Who Is Mining Bitcoin?

BTC "price"

It is just over a year since One Heck Of A Halvening, when Tether had pumped the Bitcoin "price" up to $73,094 the month before. Thanks to The Cryptocurrency Industry's Unprecedented Election Spending it was pumped over $100K and is now around $92K. The security of the Bitcoin blockchain depends upon Proof-of-Work, the idea being that it is more expensive to attack than any possible gains. Thus it is important that miners both spend a lot of money to mine coins, and that they can make a return on their investment in doing so. Now it is time to take a look below the fold at how the miners are doing post-Halvening.

First I should point out that the idea "that it is more expensive to attack than any possible gains" sounds plausible but is actually an oversimplification. Everyone has decided to ignore Eric Budish's The Economic Limits Of Bitcoin And The Blockchain, which shows that, for safety, the value of transactions in a block must be low relative to the fees in the block plus the reward for mining the block. In other words, the value transacted must be less than the total cost of the transaction. Clearly, this means the network is either unsustainable or unsafe. Right now, the average value per block is around $76M but the miners' income per block is around $285K, violating Budish's criterion by a factor of 267.

Everyone has also decided to ignore Raphael Auer's Beyond the doomsday economics of “proof-of-work” in cryptocurrencies, in which Auer not merely confirms Budish's conclusion but shows that the current violation of Budish's criterion is inevitable because:

proof-of-work can only achieve payment security if mining income is high, but the transaction market cannot generate an adequate level of income. ... the economic design of the transaction market fails to generate high enough fees.

See my posts Cryptocurrencies Have Limits. The Economics Of Bitcoin Transactions, Fee-Only Bitcoin and Bitcoin's Fee Spikes.

And everyone has decided to ignore Vitalik Buterin's comment:

In the case of blockchain protocols, the mathematical and economic reasoning behind the safety of the consensus often relies crucially on the uncoordinated choice model, or the assumption that the game consists of many small actors that make decisions independently. If any one actor gets more than 1/3 of the mining power in a proof of work system, they can gain outsized profits by selfish-mining. However, can we really say that the uncoordinated choice model is realistic when 90% of the Bitcoin network’s mining power is well-coordinated enough to show up together at the same conference?

But since everyone has decided not to worry what pointy-head economists and Etereum co-founders think, we will assume everything is just fine.

Miners' Revenue

From blockchain.com we can see that the Bitcoin miners' were doing great late last year and early this year, but things aren't so great now. Revenue peaked at around $50M/day in early February and recently has been as low as $37M/day.

Transaction Fees

The reasons are the drop in the BTC "price" and a drop in transaction fees to around $650K/day.

Transaction Rate

Fees have dropped because the demand for transactions has dropped, with the network recently running at half-speed, averaging only around 4 transaction/sec.

Mempool Size

Nearly a year ago the mempool held around 180Mb of pending transactions, recently it has been around 2MB.

Cost Per Transaction

Adding the fees and the inflation of the currency through block rewards shows the cost per transaction peaked at around $160 and is currently around $100.

All that is on the income side of the miners' balance sheets. What about the cost side? Hope Corrigan reports that Bitcoin mining now just totes unprofitable, costing over $137,000 to mine just one BTC in the US and near $200,000 per coin in Germany:

New data tells us that mining a single Bitcoin or one BTC costs the largest public mining companies over $82,000 USD, which is nearly double the figure it did the previous quarter. Estimates for smaller organisations say you need to spend about $137,000 to get that single BTC in return. BTC is currently only valued at $94,703 USD, which seems to be a problem in the math department.

These costs can even get worse depending on the country you're doing your mining. Germany is typically considered to be one of the worst places to mine BTC from a profit perspective. It costs around $200,000 USD to mine a single coin there.

If Corrigan is right, that gives the big miners a 12% gross margin, out of which they have to pay taxes, staff, space, debt interest, stock grants to executives and depreciation of the rigs (but see The problem with Bitcoin miners). Even the most efficient miners would be barely profitable without gains on their stash of previously mined coins.

Hash Rate

The result of the pressure on their margins is that the least efficient miners have stopped mining, perhaps to Pivot to AI, and the hash rate has dropped. Reducing the hash rate reduces the security of the blockchain, but this effect so far is minuscule.

If we stop ignoring Budish, Auer and Buterin we see that in practice the security of the Bitcoin blockchain is assured not through decentralized Proof-of-Work, but because no-one wants to kill the goose that lays the golden eggs. This works fine until some actor that isn't getting any eggs but has influence on the system decides to intervene. Consider a hypothetical scenario of this kind.

