Does a cryptocurrency die once the price of a coin goes below the cost to mine?

Cryptocurrencies are designed to have an in-built cap on their maximum coin supply, as well as be mined in order to reach this cap.

As more coins are produced, the cost of mining goes up – which means that the cryptocurrency gets harder and harder to mine. In most cases, this is intended to ensure that the cryptocurrency in question maintains a level of scarcity, which can drive its price up further.

But what happens if the price of a cryptocurrency drops below the point at which it’s profitable to mine? Is it time to panic? The answer isn’t necessarily so clear-cut...

 

The dynamics of mining

Mining is an expensive process in terms of both electricity and hardware. If you’re mining bitcoin, your hardware runs 24/7 and consumes an immense amount of power—in fact, it’s estimated that miners use almost as much electricity as Ireland.

It doesn’t help that it usually takes years for miners to recover their initial costs. Mining new coins at break-even costs can sometimes take months or even years depending on which cryptocurrency you’re mining, which leads us to our next point...

Bitcoin's halving: The last time Bitcoin had a halving was in 2016 when block rewards were cut from 25 bitcoins per block mined down to 12.5 bitcoins per block mined.

That halving didn't spell disaster for Bitcoin's value though; instead, its value increased over 100% since then (from around $430 USD to around $1,000 USD).

A lot of people are hoping that another halving will have a similar effect on Ethereum's value too (although with less than half of Ethereum's current market cap).

But if we've learned anything from Bitcoin so far it's that there are no guarantees when it comes to crypto prices—even ones based on hard math equations like halving events.

 

The Bitcoin Mining Network

There are two basic ways to make money from bitcoin mining: you can either purchase dedicated hardware known as an ASIC that is designed specifically for bitcoin mining or you can mine altcoins and exchange them for bitcoins.

Mining operations vary from person to person, but there are basically three things that need to be present in order for a true mining operation.

These include an ASIC (see definition below), which serves as a specialized computer chip that is designed and manufactured only for one purpose—mining cryptocurrencies; access to cheap electricity; and cooling equipment since all those high-end chips create tremendous amounts of heat.

 

The Role of Miners in Cryptocurrency

Cryptocurrencies like Bitcoin and Ethereum work on blockchain technology, so when miners create new blocks they are rewarded in cryptocurrency. However, there's a catch: your computer hardware needs to have been designed specifically for mining.

There are many different options out there, including FPGAs and ASICs. If you want more information about how cryptocurrencies work—and what mining means for blockchain—check out our explainer here.

More from Investopedia: What is Mining? How Blockchain Technology Will Change Finance The Beginner's Guide To Ethereum: What It Is And How It Works 5 Alternative Coins To Watch In 2018 Top 5 Cryptocurrency Scams of 2014 Litecoin Vs.

Your profitability isn't set in stone though. Miners don't get coins for free; instead, those who verify transactions must compete with others (called miners) to win cryptocurrency through something called proof-of-work.

The details behind proof-of-work change from currency to currency, but generally speaking it involves completing complex computational problems before anyone can move forward with verifying their transaction and earning digital coins as a reward.

This competition incentivizes people around the world to power their computers with massive amounts of electricity (costing them real money) so that they can turn over as many transactions as possible per second - hence why proof-of-work is often called mining.

How Miners Are Compensated For Their Work

Miners that are contributing computing power towards processing transactions for blockchains are compensated for their efforts. In bitcoin, miners get two kinds of rewards: one is newly created bitcoins and another is fees that they receive as compensation for their work in helping validate transactions.

The system compensates miners by releasing new bitcoins at a predictable rate until all 21 million have been created. Currently, 25 bitcoins are released approximately every 10 minutes, which helps stabilize and control inflation in bitcoin, but also means that as time goes on it takes more and more time on average to find new blocks.

By 2020 (estimates say around 2140), 21 million will be reached and no further bitcoins will be generated at all - leaving only transaction fees as compensation for miners’ work.

