China has banned the use of Bitcoin and other cryptocurrencies. Image: NurPhoto

A global chip shortage is hampering the production of machines used for bitcoin mining, a sector dominated by China, driving up the cost of the rigs as demand for the crypto surges. 

Smaller miners are being priced out, which is accelerating the consolidation of the sector because it is only profitable for the bigger players, many of whom operate outside China, Reuters reports.

Bitcoin mining is closely watched by traders and users because the amount of the crypto miners make and sell into the market affects its supply and price.

Trading around $32,000 on Saturday, bitcoin is down 20% from its all-time high near $42,000 two weeks ago but it is still up about 700% from its March low of $3,850.

“There are not enough chips to support the production of mining rigs,” said Alex Ao, vice president of Innosilicon, a chip designer and major provider of mining equipment.

Bitcoin miners use increasingly powerful, specially-designed computer equipment – rigs – to verify bitcoin transactions in a process that creates new bitcoins. 

Taiwan Semiconductor Manufacturing Co and Samsung Electronics Co, the main producers of specially designed chips used in mining rigs, would also prioritize supplies to sectors such as consumer electronics, whose chip demand is seen as more stable, Ao said.

The global chip shortage is disrupting production across a global array of products, including automobiles, laptops and mobile phones, said the Reuters report. 

Mining’s profitability depends on bitcoin’s price, the cost of the electricity used to power the rig, the rig’s efficiency, and how much computing power is needed to mine a bitcoin.