On the reduction of mining income in the past few months

Even though we are in a bear market, Bitcoin mining companies are still increasing ^their computing power by issuing large amounts of additional ^shares1 . The increase in computing power has also led to multiple positive adjustments in the difficulty of the Bitcoin network recently, which is currently at a historical high.

At the same time, the price of the coin has been hovering around the "high point" of around $20,000 in 2017, which is 71% lower than the historical high of $69,000. With the increase in mining difficulty and the decline in coin prices, miners' mining income is also decreasing.

The article analyzes the impact of declining miners’ revenues on their mining profits and shows that many mining operations are currently in dire straits.

Bitcoin mining machine unit computing power Bitcoin production has not decreased

The work of a mining machine is actually to convert electricity into computing power and obtain Bitcoin as a reward. The Bitcoin obtained by a mining machine per unit of computing power every day is called the computing power price under the currency standard. This number is determined by block subsidies, transaction fees and difficulty.

Bitcoin's block subsidy is fixed, and the proportion of transaction fees has been negligible but stable over the past year. Therefore, when we analyze the recent development of hashrate prices in the coin standard, we should focus on mining difficulty.

The increase in mining difficulty means more competition for Bitcoin block rewards and a decrease in the amount of Bitcoin per unit of computing power. The increase in difficulty leads to a decrease in mining income or computing power price under the currency standard.

Figure 1: Relationship between hashrate price and mining difficulty

The above chart shows the inverse relationship between the price of hashrate and the difficulty of mining under the coin standard. In 2021, the difficulty of mining will be nearly 50% lower than it is now, while the Bitcoin output that miners can obtain per unit of hashrate will be nearly 50% higher than it is now.

To show how computing power affects the ability to produce Bitcoin, we can see that some large mining companies have reached the level of EH/s, and 1EH/s can now produce 3.5 Bitcoins per day, but a year ago the capacity could reach 6.7 Bitcoins. Only those miners who have more than doubled their computing power in the past year can earn the same amount of Bitcoin as in October last year.

As more hashrate is added and mining difficulty increases, the price of hashrate in the coin standard may continue to decline. In the long run, this situation is very bad. In the spring of 2024, the Bitcoin halving mechanism will be triggered again, and the block subsidy will be halved from 6.25 to 3.125, which will lead to a significant drop in the price of hashrate in the coin standard.

The decline in hashrate prices also means that the only option for miners to maintain their Bitcoin production in the long term is to rapidly increase hashrate, thereby taking a larger share of the total network hashrate. This is the strategy of listed mining companies that plan to deploy a large number of ^machines in the ^future34 .

Bitcoin mining machine unit computing power dollar revenue has not decreased

Not only is the number of bitcoins produced per unit of computing power decreasing, but the value of bitcoin itself is also shrinking. October 2021 was the golden age of bitcoin mining, when the average price of bitcoin was $59,000, while today's price is only 32% of that.

To combine the price of the coin and the price of hashrate in the coin, Luxor provides a hashrate price index denominated in ^USD5 . Hashrate price accounts for all the variables that affect the profitability of Bitcoin mining, showing the USD revenue per unit of hashrate of a miner. It is a great metric for measuring mining profitability, and most importantly, it captures all the components that affect miner revenue: Bitcoin difficulty, block subsidy, transaction fees, and Bitcoin price. For this reason, Luxor recently launched a non-deliverable hashrate price ^NDF6 , which allows miners to fully hedge their mining revenue.

Figure 2: Hashrate price trend in USD

Most miners would have liked this hashrate derivative product to have been around earlier, so they could have hedged their mining revenues when hashrate prices were at all-time highs in October 2021. Since then, the increase in mining difficulty has caused Bitcoin production to fall by 50%, and combined with the roughly 70% drop in the price of the coin itself, this deadly combination has caused hashrate prices to plummet by 84%.

If a miner can double its computing power in the past year, it may be able to keep its Bitcoin production unchanged, but its income in US dollars is still about 70% lower than when the currency price was at its highest. This shows that although the growth of computing power is important for protecting miners' mining income (Bitcoin), their income is still greatly affected by Bitcoin price fluctuations, which makes hedging computing power price a wise choice for miners.

Mining machines can only achieve positive cash flow under low electricity prices

An 84% drop in revenue without a corresponding drop in costs is devastating for any business. After making huge profits during the 2021 Bitcoin gold rush, miners are being slapped in the face by the reality that their profit margins are now greatly compressed.

At the peak in October 2021, assuming an electricity price of $60 per megawatt-hour, the most energy-efficient mining machines on the market can achieve a mining gross margin of 88%. In other words, a miner with a reasonable electricity price can produce 1 Bitcoin with energy worth only 0.12 Bitcoins.

