Key Points
- AntPool and Foundry USA control more than 50% of Bitcoin’s hash rate, triggering risks for BTC users.
- JPMorgan revises Bitcoin production cost estimate to $45k.
Bitcoin mining is slowly but surely moving in the hands of only a few entities. Now, famous mining pools have seized huge power and this is posing an existential threat to the Bitcoin network and smaller Bitcoin mining companies as well.
Bitcoin mining is shifting towards centralization. A while ago, BTC miners used to mine blocks with their CPUs on PCs due to fewer miners, and back then, there was a lower overall hash rate.
This evolved into GPUs in 2010 and into ASIC miners in 2021. ASICs triggered the rise of massive mining companies that built huge warehouses with hundreds and even thousands of rigs.
Now, miners who control a greater percentage of Bitcoin’s network hash rate are obviously more likely to mine blocks and collect the block rewards – the financial revenue for verifying and adding transactions to the blockchain.
This is the main reason why small-scale miners often join a mining pool together with others who run their own ASICs. They can earn in proportion to the amount of computing power that they contribute to a mining pool’s network.
AntPool and Foundry USA control over 50% of Bitcoin’s hash rate
Mining pools are a centralizing influence on the Bitcoin network, and big mining pools see massive economies. Larger pools have more efficient operations, as expected. A mining pool that controls more than 50% of the Bitcoin network could initiate a 51% attack against the network.
Mining pools are dominating the Bitcoin mining industry. Small and medium-sized miners are lending their power to a pool which results in minimizing costs and maximizing revenues.
Now, Bitcoin mining pools have come to be more centralized and prone to censorship. AntPool and Foundry USA are two examples that require miners to go through KYC protocols.
These two pools controlled almost 50% of Bitcoin’s hashing power back in February.
Now, according to the latest reports, as of May, the two entities have grown their share to 56.4%. This offers them ability to censor transactions by confirming refusal in their mined blocks.
Risks of censoring transactions and double-spending
Another worthy example, the first one that took place back in September and October 2023, is F2Pool. The entity failed to validate six transactions from OFAC-sanctioned addresses.
Bitcoin dev 0xB10C who is a mining pool-observer found that four of the transactions were intentionally filtered which made F2Pool the first one to adhere to OFAC sanctions.
Another Bitcoin developer Matt Corallo said that miner centralization does have a great impact on Bitcoin and destroys the long-term value proposition of BTC itself.
If there’s a single group that controls 51% of Bitcoin’s mining power, they can censor transactions and double-spend. This means spending the same Bitcoin more than once.
A shift in mining hash rate
Recent reports reveal that JPMorgan revised its central estimate of Bitcoin production cost to $45k from the previous projection of $42k amidst a shift in mining hashrate.
JPMorgan analysts led by Nikolaos Panigirtzoglou said recently that they previously anticipated an important drop in the hash rate post-halving as unprofitable Bitcoin miners exit the network.
The analyst also noted that the production cost estimate is a function of the hash rate and mining equipment efficiency. He said that the $45k current estimate would change as the hash rate and mining equipment efficiency evolve.
Maintaining optimism in the Bitcoin ecosystem
Mining pool consolidation is concerning, but it’s very important to note that Bitcoin has too much power to fail. Node operators, small blockers, and plebs, if they work together, will prove strong enough to avoid control from any centralizing force.
The Bitcoin community can fight back by running as many independent nodes as possible. Nodes can choose any unadulterated chain in case a Bitcoin mining pool launches a 51% attack against BTC.
Small-scale Bitcoin miners can overcome these hurdles by upgrading their equipment and by taking advantage of other technological advancements such as the rise of AI, the boost that the Runes protocol has given the Bitcoin network, and more.
The launch of Runes Protocol led to a temporary surge in Bitcoin transaction fees and this offered miners a revenue boost following the halving event.
However, the enthusiasm around the Runes protocol dropped recently, and the temporary boost for Bitcoin miners went down.
The power consumption on the network also declined more than the hashrate, according to analysts. This showed the exit of unprofitable miners with ineffective setups.
It’s also important, analysts say, to understand that this exodus is part of a natural feedback loop linked to Bitcoin prices. Declining prices trigger the exit of unprofitable miners, and this only reduces the hashrate and production costs.
As noted multiple times, Bitcoin’s future is uncertain and history might not apply to its price like in the previous cycles post-halving, due to other new factors and events that marked 2024: the approval of Bitcoin ETFs and their success, the launch of the Runes protocol on the network, the rise in AI computing.
Also, notable shifts in Bitcoin mining such as the one displayed by El Salvador are also innovative approaches regarding the recent criticism about Bitcoin’s high energy consumption.
Regarding the price of Bitcoin today, at the moment of writing this article, the coin continues trading over the important mark of $66k.
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An important price booster for BTC was the release of the CPI data. Inflation eased to 3.4% in April from a year ago, which was in line with economist expectations.
