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Bitcoin miners are sick, and it’s not just COVID-19

The central premise of cryptocurrency networks with Proof-of-Work (PoW) consensus algorithms is that a distributed, anonymous web of confirmations enables healthy trustless commerce and transactions. The reality, however, is that many of the vanguard Proof-of-Work cryptocurrencies are far from distributed — and far from healthy.

Centralisation poses a systemic risk to these large and valuable networks. It is the anonymous and distributed nature of hashing and confirmations that protects ledgers from being altered and maintains network security. If any single agent or group of agents dominates the hash-power of an entire network, they can effectively control the network, interfere with transactions, manipulate the spending parameters of the network’s currency, or alter parts of the ledger. In such a scenario, the key value-creating properties of the network’s coin or token would be rendered moot.

Economies of scale have allowed major corporate mining operations and mining pools to dominate the landscape, and — when bear markets hit — this centralisation speeds up further. For many blockchains, a correction on the consolidation trend would require massive community action; and, for others, it seems all but certain centralisation will only continue to get worse.

Structural Drivers for Centralisation

One of the most dominant forces driving centralisation within PoW cryptocurrency networks is — simply — economies of scale. By aggregating large collections of mining equipment, major mining operations can take advantage of lower per-unit costs associated with fixed power needs, employment costs, cooling expenses, and maintenance fees. Along with these advantages, large mining operations are able to leverage opportunities such as relocation and electricity rebates, which are largely unavailable to independent miners and smaller mining operations.

Saving as little as $0.02 in variable costs through relocation or rebates can boost a major Bitcoin mining operation’s per-rig gross margin by 441.4%, an advantage that scales as it is multiplied across dozens or even hundreds of rigs. At current price levels ($4,000 — $6,500), smaller Bitcoin miners simply can’t compete. In the US, just breaking even on the cost of running rigs requires mining operations to realise economies of scale and synergies equivalent to more than $0.02 / kWh across their mining centres. In the UK, the situation is even worse. Breaking even on rig-operating expenses demands that miners are able to effectively reduce their fixed and variable costs by the equivalent to more than $0.08 / kWh.

BTC Mining Profitability by Variable Electricity Expense

For a positive gross margin, miners in the US must take advantage of economies of scale, relocation efforts, and rebates that manifest in the equivalent to more than $0.02 / kWh. In the UK, the figure is over $0.08 / kWh.Facing these market forces, the largest miners are the only players that can survive, which feeds a cycle of worsening centralisation. As the major mining conglomerates reap the most block rewards, they aggregate more hardware and make investments that drive improved margins, making small and medium miners less competitive. Consequently, the larger miners earn even more of the available block rewards, and the cycle continues. Though improved market conditions for Bitcoin and other PoW currencies can slow this trend, the structures and incentive architectures of many of the largest Proof-of-Work networks impede the continued distribution of mining power.

The Mining Pool Paradox

Like major mining conglomerates, mining pools are driving more and more centralisation within Proof-of-Work crypto networks. Mining pools have emerged as a response to the increasing difficulty of earning block rewards in networks like the BTC network. As difficulty has increased in tandem with network size, it takes more and more time to earn rewards while using the same hash-power.

The time to mine 1.0 BTC, using a 67 TH / s machine like the popular Antminer S17+, has increased to nearly 2.7 years. For many miners, waiting almost 3.0 years before a machine gets a payout is not an option. In response, small and large mining operations alike aggregate under the direction of organised business entities, sharing their computing power. With greater cumulative computing power comes more frequent rewards, which are then divided among the participating miners based on their hash-rate contributions (with a fee going to the organising agent).

The model addresses a very real need and has been highly successful, with both the number and size of mining pools growing rapidly. As a result, however, these agents have come to dominate the majority of all hash-power for the largest PoW networks. Nearly 60.0% of all hash-power for the Bitcoin network is controlled by 4 mining pools; for the Ethereum network, the top 3 mining pools control over 63.0% of the total hash-rate. Litecoin and Bitcoin Cash are no better off, with the top 4 mining pools in each network controlling over 63.0% of each network’s respective hash-rate.

Hash-rate Distribution by Network

The negative centralising impact of mining pools manifests in both the control they gain over their respective networks and the way the pools feed the already dangerous cycles in many PoW networks. The amount of hash-power the top mining pools control in each network creates the potential for 51.0% interventions. Although not all 51.0% interventions are harmful, they epitomise the failure of the distributed thesis of PoW networks. In May of 2019, and (two of the top Bitcoin Cash mining pools) demonstrated the reality of this threat when they carried out a 51.0% intervention on the Bitcoin Cash blockchain. Although the intervention was not malicious, it demonstrates the capability small cohorts of mining pools have to undermine the security, immutability, and trust of a network.Mining pools also contribute to centralisation by becoming mining agents themselves. Several mining pools use the fees they generate to invest in their own mining centres, further boosting their influence on the network. Given their position as the pool host, they also have the capability to benefit from the consistent partial rewards the pool offers without being burdened by pooling fees. As a result, they can realise greater margins than small or medium miners, again placing them at a disadvantage.
Unfortunately, mining pools can even help prop up the largest mining centres. The same structure that helps small and medium miners survive, also helps larger miners survive. Although mining pools were created to help make consistent rewards possible for miners that don’t have massive amounts of hash-power, they also help those that have amassed large amounts of hash-power earn rewards more frequently and boast healthier cashflows. Without any competitive benefits being offered to small and medium streamers, mining pools simply feed the centralising forces of PoW networks.

