What the global chip shortage means for bitcoin mining
The flip of the calendar to 2021 has seen a historic bull run for bitcoin and the majority of the cryptocurrency space, with the prices of many digital assets reaching all-time highs as more and more investors get involved.
But this success is not without its share of challenges, however, highlighted by a severe global shortage of computer chips used for making bitcoin mining rigs. This shortage is greatly impacting the already volatile crypto space and is affecting everything from the price of miners to the global distribution of mining activity.
Here is a closer look at the state of the chip shortage and what it could mean for crypto mining in 2021 and beyond.
The importance of mining hardware
To fully understand the industry implications of the bitcoin miner chip shortage, we first need to revisit the role of miners and why they are so important.
Bitcoin mining hardware (and all crypto mining hardware, for that matter) serves a critical purpose in powering the health and profitability of the Bitcoin network. Not only are mining rigs needed to process transactions and to add new bitcoins into circulation, but they also help keep the network alive and healthy so it can keep performing at an efficient rate.
For miners to maximize their profitability, it is important they are kept up-to-date to compete with the network’s increasingly difficult landscape. Profitability is ultimately determined by a number of factors, including the price of the cryptocurrency being mined, the cost of electricity to power the hardware, the power and efficiency of the hardware itself, and more.
Without access to the right hardware, miners become unable to operate to keep the network moving forward. And the global chip shortage is making that access more difficult to come by for a large percentage of the mining population.
Decreased supply in China
The global chip shortage is drastically reducing the production capacity of bitcoin mining rigs in China, which is especially noteworthy, as China has dominated bitcoin mining and hardware manufacturing for the better part of a decade.
Increased demand worldwide
The decreased supply of hardware in China and elsewhere is coinciding with never-before-seen demand worldwide, as crypto markets continue to perform at a record pace. This demand is causing the prices of both new and used mining hardware to skyrocket.
Bitmain – one of China’s leaders in mining hardware manufacturing – doubled its prices in order to capitalize on the increased demand. The firm has since sold out of miners and is now pre-selling rigs for delivery later this year.
In fact, miners are now placing orders for hardware that will not be delivered until November or December of 2021. Others are also paying a premium for secondhand machines, with prices for used hardware having risen by 50-60% over the past year.
The chip shortage effect on other industries
The crypto space is not the only industry being affected by the chip shortage. In fact, with several sectors from automobiles to consumer electronics also feeling the impact.
Taiwan Semiconductor Manufacturing and Samsung Electronics are the two main producers of chips used in mining rigs. Alex Ao, vice president of mining rig manufacturer Innosilicon, says these companies will prioritize supplies to these other sectors whose chip demand is seen as being more stable. This could further delay any return to normalcy for chip supply to miner manufacturers.
The phasing out of smaller miners
As pricing and demand increase while supply decreases, it is expected that smaller miners will likely be phased out of the picture – particularly on the Bitcoin network – as it begins to require more power and efficiency to mine profitably.
This shift away from smaller hobby miners may also lead to a consolidation of the mining industry into the control of a few larger players – most of which are not located in China (i.e. institutional investors in North America and the Middle East).
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