How the global energy crisis will affect the cryptocurrency market: experts’ version
After the COVID-19 pandemic, the world is facing another crisis – a sharp rise in energy prices in Europe and the US. In recent weeks, there have been spikes in the local cost of oil, gas and electricity, while the geopolitical conflict has led to a sharp rise in the price of fertilizers. In addition, consumption of coal and other natural resources is also on the rise. In Europe alone, coal consumption rose by 14 percent last year and is expected to increase by a further 17 percent by the end of 2022. How will this affect digital assets, which are not directly linked to these industries?
This situation leads to an increase in the cost of electricity, a critical resource for cryptocurrency miners based on the Proof-of-Work consensus algorithm, which requires video cards, ASICs and other computing devices. Bitcoin’s price is still hovering around $20,000, but the cost of mining is steadily rising as its hash rate and complexity increase.
To illustrate, here is a graph of the Bitcoin network hash rate, i.e. the total processing power of the blockchain. The day before, it reached a record 321 hashes per second.
Bitcoin network hash rate graph for the past year
In a related development, the complexity of BTC mining also reached a record high, rising by 3.44 per cent on Monday. Accordingly, certain equipment is now generating the lowest yield in cryptocurrency terms of all time.
Bitcoin mining difficulty graph
With this in mind, it is clear that the energy situation will affect miners, who have traditionally been one of the most important participants in PoW networks.
What will happen to Bitcoin during the crisis
AllianceBlock crypto founder Matisse de Vries commented on the state of the current crisis in an interview with news outlet Cointelegraph. Here is one of his quotes in which he shares his perspective on what is happening.
These issues are interconnected primarily in how capital comes in and out of industries that impact the economy. The worse the macroeconomic climate, the less liquidity flows into and out of the digital asset industry. It is this liquidity that allows blockchain’s incentive mechanisms to continue working. For miners, the lack of liquidity means fewer transactions to confirm, lower fees and less incentive to continue their business.
Cryptocurrency miner
The head of AllianceBlock believes this situation could play into the hands of the Etherium ecosystem. After all, the altcoin switched to the Proof-of-Stake (PoS) consensus algorithm a month and a half ago, which reduced the power consumption of its network by 99.9 percent. With this happening, miners have been replaced by validators – those who maintain Eth’s network and profit by stacking.
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Nero Jay, owner of YouTube channel Dapp Centre, believes that the crisis will continue to have a negative impact on the crypto market, leaving crypto as a high-risk and speculative sector for most investors. In other words, Bitcoin has not only fundamental problems, but also reputational ones.
However, there is a silver lining – the aforementioned issues could serve as an opportunity for wider adoption of cryptocurrencies in everyday life in countries with hyperinflation and significant international sanctions pressure. We are talking about Venezuela, Turkey, Argentina, Zimbabwe and Sudan – the citizens of these countries are clearly better off keeping their savings in crypto due to skyrocketing inflation.
Cryptocurrency miner
Rising energy prices will lead to higher costs for miners, which in turn may force them to sell their bitcoins, thus lowering its price even more. Moreover, an increase in hash rate could lead to miners needing a higher BTC price to cover their daily operating costs. In some cases, those market players, who were not able to achieve efficient bitcoin mining performance, will be forced out of business altogether. At least temporarily.
If miners continue to go out of business, the total amount of BTC mined will remain the same, but the reward per block will be distributed among fewer people. This suggests that miners who are able to withstand the pressure on the market caused by rising energy costs will reap relatively higher profits in the medium term.
Also, shutting down miners will mean relatively less security for cryptocurrency networks. However, Bitcoin’s current hash rate allows it not to worry about what is happening, as the cost of hypothetically creating problems for the blockchain is already very high.
We believe that the energy crisis will first and foremost affect the overall situation in the economy as ordinary people will have to at least spend more on utility bills. This will mean less available funds and less appetite for further investment, which will result in a dip in investor purchasing activity.
However, the energy problems will eventually be solved and inflation will surely be stabilised. Under such conditions, cryptocurrencies will once again appear as a promising fast-growing sector, which will attract the attention of new users who value decentralisation and independence from banks, governments and other such bodies.
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