With the rising popularity of cryptocurrencies during the past couple of years, the cost of mining the most valuable coins have skyrocketed too. Almost every country on the planet hosts mining rigs operated by individuals who invest hundreds to thousands of dollars to mine crypto. A recently published paper examined closely one overarching question regarding the cryptocurrency mining phenomenon: what factors explain the geographical distribution of cryptocurrency nodes (i.e. mining rigs) across the world?
In an attempt to answer this question, the research paper considered the price of electricity, internet connection speeds, Tor network relays, and other factors. Authors of the paper used node distribution data for the two largest cryptocurrencies by market capital; bitcoin and ethereum.
Electricity and node distribution:
The research didn’t find electricity prices to play an important role in the distribution of nodes across different world countries. Nevertheless, this claim is limited due to:
1- Electricity price data was obtained from Wikipedia. The Wikipedia article obtained this data from official government sources, which have skewed the impact of electricity prices on the distribution of nodes in a number of ways. For example, electricity price data representing developing countries were most probably inaccurate.
2- The technologies studied in this paper are relatively new, so historical trends are not definitive. The initial group of regressions reflecting the prices of electricity are cross-sectional and only represent the period between 2013 and 2016. Extensive data regarding the geographical distribution of nodes, at the present point of time, are not available, so the effects of the prices of electricity on the distribution of nodes should be questioned later in time. Best to do it in 5-10 years, when historical effects and trends can be observed.
Tor relays and node distribution:
The paper also identifies that there exists a possibility of reverse causality, throughout which bitcoin nodes can explain Tor relays, rather than Tor relays explaining bitcoin nodes. This reverse causality can lead to an endogeneity problem when the conducted regressions are considered. The research depends on the non-existence of this endogeneity, even though it does not discount this possibility. On the other hand, the research has identified an obvious statistical relationship of Tor relays explaining the overall number of bitcoin nodes, and when history is considered, the Tor network has been available since the mid 1990s, and as bitcoin was launched in 2008, this reverse causality was highly unlikely.
The most likely reason that explains why Tor relays have a negative effect on the number of bitcoin nodes is related to the difference in the nature of secrecy associated with operation with these two technologies. People are mostly secretive regarding whether or not they are hosting a bitcoin node. Nodes are relatively expensive to build, and it is recommended to be secretive of hosting a node and to be discrete regarding owning any cryptocurrency due to issues related to taxing and the rising trends of hacks of cryptocurrency wallets. On the other hand, Tor relays are mostly less discrete. The Tor project includes instructions on its website on how to create a Tor relay, and explicitly states that those doing so have to notify their ISP about the operation.
Due to differences in secrecy related to Tor relays and bitcoin nodes, authors of the paper proposed that individuals hosting a Tor relay are less likely to create a bitcoin node. An individual might build a bitcoin node and choose to use the Tor network, or host a Tor relay and send bitcoin transactions, yet due to the differences associated with the nature of discretion when using these different technologies, it is highly unlikely for an individual to host both a bitcoin node and a Tor relay.
Iceland – the haven for cryptocurrency miners:
The paper suggested that Iceland will most probably become the world’s cryptocurrency mining center for three main reasons:
1- Electricity prices are very low due to the usage of hydroelectric and geothermal power.
2- Iceland boasts high speed, widespread internet access. It represents the only country in the world with an internet access proportion of almost 100%.
3- Due to Iceland’s cold climate, the cost of cooling cryptocurrency mining rigs is also very low. The price of rigs’ cooling can be astronomical in countries with hot climate, such as the UAE.