Why Miners Are Mining Bitcoin Cash and Losing Money Doing It – CoinDesk

Jimmy Song is a bitcoin developer and principal architect at blockchain technology startup Paxos.

In this opinion piece, Song discusses mining patternson the bitcoin cash blockchain, theorizing on what they might indicate about the incentives powering the new cryptocurrency.

Over the weekend, the bitcoin cash blockchain experienced a notable technical change.

Like the bitcoin blockchain from which it forked, bitcoin cash is hard-wired to adjusthow hard it is for miners to claim its rewards, and on Saturday, it saw such a change. As a result, bitcoin cash was made 300% more difficult to mine.

This, in turn, caused the profitability of the coin to decrease dramatically. Many miners left for bitcoin, and for about 10 hours only a few blocks were found.

As a result, emergency difficulty adjustments (a technical mechanism unique to bitcoin cash) were triggered, causing the difficulty to drop enough for miners to begin switching back.

What's interesting, however, is that at the time, bitcoin cash was stillless profitable to mine than bitcoin by about 20%. Still, many miners, including those using pools like BTC.Top, ViaBTC and AntPool continued dedicating computing power to the blockchain.

This means these miners were likely giving up profit that they could have earned had they been mining bitcoin.So what gives? And why are miners mining at a loss?

This is not an easy question to answer and my analysis here is speculative. But, here are some possibilities:

Miners may be committed to making the new cryptocurrency work, as they may have now accrued a large bitcoin cash position.

Armed with this vested interest, they may believe slow blocks will cause bitcoin cash to tank, so they may be mining to keep the network working smoothly.

The argument against this is that during the 10-hour window after the non-emergency difficulty adjustment, many of the same miners left. If consistent blocks were the major concern, there should have been more mining power on bitcoin during that interval.

The miners mining now may be thinking that the bitcoin cash price will increase in the near future to make mining worthwhile. A 3040percent increase in the bitcoin price relative to bitcoin would certainly make their mining profitable, and they may be waiting until then to sell.

These miners may have insider information about a large buy order or may be just hoping for larger fluctuations of bitcoin cash price.

Another theory is that there may be bitcoin cash supporters that are subsidizing mining in some way, behind the scenes.

This could be something like an over-the-counter market for bitcoin cash where buyers are paying a higher price than the exchanges to incentivize mining. If the buyers demand freshly minted bitcoin cash, this would effectively make it so miners were the only supply that could satisfy this particular demand.

Similarly, bitcoin cash supporters could simply be paying pools to point hash power the blockchain network.

Ultimately, there are now more questions than answers.

We don't really know why miners are mining bitcoin cash instead of bitcoin. But, we know that at the very least, they aren't making as much money as they could, and this means these miners are paying some opportunity cost in order to mine bitcoin cash.

Gold panning image via Shutterstock

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Why Miners Are Mining Bitcoin Cash and Losing Money Doing It - CoinDesk

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