In essence, a cryptocurrency is nothing but a transaction system, a means of exchange. You can argue (as you can with all currencies) that it is also a store of value, but the only reason to store value is the intent to exchange it for something else at a later date.
Every transaction system has a settlement system. For all digital currencies, the settlement cannot be physical. The main problem with the previous versions of digital currencies has always been that digital things can be copied. Cryptocurrencies solved this with distributed ledger and the mining process.
The Mining Process is the Settlement System
In a Proof of Work cryptocurrency, transactions are facilitated through the mining process. So, in the case of proof of work cryptos, such as Bitcoin and Dash, there has to be a mining process. For there to be a mining process, the mining has to be profitable over the long term.
Think of it this way: If I can buy a Bitcoin for less than the cost of mining a Bitcoin, why would I mine Bitcoin? But if the miners would stop mining Bitcoin and rather buy Bitcoin, there would be no Bitcoin.
But That’s not how it Works…
The Proof of Work system is beautiful in that way because it adapts over time. If the price of Cryptocurrency falls below the cost of mining, fewer people will mine, which means that the total Hashrate will drop. When the Hashrate drops, the difficulty rate drops, which means that the likelihood of winning the block reward goes up.
This mechanism means that over the long run, a functioning cryptocurrency should provide proper incentives to the miners, that is mining yields.
The Dash Example
Dash is a Proof of Work cryptocurrency. The Dash development community has been very focused on payments and on building applications for Dash to become an alternative option to payments. Although Dash seems to be gaining traction on many levels, the price of the currency has fallen drastically over the last 6 months.
For Dash miners, this means that mining Dash has become unprofitable. In April 2019, one could buy a Dash mining contract from Genesis Mining that would have a current yield (current daily mining output/cost of a day of mining) of close to 100%.
Currently, you can buy a 12 month Dash mining contract that will cost you $0.27 a day per 30,000 mh/s. The output, however, based on the current Dash to USD exchange rate will be about $0.19.
So as a potential Dash investor, what does this mean? One of two things needs to happen. Either Dash miners need to leave the mining pool to make mining more profitable or the value of Dash needs to go up and above the cost of mining.
More Thoughts on Crypto
- Bitozi Crypto Compendium
- Will there ever be more than 21 million Bitcoin?
- The Economics of Cryptocurrency Mining
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