Why does bitcoin mining remain profitable even in a devaluation scenario?
It doesn’t matter if the final value of the coins drops or not
Over the past few years, cryptocurrencies, especially bitcoin, have not only managed to break the stigma that has been applied to them, but have also become a major innovation for investors and the financial market. Its multiple functionalities and characteristics ensure that these funds are perceived as means of payment, currency exchange, investment opportunities, among other situations.
However, in the same way that it rises quickly, the fall is usually dizzying. Bitcoin, the oldest and main global cryptocurrency, has lost much of its value during 2022. However, there is a segment that continues to grow despite the decline and devaluation scenario: cryptoasset mining.
From an activity initially carried out by tech-savvy people on their own personal computers, the activity has now become a large industry that mobilizes investment and participation from multiple companies. Proof of this is the projection of Brandessence Research on this niche in the coming years. For example, in 2021, the cryptocurrency mining market was worth $2.2 billion. It is expected to reach nearly USD 5.3 billion in 2028, with an average annual growth rate of 28.5% during that period.
The mining process is nothing more than validating and adding new cryptocurrency operations to the database it uses (usually the blockchain). These are people and companies that authenticate transactions with complex mathematical codes and make more crypto assets available online.
These users and organizations are responsible for verifying the validity of the information traveling through the blockchain, ensuring its protection against fraud attempts. A miner receives a block of transactions, validates them all to ensure there are no double spends, and adds the block to the chain of transactions to make this work. The miner gets an incentive in bitcoin.
But why is this activity still on the rise even with the devaluation of the prices of major cryptocurrencies?
First, it is necessary to recognize that there is an independence between the mining of this crypto asset and the daily price. Several factors affect the price of an asset, such as demand, external pressures, regulation, among others – and the act of putting more into circulation is just one of them. By the way, the availability of major cryptocurrencies is limited. Bitcoin, for example, has 21 million units. After that, miners will no longer receive bitcoins as an incentive, only transaction fees, and the price will continue to fluctuate.
Another explanation is the status change of this category in recent years. From something confined to niches, it has become the basis of innovation for various organizations and sectors. Through the blockchain, companies guarantee additional protection in their operations with encrypted and immutable codes. Digital currencies also stand out, making transactions and unlocking concepts like the Metaverse in the near future.
Of course, in order to take advantage of the positive numbers and this favorable scenario, some precautions must be taken. As mentioned before, cryptocurrency mining is no longer a simple matter to become a complex process, dependent on the sole focus of the company willing to perform this task.
There is also the problem of environmental protection, with high energy costs to maintain the structure of ASICs (computers specialized for the task of mining). Not to mention the ability to adapt to challenges that already exist and those yet to come. Like everything else in technology, cryptocurrencies are also constantly evolving – and what worked before may not have the same effect in the future.
However, it is important to understand that mining cryptocurrencies is an essential task in a world where these digital currencies have a major impact on the daily lives of people and businesses. By controlling the amount in circulation, it not only contributes to the appreciation of the currency, but also to the feeling of “I want more”. So it doesn’t matter if the final value falls or not, because even in the middle of the storm, the demand for this asset will be high all over the world.
John Blount is the CEO of FMI Minecraft Management.