Cracks in the crypto infrastructure are beginning to appear, as the ravages of Crypto Winter take their full toll. For the past few months, the financial press has been filled with headlines related to crypto miners departing the scene. Miners are sometimes called the backbone of the crypto ecosphere. Operations can range from small to large, but estimates run as high as 800,000 entities that have called it quits over the past three months. News today is that Liqui, a small Ukrainian exchange that has been around for sometime, is closing down its operations.
The 80% meltdown in cryptocurrency valuations during 2018 is the core issue driving closures across the industry, but there are several more extenuating circumstances that come into play, as well. For miners, the competitive landscape has gotten fiercer with each passing month. There has been an “arms race” of sorts to get better, faster, and more efficient equipment from companies like Nvidia, Taiwan Semiconductor, and Bitmain Technologies. Electricity prices have also doubled during the winter months, too.
As with oil drilling, there is an average price beneath which miners operate at a loss. Insiders peg that figure for crypto miners at $4,500 for Bitcoin, a price level it has not touched since November of last year. This figure, however, is an average. Miners with old and obsolete equipment have been doomed for some time. Hash rates, a measure of how many computations can be performed in a second and be applied to solving the complex “Proof of Work” puzzles demanded by blockchain ledgers, dropped 22% in November alone, due to departing mining operations.
It now appears that the same cruel financial scenario has engulfed exchanges, as well. Best guesstimates put the current global population of exchanges at somewhere north of 250, with many more in the pipeline. If a long-timer like Liqui cannot make it, then how many more exchanges are clinging on for dear life and ready to pull the plug?
In its farewell note to customers, it admitted that the lengthy bearish collapse in values was the primary issue, which curtailed the liquidity necessary to continue on. Its note read:
We also do not see any economic point in providing you with our services. However, we do not want to return to where we were a month ago. Hence, we decided to close all accounts and stop providing our services. It broke our hearts to do that.
The industry reaction has been one of speculation as to whether Liqui is just the tip of the iceberg. How many other exchanges are holding on by their fingernails in hopes that better days are just around the corner? Ran Neuner of CNBC commented on Twitter:
I’m expecting more exchanges to shut down in this bear market. Last year everyone rushed to start an exchange. Exchanges require infrastructure that is expensive to maintain and most won’t survive this.
In Nature, the culling of a herd is healthy and a necessary process for survival of the entire herd. A recent report revealed that nearly 1,000 blockchain developments failed in 2018. Bitmain Technologies, the largest mining operation and also preparing for an initial public offering, had to lay off 80% of its workforce to meet its financial imperatives. Small miners have had to succumb, and now Liqui, which ranked 180th on the volume Hit Parade, has demonstrated that exchanges are not immune.
Economists and analysts have predicted that a consolidation of the crypto industry in 2019 may be a necessary event for the entire network to survive and prosper going forward. Perhaps, we are observing the “culling” of the crypto herd for better or worse.