Takeaways for BTC investors from the BlackRock update, and more

1. Bitcoin’s mining sector has potential

Recently, BlackRock became the second-largest shareholder in the four top Bitcoin mining firms. This clearly meant that the investment management company saw potential in BTC’s mining sector and had high expectations. The firm has recently increased its attention in the crypto space, and the recent developments reflect its confidence in BTC’s future.

Actually, BTC’s hashrate was already on the rise for years. Coinwarz’ chart revealed that its hashrate graph has gone up substantially over the last year. At press time, Bitcoin’s hashrate stood at 354.43 EH/s.

Increased hash rates suggested that more processing power was being devoted to ensuring the network’s security and validating transactions. As reported earlier, this also caused the blockchain’s mining difficulty to spike and even touch an all-time high.

At the time of writing, Bitcoin’s mining difficulty stood at 55.62 T. However, it should be noted that while the blockchain’s hashrate grew, miners’ revenue registered a decline over the last seven days. A possible reason for this could be BTC’s sluggish price action.

As miners’ revenue dropped, they might have had to sell their holdings in order to meet operational costs. This was evident from Glassnode’s data, which revealed that miners’ balance also registered a downtick on 26 August 2023.

Moreover, BTC’s Miners’ Position Index (MPI) pointed out that miners were selling holdings in a moderate range compared to its one-year average.

Anything in store for Bitcoin investors?

Interestingly, Bitcoin’s mining metrics not only reveal the industry’s position but also hints at patterns and opportunities that can help investors make informed decisions. For example, the Hash Ribbon is a market indicator that assumes that Bitcoin tends to reach a bottom when miners capitulate.

At press hour, the 30-day Moving Average (MA) of hashrate was above the 60-day MA, which generally suggests a good buying opportunity for investors.

However, things can change soon, as CryptoQuant’s data pointed out that BTC’s Relative Strength Index (RSI) was in an oversold zone. This can increase buying pressure and, in turn, lift Bitcoin’s price in the coming days.

2. Is Crypto Mining Dead After 2023?

Current state of affairs: Is crypto mining dead?

The notion of cryptocurrency mining being dead is primarily rooted in the declining profitability of the practice. With the surge in mining difficulty and the substantial costs associated with energy and hardware, many miners struggle to break even, leading to speculations about the death of mining.

However, declaring the death of mining would be a premature verdict. Although the profitability has reduced, opportunities still exist for miners, especially those ready to adapt to the evolving landscape and leverage the continuous advancements in mining technology.

The impact of market downturns

The most considerable challenge currently facing cryptocurrency mining is the market downturn, which has seen many cryptocurrencies’ value significantly decline from their peak. BTC, for example, has seen a major decline in its value since its peak at around $69,000.

The impact of Ethereum’s shift to proof-of-stake (PoS)

One of the most significant developments in the crypto-mining industry in recent years has been Ethereum’s shift from PoS to PoW. This transition has essentially made Ethereum mining obsolete.

Unlike PoW, the PoS method validates transactions on the network through validators who commit a specified number of tokens as a stake. The greater the stake from a validator, the higher the likelihood of them successfully solving a block.

To participate in this system, one needs a cryptocurrency wallet for collecting rewards and must hold some amount of cryptocurrency. This shift led to a flock of miners moving to more energy-efficient chains. Even today, when ETH prices fluctuate, miners continue to show their faith.

The flip side

Cryptocurrencies, especially Bitcoin, have become increasingly popular over the years. More and more businesses are accepting them as a mode of payment, and institutional investors are heavily investing in Bitcoin. For example, MicroStrategy’s $4.17 billion investment in Bitcoin at an average price of $29,803 per Bitcoin.

With this, there will always be a demand for the validation of transactions on the blockchain network, which is what mining does. So, it means that these top institutional investors will always fight against any threat that may hinder the Bitcoin mining operation.

Legality of crypto mining

Crypto mining is legal in most countries. However, there are certain countries where the practice is illegal or heavily regulated. For instance, in the United States, crypto mining is legal, but it’s banned in New York state in 2022.

Similarly, countries like China have made it illegal due to concerns over energy usage. The high energy consumption required for mining cryptocurrencies can indeed harm the environment. Therefore, the legality of crypto mining depends on a variety of factors and local regulations.

The future of crypto mining: What lies ahead?

Despite the numerous challenges, cryptocurrency mining is far from dead. While the current landscape may be characterized by declining profitability and increasing difficulty, the future holds promise.

One of the key trends shaping the future of mining is the exploration of more energy-efficient and environmentally friendly mining methods. As the environmental impact of mining becomes an increasingly pressing concern, miners are turning to renewable energy sources and exploring less energy-intensive consensus mechanisms.

