

The mining of FPGAs lasted from 2011 until the end of 2012, which was when the first ASIC machines from Avalon, Butterfly Labs and Cointerra appeared. They were even more efficient in processing and energy expenditure than FPGAs and GPUs, which soon tried to leave the scene.

Asics has managed to perfect Bitcoin mining in an extraordinary way.

In 2013, Bitcoin would start one of the biggest appreciation cycles in its entire history. It started the year quoted at US $ 12 and ended 2013 quoted at US $ 933, with an appreciation of 6987%. This price race attracted many interested parties, including Bitmain, the largest producer of ASICs in the world.

Bitcoin price in 2013. Source: TradingView.

The industrialization of mining

Bitmain created the best ASICs on the market, from the point of view of energy expenditure. As of 2013, especially after the price bubble burst, the mining market became even more competitive. ASICs took over and the first mining farms appeared.

Shot from Hashrate in 2013, after the introduction of Asics.

Some miners went on to design industrial plants to put Bitcoin mining into practice. Machines need space and especially cooling, as they get very hot. Without adequate refrigeration, ASICs could explode and cause great damage to the producer.

With that, the race did not become more to obtain the best machines on the market. After all, it is useless to have the most powerful computer if you spend much more than you collect on energy and cooling.

Now the question is about energy efficiency. That is why mining is leaving China and going to countries that have: cheap energy and cold weather. Today, countries like Siberia, Canada, the United States, Norway and Iceland are emerging with miners' favorite locations.

The objective is simple: reduce electricity costs and get the machine running for as long as possible. As a result, the market has become extremely competitive in the search for efficiency.

What scares cryptocurrency miners?

Competition always worries anyone. This is no different in the case of miners. Bitcoin is limited to 21 million units, with a temporarily fixed amount to be issued in the block.

To make matters worse, that amount halves every 4 years. That is: less Bitcoin to receive and greater competition frighten miners.

This degree of competitiveness can be seen by the Hashrate metric, which measures the computational power of the network. The higher the Hashrate, the greater the number of connected machines competing to earn Bitcoins every 10 minutes. On the other hand, the lower the Hash, the less the competition.

In short, increasing the degree of competition with lesser reward for participants is one of the biggest fears of miners. It is very difficult to compete in an extremely sophisticated and efficient market, so that only the best can keep going.

Game Theory and Bitcoin Mining

The mining market is a perfect representation of Game Theory. Where each market participant competes for their own interest. The best way to explain this is through the famous Prisoner's Dilemma.

Suppose you and your partner were arrested in a corruption case. The police placed both of them in separate cells and proposed a prize-giving agreement. If you report it, you will be jailed for 1 year if your friend does not deliver it.

If both are quiet, they get 2 years. If you don't confess and your friend gives you up, you will be jailed for 10 years, while he will be jailed for only 1 year. See the dynamics below:

The Prisoner's Dilemma

Now the dilemma remains: deliver or not? If you are best childhood friends, you could probably trust each other to be quiet, which would be the best outcome for everyone.

But as they are just fellow criminals, they don't trust each other. Worse, you will be afraid of being reported and decide to report. In the end, if they both confess to the crime, they will face 3 years in prison, which would be a worse result, but less worse than being in prison for 10 years.

Mining works in a similar way to Game Theory. When mining profitability is low or negative, whoever has more cash to insure the period wins. Inefficient miners are driven out of the market and Hashrate plummets, just as it did in 2018.

Bitcoin Hashrate. Source: Blockchain.com

In this case, miners are holding on to a non-profit operation with the expectation that their competitors will leave the market. If this competition were to last for a long time, all the miners could break down, which would cause a huge drop in the network's computing power.

In these breakdown scenarios, miners could sell their machines and their Bitcoins by weight to mitigate costs. This would lead to a huge drop in price. However, this hypothesis is not a consensus.

A survey by Brazilian Felipe Sant’anna shows that miners do not influence Bitcoin price much, because the market is already highly sophisticated and miners do not represent a large weight in the trading volume.

No to energy waste

The market has become so competitive that waste of energy is no longer tolerable. Anywhere that has energy left, there will be a miner installing a mining farm.

In some cases, mining can have a strong synergy with activities that depend on heat. Miners can meet with producers from other activities to split energy costs and offer heat to those who need to spend on heating, for example.

In Canada, some miners are using their farms in conjunction with raising fish and plants from other crops. This shows that the market adapts and creates new solutions. Bitcoin does not waste energy, it optimizes its use.

What is the future of mining?

Halving and limiting Bitcoin are two factors that will greatly impact mining in the coming years. By 2040, only a bitcoin waste will remain to be mined, so that only the most efficient ones will remain standing. But, to quote one of my favorite phrases: “No king rules forever”.

Market cycles in Bitcoin are happening, miners break and new ones come into play. The rules are defined, the game continues and whoever wants to enter. In a way, Bitcoin is Antifragile, it will be there, people will be willing to mine it because it is rare.

If Bitmain breaks down tomorrow, the impacts will be huge, but there will always be people willing to exploit these asymmetries.

So, so far, it is still impossible to say whether mining will become a highly concentrated activity in the long run, or whether costs will be so low that each person will be able to check transactions at home, with a much cheaper machine.

* Text written by Lucas Bassotto and originally published by the Investificar website.

Disclaimer - OBN is an informational website which aims to give the latest blockchain related news to the readers. Articles on OBN should not be considered as investment advice. Trading cryptocurrencies is a high-risk investment, every user is advised to consult an expert before making any decisions.