As bitcoin enters a new bear market, the mining industry is feeling the pain. Specifically, miners are seeing their profit margins shrink as the price of Bitcoin drops and Bitcoin mining difficulty continues to increase.
Bitcoin’s mining revenue potential, defined as its hash price, is down about 68% from its 2021 peak and 58% from its 2021 average.
Source: Hashrate Index
Hashprice is a Bitcoin mining metric which measures the revenue potential of a unit of Bitcoin mining computational power (what we call the hashrate). Hashrate is measured in dollars per terahash (TH) per day. So, if the hashprice is $0.12/TH/day, a 100 TH machine (“terahashes” refers to how quickly a mining rig produces calculations) can produce $12 a day.
Two things affect the Bitcoin hash price: the actual Bitcoin price and Bitcoin mining difficulty, which affects the probability of solving a block and getting a reward of 6.25 BTC (approximately $187,500). For a bit of context, at bitcoin’s historic peak in November 2021, a block reward would have netted approximately $430,000.
Bitcoin mining difficulty adjusts up or down approximately every two weeks, making it easier or harder to mine Bitcoin based on network competition. The difficulty increases if miners produce blocks very quickly in the previous two weeks, and conversely, the difficulty decreases if miners produce blocks very slowly. This ensures that miners propagate blocks as close as possible to the 10-minute average targeted by the Bitcoin code.
Over the past year, 18 of the last 26 adjustments were positive (and four of the negative adjustments were a result of China’s mining ban, a once-in-a-blue moon phenomenon).
When the difficulty increases, it becomes more energy intensive to mine bitcoin, so the hashprice drops. Hashprice also drops when the price of Bitcoin drops, and at the moment, the price of Bitcoin is falling at a time when the difficulty is at an all-time high.
As Bitcoin mining profitability declines, most Bitcoin mining stocks are down 60% or more during the current market rout. As you can see in the chart below, major mining companies such as Marathon, Riot, Bitfarms, Hut 8, Hive, Core Scientific, Argo Blockchain, Iris Energy, DMG Blockchain and Cleanspark have seen their prices drop 50-60% on average. .
What do reduction margins mean for public miners?
Many of the big public companies are still mining profitably, and some will continue to do so even if the hash price is halved from here (from ~$0.12/TH/day to $0.06/TH/day ). Still, some like Bitfarms and Core Scientific have backtracked on their hashrate estimates for 2022, a measure of caution given the dramatic shift in market temperature. It would not be unexpected for other miners to do the same in the coming weeks and months.
In particular, the bear market can be tough for miners who are overleveraged and who bought more machines in 2021 than they could connect during last year’s market craze.
And it will also be brutal for miners with higher operating costs in the form of higher energy or hosting. For example, a miner paying $0.06/kWh for electricity is still making healthy margins (see chart below), but not as much as last year’s bull market peak.
Of course, this model does not take into account other operating expenses outside of electricity, and in reality, each miner’s situation is different. But the basic idea remains: mining margins are shrinking and miners further up the operational cost ladder (e.g. machine and infrastructure cost) will have problems when/if the hash price drops below $0.10/ TH/day.
Many public and industrial miners have the lowest production cost, so some of the more established players aren’t breaking a sweat just yet.
But just because a miner is big, that is no guarantee that it will withstand the upcoming bear market. In fact, according to a report on break-even costs for public miners, Galaxy Digital Research found that out of 10 miners surveyed, the simple average for break-even price was 13 cents, the median was 11 cents, and the hashrate weighted average was 10 cents.
Source: Galaxy Digital Research
So, according to Galaxy research, the average miner in your cohort is treading water.
With that in mind, this bull market will separate the acquisition class from the merger class. Those who made great promises in the bull, but cannot fulfill in the bear, will be swallowed up. Those who can execute will thrive and have the opportunity to buy cheap assets (rig, farms, etc) as we enter the belly of this bear market.