The Cost of Bear Markets and the Coronavirus

During bear markets, the centralising trajectories of Proof-of-Work networks become even steeper. Lower prices make economies of scale, rebates, and the other advantages afforded to large mining operations even more critical. As mining becomes less economic, small and medium miners with small balance sheets and limited access to bridge capital fold even more quickly.

In an uncharacteristic turn, Bitcoin and other major digital assets have tumbled alongside traditional securities markets since they began sliding in late February. Over the past month, the global market capitalisation for cryptocurrencies has dropped over 33.3%, while the S&P 500 has fallen by 25.1%. As a consequence, two weeks ago the market price for 1 BTC dipped as low as $4,183.97, and it has now settled at approximately $6,675.00. For US and UK miners paying the going rate for variable costs, however, recouping their equipment costs within one year requires BTC prices to reach $10,872.49 and $14,752.14, respectively.

The price turn for PoW digital assets has been driven by the confluence of another miner capitulation cycle, general market losses and uncertainty, and the novel Coronavirus. During times of stable or decreasing market values for Proof-of-Work tokens and assets, miners face increasing expenses as they compete with growing mining efforts and the accompanying hash-rate increases. These growing expenses squeeze mining margins for all miners, but the margin cuts disproportionately impact small and medium miners, as they already operate with thinner margins.

As the most highly-affected miners face mounting losses, they cease mining operations and are forced to liquidate their asset holdings. These cyclical trends are referred to as the miner capitulation cycle, and the cycle has major implications for PoW networks. As miners fold, the hash-rate of their respective networks takes a dive, decreasing security. Simultaneously, the market is flooded with digital assets as the miners sell their holdings, which drives prices down. The negative price impacts of miner capitulation cycles are especially important, as they can both catalyse price dips and serve to exacerbate them. While prices decline, more miners are forced to capitulate, which floods the market with more liquidations and further harms prices. Even more miners are forced to fold as a result.

(See and for more information on the miner capitulation cycle.)

Bitcoin Network Hash-rate

Notable dips in hash-rate indicate decreases in mining activity, which can be caused by miners folding due to market pressures.As the consequences of the Coronavirus continue to expand and linger, it could be yet another blow to the independent mining community. It has made mining even less sustainable for small and medium miners primarily by pushing BTC prices down. It’s other impacts, though, are also forcing out miners. Boosted unemployment, risk, and insolvency rates all make amassing an asset like Bitcoin for extended periods less feasible.

Although Bitcoin and other PoW currencies are built to react to changes in price and activity through changes in difficulty, the difficulty changes can trail price drops by months. Stuck with little bridging capital and wallets full of digital assets that have faced significant devaluation, smaller miners feel this lag more severely than larger miners.

Decreases in the difficulty of PoW networks can lag price drops by months.

What’s Next?

Proof-of-Work consensus algorithms and the digital assets they support are a revolutionary offering that enables trustless transactions and truly secure decentralised networks. When their incentive structures are not carefully architected or maintained, however, they exhibit dangerous centralising tendencies. When the economic forces of mining add to the influences of pooling agents and bear markets, a minority of very powerful players emerges, making these networks anything but decentralised. Moving forward, it is difficult to see how these networks will be able to avoid becoming even more decentralised without major community action. The question investors and PoW currency supporters must ask themselves is how valuable their assets will be if 51.0% interventions can take place on any given day. Currently, the immutability and security of many of the top networks are dictated by fewer than 6 mining entities, and over 70.0% of the mining market is dominated by miners from a single country.

Several new PoW networks and digital currencies have taken these centralisation issues to heart, creating novel architectures that incentivise improved distributions of hash-power. The Minima protocol fights centralisation by automatically making each user’s device a complete node. Rather than requiring network participants to purchase new equipment, one of the first barriers to widespread distribution of hash-power, the Minima application allows any mobile or IoT device to participate in block construction and validation activities. Ravencoin has approached the problem from a different angle; it hopes to create a more equal distribution of hash-power by using the X16R algorithm to disrupt the efficacy of ASIC mining hardware and by creating what it refers to as “fair launch” conditions.

(Information regarding both of these projects and other innovative blockchain initiatives can be found at, and, and additional insights, follow Saxon Advisors on LinkedIn ( or visit


Profitability estimates based on the use of Antminer S17+ 67 TH / s mining rigs. Estimated hardware cost per mining rig is $1,567.00, and estimated power consumption per rig is 2,680 Watts. Network difficulty for profitability estimates and time to 1 BTC is 16,552,923,967,337; Bitcoin base price for profitability estimates is $5,337.00. Bitcoin hash-rate dominance estimates based on 4-day history. Ethereum and Litecoin hash-rate dominance estimates based on 24-hour history. Bitcoin Cash hash-rate dominance estimates based on 7-day history. Hash rate distribution calculated as of 2020.03.18.


CoinWarz — Inputs for profitability, breakeven, and time to 1 BTC analyses.

CoinMarketCap — Historical and current digital asset prices.

Bitmain Technologies — Pricing, performance, and energy consumption metrics for mining equipment.

US Energy Information Agency — US energy pricing estimates.

UKPower — UK energy pricing estimates. — Bitcoin hash-rate and hash-rate distribution estimates. — Ethereum hash-rate distribution estimates. — Litecoin hash-rate distribution estimates.

Coin Dance — Bitcoin Cash hash-rate distribution estimates.

Cointelegraph — Bitcoin Cash 51.0% intervention; posted by Max Boddy.

CNBC — Traditional securities market pricing.

Block Crypto Inc — Geographical centralisation of mining estimates.
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