Figure 3: Changes in profit margins of mining machines at different efficiency levels

But over the past year, mining profit margins have evaporated. At the peak of 2021, the machines' mining gross margins were close to 90%, but now they can only barely maintain 30%-40%. A 30% gross margin may not look too bad, but remember that this profit margin should include all non-energy costs, such as wages and management costs.

Antminer S19j Pro was the most energy-efficient mining machine model on the market in October 2021, and was widely used in mining operations at the time with a gross profit margin of 88%. But now, its mining gross profit margin has dropped to 38%. Whatsminer M30s+ is also a relatively energy-efficient mining machine model, with a mining gross profit margin of only 28% at an energy price of $60 per megawatt-hour. Most of Bitfarms' mining machine units are composed of this machine.

In addition to the water-cooled version, Antminer S19 XP is the most energy-efficient mining machine on the market. Many listed mining companies have placed large orders for this model, and the first batch of machines has been delivered in July 2022. Miners who use this model for mining operations can still maintain a good profit margin of up to 55%. One thing is certain, that is, these machines will not be replaced immediately.

Another way to think about the decline in mining revenue is to look at the breakeven electricity prices for different mining machine models. As we can see in the figure below, the breakeven electricity price for the Antminer S19 XP is currently $129/MWh. For reference, the average electricity price in Germany this year, affected by the energy crisis, is $250/MWh. Although the price of $129/MWh is still relatively high for Bitcoin miners, most miners mining with this machine can still get a good profit margin.

Figure 4: Comparison of breakeven electricity prices for different mining machine models

When we turn our attention to less energy-efficient machines, the picture is bleaker. The breakeven price for the Antminer S19j Pro is $94/MWh. Many miners should be able to host their mining rigs in this price range.

Looking further down at the faithful Antminer S9 that has been running since 2016, we see that it now needs electricity prices below $28/MWh to be cash flow positive. Such low electricity prices are almost impossible to find on any grid in the Western world, except in a few areas like northern Norway, where the average electricity price this year is $15/MWh.

Figure 5: Comparison of computing power prices of different models when they reach their respective break-even points under different electricity price standards

The beginning of the article explained how the price of computing power has plummeted over the past year. The table above shows the price of computing power for different models when they reach their respective break-even points under different electricity price standards.

The current hashrate price is $70/PH/s. A miner with an S19 XP can make a decent profit even at an electricity price of $0.1/kWh ($10/MWh). The S19j Pro can only make a decent gross margin if the electricity price is below $0.07/kWh. The medium-efficiency model S17 needs an electricity price below $0.05/kWh to achieve a mining profit of 23%.

The problem is that it is very difficult to get such cheap electricity, especially in the current energy crisis, which has caused energy prices to soar around the world. Although the worst energy price increases are concentrated in Europe, the United States is also facing the same problem, as the prices of transportation fuels such as oil, natural gas and coal have soared due to rising global demand.

Figure 6: Comparison of mining machine hosting fees in various states in the United States

Rising energy prices have led to a significant increase in hosting costs worldwide. The above chart shows the average hosting costs in each US state. In most states, the average hosting costs are not far from the break-even electricity price of $0.094/kWh for the Antminer S19j Pro.

The states with the cheapest electricity prices, such as Washington, Oregon, Louisiana, and New York, all have an average hosting fee of $0.075/kWh. At this electricity cost, the S19j Pro has a gross profit margin of only 20%, which means that if the hash rate drops below $53/PH/s, the machine will lose money at this hosting rate. The current hash rate is $70/PH/s, which means there is only a 24% difference from $53/PH/s, which is likely to happen in the next few months as mining difficulty continues to soar.

How Bitcoin mining revenue will develop in the coming months

As explained in this article, Bitcoin mining income depends on three factors: Bitcoin price, mining difficulty, and transaction fees. In the short term, we should focus on Bitcoin price and mining difficulty.

No one knows where the price of the currency will go, and Luxor cannot predict whether the bear market will worsen or the bull market will suddenly break out. Therefore, I use a price of $20,000 as the base price for the forecast. Regarding difficulty, I believe that as the Bitcoin hashrate continues to increase, it will continue to increase until 2023. Listed mining companies will have large-scale hashrate expansion plans in the coming months, and private mining companies are also constantly increasing their hashrate. The continued increase in difficulty coupled with the flat price of the currency will also cause the hashrate price to fall further in the US dollar standard, and may fall below the $0.05 level. The reduction in mining income, coupled with the surge in energy costs, will undoubtedly cause trouble for many miners, some of whom may shut down their mining operations within the next month.