As the end of May approaches and prices remain low due to COVID-19, miners are increasingly inclined to buy bitcoins rather than put more coins into circulation.
The recent historic drop in bitcoin has made mining this coin more expensive than buying it, which could have serious consequences for the security of its underlying network and casts uncertainty over the asset’s future.
The entire cryptocurrency market continues to feel the impact of the recent pandemic. With more countries locked down around the world, the resulting panic led to heavy sell-offs that pushed bitcoin’s price to record lows and made mining less economical than purchasing the coin.
Bitcoin’s underlying blockchain security is governed by a Proof-of-Work consensus protocol. In this system, miners solve advanced mathematical problems to secure the network and are rewarded in BTC for doing so.
Mining bitcoin is not as simple as turning on a computer and watching coins appear. It is a highly competitive industry with significant energy and equipment costs. The recent troubles affecting global markets mean miners will struggle to make any profit, and these participants will face even greater pressure when the halving occurs this summer.
Bitcoin is built on a deflationary model with a fixed maximum supply. Deflation is enforced by halving the reward given to miners every 210,000 blocks, and the next halving is imminent. When it happens, the reward for the original cryptocurrency will drop from 12.5 to 6.25 coins, effectively doubling the cost of mining overnight.
However, there is a positive side:
As mining farms begin to shut down due to low profitability, mining difficulty will fall and costs will decrease as well. Additionally, as miners shift from selling to buying, demand for bitcoin will rise, putting upward pressure on its price. Combining these forces with the possibility that bullish investors may start to accumulate, we could see bitcoin’s price rebound as sharply as it fell.
But for that to happen, global markets must first stabilize, and that depends entirely on controlling and mitigating the spread of the coronavirus.