The current adminstration seems intent on integrating cryptocurrencies (and their inevitable grifts) into the US financial system. Previously, major disruptions of the cryptocurrency ecosystem, such as the Terra/Luna crash or the FTX bankruptcy, had little effect on the broader financial system because previous adminstrations took care to maintain a firewall between them. Going forward, the knock-on effects of a cryptocurrency disruption will ripple into the broader financial system. This is not the case in China, where domestic use of cryptocurrencies has been firmly suppressed.

Once the US integration of cryptocurrencies has proceeded, suppose China decided that disrupting the US financial system in a non-attributable way was in their national interest. What levers do they have to pull?

A year ago in "Sufficiently Decentralized" I discussed this question, quoting Blockchain Analysis of the Bitcoin Market by Igor Makarov & Antoinette Schoar:

We show that the Bitcoin mining capacity is highly concentrated and has been for the last five years. The top 10% of miners control 90% and just 0.1% (about 50 miners) control close to 50% of mining capacity. Furthermore, this concentration of mining capacity is counter cyclical and varies with the Bitcoin price. It decreases following sharp increases in the Bitcoin price and increases in periods when the price drops or. Thus, the risk of a 51% attack increases in times when the Bitcoin price drops precipitously or following the halving events.

Figure 1

They use the analysis of Ferreira et al's Corporate capture of blockchain governance, which identifies the extent to which Bitcoin mining is controlled by a Chinese company, Bitmain Technologies, which has been for many years the leading supplier of Bitcoin mining rigs:

Figure 1 shows the evolution of the market shares of Bitmain’s affiliated pools and those of other large pools until early 2021. Bitmain-affiliated pools’ market shares have been consistently at or above 30% since October 2016. Bitmain core refers to pools in which Bitmain has known ownership stakes (AntPool, BTC.com, and ViaBTC). Bitmain total adds to the core pools those that are Bitmain’s business partners (BTC.Top, OKExPool, Huobi.pool, and 1THash;

Table 1

Ferreira et al's Table 1 is revealing:

As of March 2021, the pools in Table 1 collectively accounted for 86% of the total hash rate employed. All but one pool (Binance) have known links to Bitmain Technologies, the largest mining ASIC producer.

AntPool and BTC.com are fully-owned subsidiaries of Bitmain. Bitmain is the largest investor in ViaBTC. Both F2Pool and BTC.TOP are partners of BitDeer, which is a Bitmain-sponsored cloud-mining service. The parent companies of Huobi.pool and OkExPool are strategic partners of Bitmain. Jihan Wu, Bitmain’s founder and chairman, is also an adviser of Huobi (one of the largest cryptocurrency exchanges in the world and the owner of Huobi.pool).

Mining pools 25 June 2018

How would China go about preparing to pull these levers? The first observable step would be to obscure the actions of the Chinese-influenced mining pools. In the early days there was essentially complete transparency about mining pools. Seven years ago, this is what the market share of the various mining pools looked like. Note that:

• "Unknown" is 5.3%.
• 3 identifiable pools together control more than 50%
• 6/17 identifiable pools each have more than 5%
• 5 of the 6 are Bitmain affiliates

Mining Pools 5/17/24

A year ago this is what the market looked like. Note that:

• "Unknown" is 7%.
• 2 identifiable pools together control more than 50%
• 5/10 identifiable pools each have more than 5%
• 5 of the 10 are Bitmain affiliates

There have been slight but not really significant increases in centralization and opacity, but a huge decrease in the number of identifiable pools. Economies of scale have eliminated the smaller pools.

Mining pools 4/30/25

Now this is what the market looks like. Note that:

• "Unknown" is 56%.
• 0 identifiable pools together control more than 50%
• 3/7 identifiable pools each have more than 5%
• 4 of the 7 are Bitmain affiliates

"Unknown" now controls the network. There has been a further decrease in the number of identifiable pools.

As blockchain.com notes "Blocks that are grouped into the 'Unknown' category do not mean an attack on the network". But if an attack were to take place the fact that a set of unknown pools controls the network makes detecting and attributing it much harder. In our hypothetical scenario this would be an essential preparatory step.

There are, of course, other possible explanations for the huge increase in stealth mining. Unfortunately, I can't think of any that would be good news. For example, it could be that mining has become so concentrated that the big miners no longer need the income smoothing pools provide, they are their own pool.