 

The Impact of Cryptocurrency Prices on Mining Costs

Mining costs are one of the most important factors in determining how profitable it is to mine a certain cryptocurrency. If a currency’s mining costs are high, it’s going to be harder for miners to turn a profit.

That makes mining pools vital—the more people mining together, and hence sharing their resources, means that everyone has better chances at earning rewards without too much difficulty.

Cryptocurrency prices are an interesting element of all this because they can impact miners' profitability. When prices go down, people tend to stop mining because they think it’s not worth their time or money anymore.

This can lead to less competition among miners, which could make it easier for someone with fewer resources (or who's willing to put in extra work) to take over a network.

In short: yes, cryptocurrencies do die when they drop below mining costs--but only if no one wants them anymore!

 

How Large Is A Cryptocurrency Network?

One way of answering that question is by looking at its network hash rate, which measures how many trillion calculations per second are being made by all computers combined in that network.

As of December 2017, Bitcoin's network hash rate is 30 quintillion (30 followed by 18 zeros) SHA-256 hashes per second. That's 30 million teraflops, about 5% more than the peak performance of one petaflop supercomputer.

In other words, Bitcoin has become twice as powerful in less than half a year. It took humanity 200 years to get from 0.1 teraflops (one-tenth of one percent of 1 petaflop) to 1 petaflop. It took another four years for us to reach 10 petaflops and only three years for 100 petaflops!

The pace is quickening and no one knows where it will end... including us. And it’s not just Bitcoin: Ethereum, Litecoin, Monero and hundreds of others are also growing exponentially every day!

 

How Do Altcoins Affect Mining

As long as there is an opportunity for miners to make a profit, then that currency will live on. To understand why we need only remember what it means for something to be profitable: that it provides an opportunity for a miner (or group of miners) to earn more than what they would receive by mining some other cryptocurrency.

The important thing to note here is that it doesn’t matter if they simply intend on mining and selling their coins in order to gain value from those trades.

Whether or not they actually sell those coins is irrelevant; what matters is that they could have sold them and chose not to, thereby providing them with profit.

Miners who have such opportunities continue mining—and thus keeping transactions active—until no further profitable opportunities exist.

 

The Cost Of Mining Vs. The Reward Of Cryptocurrency Collected

Over time, these numbers will be eroded due to inflation. It is estimated that by 2140, all bitcoins will have been released. Once no more coins are being generated, what's going to happen?

Sure, transaction fees might make up for it (depending on how much they're worth), but there won't be an incentive for people to generate new currency units.

They'll simply leave their coins alone and wait for them to rise in value; that's one reason why we haven't already seen governments take action against crypto-currencies. They know its value will drop if nothing is done.

If you want to earn some money mining cryptocurrencies, you should probably do so sooner rather than later. You may not see your investment pay off before you run out of coins to mine.

 

The Odds Of Becoming A Miner, And Many More...

You might be surprised. Even after they fall well below their initial mining costs, most coins continue on to live full lives with real utility—and some even enjoy impressive recoveries later down the road.

This doesn’t mean you should hold onto every crypto you own that dips in value, but there are definitely more than a few exceptions to that rule. If you’re looking for an investment and not just speculation, remember: Only spend what you can afford to lose.

And don’t forget about taxes. This guide won’t help if it leads to bankruptcy (though things aren’t as bad as they seem; see Why Crypto Investors Needn't Worry About Taxes ).

 

Conclusion

The short answer is no. The long answer requires understanding something called an exchange ratio. For example, if you’re mining Bitcoin and each Bitcoin is worth $5,000 then you could sell one bitcoin at $5,000 and break even on your initial investment into mining equipment (probably including electricity costs for running your computer).

If you don’t believe that Bitcoin will ever hit $5,000 then mining is probably not for you. Instead, invest in something like Ethereum where there are more known ways to increase value because Ethereum has its own technology built into it that helps it achieve certain goals faster and better than Bitcoin.