Thursday Checkup: SEC Regulation Woes Sink Bitcoin, Popularity Waning, Mining Not
Good Afternoon crypto fans. We hope your week has been a good one thusfar, and that you have been enjoying yourselves even with the never-ending market turmoil and investor uncertainty. We know that you have what it takes to stomach your way through these downspells, or else you wouldn’t be here. This business is not for the feint of heart! No matter, onwards and upwards, as they say.
BTC Sinks on Federal Regulation News
The price of bitcoin tanked hard on Wednesday morning after reaching a March high of $11,660 on Monday night. Bitcoin had already been in trouble since late February when the Securities and Exchange Commission (SEC) started sending subpoenas to individuals connected with ICOs in an effort to crack down on fraudulent practices frequently associated with cryptocurrency launches. A ruling by a federal judge on Wednesday reconfirmed the opinion of the SEC that cryptocurrencies are commodities, and thus subject to applicable regulations.
Much like stocks and other tradeable assets, the SEC now has the authority to regulate ICOs and coin exchanges, subjecting them to detailed registration processes that go against the independent, libertarian ethos of the blockchain. The ruling is being blamed for the sharpest sell-off crypto markets have seen since early February, when BTC prices dropped into the $6,000s.
The SEC filed formal charges against one such ICO, known as PlexiCoin, as early as December, and filed three similar lawsuits in January. The associated individuals were charged with making “materially false and misleading statements” in attempts to lure investors, including promises of return-on-investments which in some cases exceeded 1,000%. Since the cryptocurrency market is anything but stable or a sure thing, such promises are usually associated with Ponzi schemes, in which payouts are not funded by savvy trading and investing as advertised, but incoming money from newer investors.
Bitcoin Popularity Waning?
According to patterns in Google searches for the term “Bitcoin,” the answer may be “yes.” An article published by Bloomberg on Tuesday centered on the fact that relative search popularity for the granddaddy of all cryptocurrencies has been on the decline since last December, currently sitting at levels not seen since October 2017. A look into search activity with Google Trends reveals that none of the major altcoins are exceptions to this decline, with searches for NEM (NEM) remaining the most consistent among its peers across time:
A Harvard economist warned bitcoin investors that upcoming regulatory hurdles will diminish the value of the cryptocurrency, which he believes is necessary for its continued survival. Outside of its use for “tax evasion and money laundering,” he noted bitcoin’s potential for use as a currency is “very small.” Longtime skeptic economist Nouriel Roubini, dubbed “Dr. Doom” after his dire prediction of a housing bubble crash came to fruition in 2007, made similar comments in February, stating that he believed bitcoin would end in the “ultimate crash” and that the intrinsic value of bitcoin was “zero.”
Indeed, the number of transactions per day, the number of transaction per block and the revenue earned by miners have all been steadily decreasing for bitcoin since December 2017, as they have for most altcoins as well. Interestingly, the cost per transaction has remained relatively flat in the same time period, at over $100 per transaction since mid December. Bitcoin mining difficulty remains at an all-time high, even though mining profitability has declined to October 2017 levels. Although the blockchain really does still have the power to change finance, the economy and technology as we know it, there’s little doubt that the entirety of cryptocurrency was – and perhaps still is – in a speculative bubble whose assets were/are overvalued, at least for the time being.
Bitcoin Mining Activity and Costs Around the World
Despite not being as profitable an endeavor as it once was, bitcoin mining remains tremendously popular worldwide. The industry is especially popular in China, Georgia, Sweden, and the U.S. It is estimated that 80% of all bitcoin mining occurs within these four countries, with the remaining 20% divided up across the entirety of the globe. Other countries home to notable mining pools include Iceland, Japan, the Czech Republic and India. The most popular form of mining equipment at present, the Bitmain Antminer S9, uses about enough power to run a hair dryer on full blast, which means that all the countries listed above have something in common that sets them apart from non bitcoin-producing nations: an abundance of relatively cheap electricity. (A cooperative government is of course also required).
In a study that featured comprehensive, unprecedented inclusion in its worldwide tallies, Elite Fixtures averaged bitcoin mining costs across 115 countries and released their results in a blog post earlier this week. The cheapest countries per cost of mining a single coin tended to not only have cheap electricity but economic or political strife as well, and included Venezuela ($531), Uzbekistan ($1,788), Ukraine ($1,852), and Myanmar ($1,983). The most expensive countries tended to have stable governments but extremely high electricity prices, and included South Korea ($26,170), Germany ($14,275), Denmark ($14,275), and Belgium ($13,482). Bitcoin mining is prohibitively high in first-world countries without an excess of fuel resources, while countries with cheap power and unstable governments are seemingly lucrative places to start large-scale mining operations.
A January study which broke down mining costs by state revealed Louisiana to be the cheapest state to mine bitcoin, with an average cost of $3,224 per coin. Idaho, Washington, Tennessee, and Arkansas rounded out the bottom 5, while Alaska, Connecticut, Massachusetts, and New Hampshire ranked among the most expensive, with Hawaii winning the #1 spot at $9,483 per coin. At this price, it is currently the only state where the cost of electricity has the potential to render bitcoin mining unprofitable.
Also to be included into average costs are mining equipment, computer servers, connection cables, fans, storage space, as well as maintenance and personnel costs. If all of these factors are not well taken into consideration, it is very easy for a mining operation to quickly become unprofitable and go belly up, despite promising circumstances and/or location. Theft of bitcoin mining hardware continues to grab headlines internationally as criminals hoping to hide behind the anonymous nature of bitcoin are stealing computer and equipment dedicated to cryptocurrency mining in order to help offset operation expenses.
Escaping SHA-256 Reliance
Proposals to change the costly mechanisms behind the bitcoin blockchain have been around for a number of years, as theoretical situations of “miner centralization,” “51-percent attacks” and extraordinarily high ASIC equipment costs have dominated discussions of Bitcoin Core developers. The algorithm which allows new blocks to be added to the bitcoin blockchain, known as SHA-256, requires such expensive machinery, sensitive political conditions and vast, inexpensive power supplies to maintain it that it is only natural for mining hotspots to develop naturally around the world.
Bitcoin’s huge price tag and consumption of power give it a lack of flexibility. These two issues are among the most common cited reasons for the necessitation of an alternative coin by developers, including the world’s first altcoin, Litecoin (LTC). Unlike bitcoin, Litecoin can be mined with graphics cards, along with other altcoins employing the scrypt encryption algorithm. These and other GPU-mined coins are now themselves blamed for rising prices of computer gaming graphics cards.
Though the employment of SHA-256 in bitcoin remains a contentious one among the Core developer community and has inspired several forks since Litecoin, it is described by long-time Core member Peter Todd as still “probably the best of many bad choices.” In a post to Reddit from 2015, Todd outlines 3 potential steps the Bitcoin Core team could consider taking to keep bitcoin from becoming monopolized, prohibitively expensive or taxing on energy resources. In them, he proposes outlawing mining pools, incentivizing solo mining, and getting rid of ASIC mining hardware, before ultimately conceding that the price of BTC may have to crash before its power can be truly redistributed, and rebuilt from the ground up.