With Bitcoin entering a new bear market, the mining sector is feeling the pain. Specifically, miners are seeing their profit margins dwindle as the bitcoin price drops and the difficulty of mining bitcoin continues to rise.
Bitcoin mining revenue potential, defined as hashrate, is down about 68% from its 2021 peak and 58% from the 2021 average.
Source: Hashrate . Index
Hashprice is a bitcoin mining metric It measures the revenue potential of a unit of Bitcoin mining account power (what we call hash). Insects are measured in dollars per mite (TH) per day. So, if the hash rate is $0.12/TH/day, a 100 TH machine (“terahash” refers to how fast a miner can produce accounts) can produce $12 a day.
Two things affect the hash rate of bitcoin: the actual price of bitcoin and the difficulty of mining bitcoin, which affects the probability of solving the block and getting a reward of 6.25 BTC (~$187,500). For a bit of context, at an all-time high of bitcoin in November 2021, the block reward could have fetched close to $430,000.
The bitcoin mining difficulty adjusts up or down approximately every two weeks, making bitcoin mining easier or harder depending on network competition. The difficulty increases if the miners produce the blocks very quickly in the previous two weeks, and conversely, the difficulty decreases if the miners produce the blocks very slowly. This ensures that miners propagate blocks close to the 10-minute average that the Bitcoin code is targeting.
Over the past year, 18 of the last 26 adjustments have been positive (and four of the negative adjustments were the result of China’s mining ban, a one-time phenomenon in a blue moon).
As the difficulty increases, bitcoin mining becomes more energy-intensive, so the hash rate drops. Hashprice also declines when the price of Bitcoin falls, and at the moment, the price of Bitcoin is falling at a time when the difficulty is at an all-time high.
With bitcoin mining profitability dwindling, most bitcoin mining stocks have fallen by 60% or more during the current market rout. As you can see in the chart below, leading miners like Marathon, Riot, Bitfarms, Hut 8, Hive, Core Scientific, Argo Blockchain, Iris Energy, DMG Blockchain, and Cleanspark, have seen their prices drop by 50-60% on average.
What does loosening margins mean for general miners?
Many large public companies are still mining for profitability, and some will continue to do so even if the retail price is halved from here (from $0.12/TH/day to $0.06/TH/day). However, some companies such as Bitfarms and Core Scientific have pulled back their estimates for the 2022 hash rate, a cautionary move given the significant temperature change in the market. It wouldn’t be surprising for other miners to do the same in the coming weeks and months.
In particular, the bear market could be tough for over-leveraged miners who bought more machines in 2021 than they could deliver during last year’s market mania.
It would also be tough for miners who have higher operating costs in the form of higher power or hosting. For example, a miner who pays $0.06/kWh for electricity is still making good margins (see chart below), but not quite as much as the peak of the bull market last year.
Of course, this model does not take into account other operating expenses outside of electricity, and in fact, each miner’s situation is different. But the basic idea holds: mining margins are dwindling, miners are above operating cost (eg the cost of machinery and infrastructure) and the ladder will be in trouble when/if the hashrate drops below $0.10/TH/day.
Many miners in the public and industrial sectors have the lowest cost of production, so some of the more established players haven’t sweated it yet.
But just because a miner is big, that doesn’t guarantee that it will beat the next bear market. In fact, according to a report on break-even costs for public miners, Galaxy Digital Research found that, of the 10 miners surveyed, the simple average break-even rate was 13, the median was 11¢, and the weighted hash rate was 10 .
Source: Galaxy Digital Research
According to Galaxy research, the average miners in their group tread water.
With that in mind, this bull market will separate the acquisition category from the merger category. Those who made great promises in the bull but could not keep the bear would be devoured. Those who can execute will thrive and have the opportunity to buy cheap assets (rigs, farms, etc.) when we enter the belly of this bear market.