Moreover, the continued growth and adoption of cryptocurrencies suggest that the demand for mining will persist. As cryptocurrencies become more mainstream, the need for a decentralized system to validate and record transactions will remain, ensuring the relevance of mining in the foreseeable future.

Summing up

In conclusion, while the landscape of cryptocurrency mining has undergone significant changes and faces numerous challenges, it is far from dead. The industry continues to evolve, and while the challenges are real, so are the opportunities. With the right strategies, resources, and understanding of the market, crypto mining can still be a worthwhile endeavor.

3. What’s a Bitcoin Drivechain and Why Are Devs At Odds Over Its Proposal?

A major proposal to increase Bitcoin’s functionality is making the rounds on Twitter—and as is now par for the course, it’s stirring controversy among developers.

“Drivechains”—proposed by Paul Sztorc as BIP 300 and BIP 301—would create a native sidechain mechanism for Bitcoin, allowing BTC to be “trustlessly” bridged to separate chains.

The sidechains are secured through blind merge mining, which allows Bitcoin’s existing miners to effectively secure other blockchains without needing to run the sidechain’s software. These networks could be built with whatever alternative functionality that developers want while inheriting both Bitcoin’s security and native currency.

“Sidechains are a kind of ‘holy grail’ upgrade to Bitcoin,” Sztorc told Decrypt via DM. “We get every single feature we could want, and—even better—the features are all opt-in.”

That includes privacy, smart contracts, and additional tokens. Certain critics, however, don’t think that’s a good thing.

“The more I read about BIP300, the more it seems like a great way to introduce enormous amounts of grift, complexity, risk and shitcoinesque functionality into the Bitcoin codebase,” tweeted the popular Bitcoiner hodlonaut on Sunday.

Like many within the community, hodlonaut supports being “extremely wary of change,” and of the motives of anyone “politicking to change Bitcoin.”

Many others oppose drivechains as being a thinly-veiled excuse to introduce so-called “shitcoins” to Bitcoin because they’re not entirely convinced it will deliver much utility. That includes avid Bitcoiner and “Bitcoin Standerd” author Saifedean Ammous, who now advises El Salvador President Nayib Bukele.

Yet according to Storzc, the opposite is true: BIP300 stands out from protocols like Taro, Ordinals, and Coloured Coins in that it does not require a new asset. Instead, they can be used for strictly BTC purposes, like more private and scalable transactions.

In a sense, it also keeps with the spirit of Bitcoin conservatism: Through one upgrade, drivechains could allow future development to take place on top of Bitcoin, no longer requiring changes to the base layer.

“It is the same as the lightning network. If you don’t run a drivechain node, then you won’t even see it,” said Sztorc.

It’s not a perfect solution, however. Certain developers are critical of drivechains for technical reasons—especially related to their peg-out mechanism.

As Storzc explained, users must “trust 51% of the [Bitcoin] hashrate not to broadcast an erroneous hash for 6 months straight,” in order to unlock drivechain features. “If that happens, the L2 coins are lost.”

According to Bitcoin Core developer Luke Dashjr, this would make a hypothetical 51% attack against Bitcoin far more dire. Not only could miners conspire to reverse the blockchain, but they would actively have the power to steal users’ coins.

“With the current state of mining centralisation, IMO it would be pretty dumb to send any bitcoins to a drivechain,” wrote Dashjr last week. “There are better ways to burn bitcoins or donate to miners.”

That said, the developer said he remains “neutral” on drivechains as a concept, and that they should be available to those who want them if there’s enough community support. Earlier this month, he submitted a rough draft proposal to Github on how to potentially implement sidechains.

While acknowledging the risk, Sztroc considers this vector of attack “easier said than done,” given that any nefarious miner behavior would be “highly auditable,” and would need to be maintained “block after block for 6 consecutive months.”

Storzc said miners should be incentivized to keep drivechains alive since they harvest them for fees. Theoretically, if this idea proves incorrect, then Bitcoin itself may also be doomed.

“Satoshi’s design assumes that—in the long run—fees alone will be juicy enough to compel forward motion of a valuable blockchain,” he said. “So either the fees are an effective deterrent, or they’re not.”

Atomic Finance CEO Tony Cai is also interested in how drivechains can foster Bitcoin-based innovation–but has several security and economic concerns. For example, Miner Extractable Value (MEV) could quickly complicate Bitcoin’s economics and incentives if miners feel prioritized to process drivechain transactions over on-chain ones.

“If a drivechain were compromised, it might tarnish the overall trust in the Bitcoin ecosystem,” he added in a message to Decrypt. “We should probably tread carefully.”

Sztorc, on the other hand, doesn’t worry too much about drivechains somehow corrupting “miner incentives.” As he pointed out, Bitcoin has already withstood numerous changes affecting its miner economy, including natural gas flaring, electricity repurchase agreements, Namecoin merge mining, and more.