Lately, there have been rumours circulating in the background that some big Bitcoin miners are facing financial stress and could be in trouble due to the excruciating environment that miners are operating under at the moment. How true can these rumours be? We examine the forces that impact Bitcoin miners’ profitability below to see how substantiated these rumours could be.
Costs Surging Yet Mining Difficulty Increasing
With energy prices soaring this year while the price of Bitcoin is hovering at a low $19,000 level, the profitability of Bitcoin miners will certainly be negatively impacted.
In previous bear markets, a decline in Bitcoin price used to lead to a fall in hashrate as some smaller miners find it unprofitable to mine Bitcoin and leave the industry. This naturally balanced the ground for the larger miners that had better economies of scale, since lesser competition would help them to be able to mine more Bitcoin. However, in this bear market, a strange phenomenon has occurred, the hashrate of Bitcoin is surging to new all-time-highs even as the price of Bitcoin remains in the doldrums.
A surging hashrate implies that it is more difficult to mine Bitcoin since more energy per terahash is needed to mine one Bitcoin, and in the backdrop of surging energy costs, this is definitely not a good situation to be in.
According to the latest Bitcoin mining difficulty adjustment data, the current mining difficulty stands at 35.6 trillion, up 13.55% from its previous adjustment two weeks ago. The next difficulty adjustment will be in around two weeks’ time, as the difficulty adjustment occurs once every 2,016 blocks, which translates into roughly two weeks. Should the mining difficulty continue to go up by 13% every two weeks and the price of Bitcoin does not rebound significantly, many miners could be in serious trouble.
Crypto Mining No Longer Viable in Europe
While most miners are suffering, those based in Europe appear to be having it worse, since energy prices in Europe have soared six-fold since the Russian gas sanction.
To name just one example, London-based miner Argo Blockchain (ARBK) was forced to raise $27 million at the start of October to ease liquidity pressures. This was not the worst news however, the worst being that the EU is currently planning legislation to block crypto mining due to their need to channel scarce energy resources to other more crucial parts of the economy. The bloc is also putting an end to tax breaks and other fiscal measures benefitting crypto miners currently in force in certain member states - this could leave the EU totally out in the cold with regards to the entire crypto industry.
Bitcoin Miners Elsewhere Not Having It Better Either
It is not a situation peculiar to Europe however, as Bitcoin miners from other regions are also facing liquidity crunches. For instance, even American mining data center provider Compute North has just filed for bankruptcy in September after many rounds of fundraising still failed to save the firm.
Another example is Bitcoin mining hosting firm Blockfusion, which has a cash reserve to last only till December this year. According to its CEO, if Bitcoin price does not rebound by December, the company will be forced to do another round of Bitcoin liquidation sale.
How Bad Is Mining Profitability?
To give readers a better idea of how bad the situation is for Bitcoin miners, we can take a look at the unit profit of miners. This is referred to as Miner Revenue per TeraHash, or otherwise commonly known as the hash price. From the diagram below, we can see that currently, Bitcoin hash price has fallen to a level even lower than the 2020 COVID crash, which itself, was a historical low. Miner revenue per terahash is only $0.07 now compared with the 2021 bull market peak of $0.422 when Bitcoin was trading at $69,000. The situation is bad indeed.
With Bitcoin’s price not bouncing much from $19,000, the longer this situation drags, the worse it could become for Bitcoin miners as they will have to endure this period of pain for longer and many may not be able to withstand such low profitability for much longer.
Reallocation of Mining Market Share
While all these sound dire, not all miners will be negatively impacted. Financially stronger miners who are able to operate at a loss or at breakeven for a long period of time, could emerge as the winners once this winter ends. Those who are able to use cheaper energy, or have more energy efficient methods of mining will also be less negatively affected by the high energy costs. Miners in these two categories will likely eat up the market share from other miners and emerge as the market leaders with the biggest market share at the end of this debacle.
Hence, this is far from the end of Bitcoin mining, but is a mere market share reshuffling where the guy with the deepest pockets wins. However, this period of reshuffling may put a bit of pressure on the price of Bitcoin as the financially strained mining firms may start to sell their Bitcoin holdings to stay afloat. Assuming Bitcoin does not stage a sharp rebound anytime soon, the coming three months could see the capitulation if we were to use Blockfusion as a gauge.