The two-faced Bitcoin: Mining will Likely Replace Some Low-Key Trading for a While until New Miners will Fill the Shortfall

It is well known that money has three primary functions. It is a medium of exchange, a unit of account, and a store of value:

Medium of Exchange is when money is used to "broker" the exchange of goods and services. Thus, it is performing a function as a true medium of exchange. In this sense, the money is only as good as it is capable of transferring the value of goods from one person to another with a minimal loss. Lately, classic "fiat" money became less and less efficient in performing this function because of their uncontrolled issuance. Modern world has more money in circulation than produced goods it is able to buy.

However, deep devaluation of classic currencies is problematic because money, unlike any investment instrument, has much greater meaning for all of us. It is bringing us food on the table. We can't eat or drink less than we have to.

The same is true for cryptocurrencies – particularly, for Bitcoin. On the very first day it was used as a medium of payment (or medium of exchange) it immediately obtained the corresponding fundamental value – no matter what is happening with its acceptance or bans now.

Bitcoin holders are only exposed to great risk of "losing everything" if all people at once decide to cease recognizing it's medium of exchange significance. In investment terminology, we refer to a corresponding asset as one having limited downside risk with unlimited upside potential. However, too rapid appreciation of Bitcoin as a medium of exchange is nearly as bad as its abrupt imaginary loss of value.

There is a hidden drawback in Bitcoin price surge this Spring: mining (read: earning money) has gradually become disadvantageous against trading. Indeed, although the price had gone up, so were the profits from all types of cryptocurrencies operations – coin-for-coin exchange, borrowing and leasing, trading, futures trading and so on. Over a given period of time, the gap between NPV of continuous trading operations as opposed to NPV of continuous mining has been growing and threatening to completely humiliate the latter.

Bitcoin is surviving a very difficult period of time. Since China cracked down on cryptocurrency mining, for the first time in the Bitcoin blockchains history, we have a complete shutdown of mining in a targeted geographic region that affected more than 50% of the network. China contributed around 65% to Bitcoin's hash rate before that happened, but that saw a massive drop after China's crackdown on mining.

The BitOoda team has recently, on July 5, 2021, shared their Weekly Hash report. The target Bitcoin (BTC) hashrate is down 28%. Because of these developments, Hashrate will "likely be below… prior forecasts for the next ~10 quarters." (wow!) The company also noted that the main driver of China's actions is "capital control – and control more generally". That goes without saying. We see wars of various controls over various things, where at the end of the day there will be winners and losers. New normal of Hybrid wars.

But cryptocurrencies' basic concept is still mining – not trading, so with protracted price declines we are returning to their basics, and that is good.

The Bitcoin code has been re-calibrated to make it 28% less difficult to mine. In other words, Bitcoin mining has a built-in incentive to keep it's network sound, stable and profitable: the lower the count of mining machines (AKA hash rate) the higher the profit of the remaining miners. And vice versa.
[Bitcoin hash rate historical chart]
Source: Glassnode

A bit of technicals. Bitcoin leverages the SHA-256 Cryptographic Hash Algorithm, and it requires a certain number of zeroes to unlock the block. To find a hash that starts with nineteen zeroes, miners use chips or GPUs to make the mathematical process as fast as possible.

The above report added that aggregate BTC earnings "per PH/s are ~9.28 mBTC, up from ~6.77 mBTC / PH/s last week. (1mBTC or milliBTC = 1/1000 BTC.)" Some crypto analysts estimate revenues of $29 per day for those using the latest-generation Bitmain miner versus $22 per day before the change. Also, the BitOoda North American Hash Spread almost "doubled (99.6% WoW) from $225 to $449."

Conclusion:
If history is of any indication, crypto mining will dominate again for as long as Bitcoin (and other smaller coins) price remains under pressure due to China's crackdown (and, possibly, other regulatory or social network postings issues). This will lead to an increase of demand on special chips like ones manufactured by Nvidia and accelerate the productive mining capacity replacement worldwide, shortage of which will further beef up the efficiency and profitability of mining operations.
Vladimir Rojankovski, MBA/LIFA
VRM Research