The crypto markets are collapsing. Across May and June 2022, cryptocurrencies lost approximately $1trn in value. Bitcoin experienced a colossal value drop after hitting a peak of £49,838 ($60,741) in November 2021, slumping to £18,976 on 1 August 2022.
This is devastating for a variety of investors, from average Joes who had pinned long-term savings plans on their cryptocurrency portfolios, to mining companies operating in countries such as Iran, Kazakhstan and Malaysia.
Alongside this, against the backdrop of a global economy recovering from the Covid-19 pandemic and high inflation rates, the threat of multiple recessions across many major countries looms.
Yet, if one of the touted benefits of investing in cryptocurrency is to avoid being part of a centralised system that is susceptible to geopolitical shake-ups and conventional banking rules, then why is this market crashing?
Is this crypto crash different?
Simply put, although inflation may not impact the decentralised nature of cryptocurrency, it impacts the crypto investor. As energy prices continue to climb, the cost of living has intensified, leading many investors to pull their crypto investments. This drop-off made headlines in June 2022 when US cryptocurrency lending company Celsius Network broke trust with investors by freezing withdrawals and transfers.
Is this kind of activity part of the risk with cryptocurrencies, however? Since it hit the market in 2008, crypto has been characterised by its unique volatility, leading many to view it as a high-risk investment space.
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The old adage of high risk, high reward may ring true for some in the crypto market. Since 2008, there have been various crypto bull runs – extended periods in market when stock prices are rising.
Alongside this, there are outlandish crypto investment success stories. For example, Erik Finman, who took a $1,000 gift from his grandmother at 12 years old, invested it all into cryptocurrency and became a millionaire by the age of 18 in 2017. In 2022, Finman’s net worth stands at $5m.
These wild success stories pushed many with deep pockets to take cryptocurrencies – and more specifically Bitcoin – seriously. As a result, many invested in or created companies to mine the finite resource in a bid to cash in on the craze.
Such investments have certainly been attractive during the Bitcoin bull runs – and for seasoned miners this will not be their first crypto crash – but in 2022’s diminishing market, could the combination of climbing energy prices, inflation and the sheer drop in crypto value be too far a fall?
More miners, more troubles
Put simply, Bitcoin mines are typically large warehouses that hold many small computers – or application-specific integrated circuits (ASICs) – that connect to the Bitcoin network and verify the blockchain by solving complex mathematical equations.
For Bitcoin mines to work effectively they require a lot of energy, from powering multiple ASICs to regulating the temperature of the warehouse. Despite the act of mining being seemingly invisible, the power required is significant.
The energy pricing crisis following the Ukraine war is hitting these miners hard following an already strained year. Since the second quarter of 2021, there has been a rise in the number of Bitcoin miners, making the process of mining the cryptocurrency more challenging and competitive. Despite the value drop, the hash rate – a metric for computing power per second used for crypto mining – actually rose between June and August of 2022, indicating that the space will remain competitive.
Even mining heavyweights such as Core Scientific, Marathon and Riot have seen their market capitalisation drop by more than 50%. This has incited strategy overhauls and profit estimates to be hastily revised.
Is Bitcoin mining ethical?
If the current cloud hanging over the cryptocurrency industry does begin to lift and prices start to recover, the ethical concerns surrounding mining practices will remain. This is particularly troublesome for countries that have become synonymous with the activity.
The Iranian government has taken an involved approach to crypto mining. In 2020, Iran was responsible for an estimated 4% of the global hash rate, making it a significant mining location. Yet blackouts and power outages in the same year were attributed by the government to the miners. As a result, the government shut down 6,914 unregistered crypto companies in the country between 2020 and 2022.
Another notable country taking a stringent approach is China; the country banned the practice of crypto mining in May 2021. China’s hash rate fell to zero for the months of July and August 2021; however, it crept back up in September of the same year, indicating that underground miners continue, although government crackdowns are a guillotine threat over the industry, adding to the risk of hefty investments into mines.
If the crypto mining industry continues to contend with high energy prices, climate concerns, government bans, a swamped market and a dwindling value, then its future looks quite bleak. However, a well-established character trait of cryptocurrency is spontaneity and unpredictability, something that many long-time miners have seemingly become accustomed to.