The growth of financing and lending business has led to a decline in the overall profit margin of Bitcoin mining

Bitcoin mining profits have hit rock bottom in 2020. On the contrary, throughout 2020, Bitcoin's hash rate has been surging, driven in part by mining farms financing mining machines and mining farms to facilitate their operations. With the end of China's rainy season, Bitcoin mining difficulty has begun to decline, but experts predict that this is only temporary, although it has greatly increased mining profitability in the short term.

For much of the year, bitcoin mining has been less profitable than ever before as the hash rate and difficulty of mining have surged to all-time highs this year.

According to the hashrate output index , miners can generate $0.096 (RMB 0.74) per terabyte of hashrate. Although miners' revenue in October 2019 was several orders of magnitude less than during the market frenzy in 2017, it was still about twice today's cash revenue, at $0.16 (RMB 1.2).

Miners were generating about 90 EH/s of hashrate in 2020. Now, miners are generating about 124 EH/s after hitting an all-time high of 157 EH/s in mid-October.

Bitcoin mining is a war of attrition, so naturally, in a year when Bitcoin’s hash rate has surged, profit margins are falling. The financing and borrowing associated with ASIC miners and mining farms is likely the main reason for this phenomenon.

The practice of large companies lending money to miners who ordered mining machines in bulk has flooded the network with new hash rate. The surge in hash rate means that competition for the digital gold rush is more intense than ever, and over time, it is difficult for small miners to keep up with the pace of mining development.

Bitcoin mining difficulty is inversely proportional to mining income

Luxor Mining pool operator Ethan Vera told CoinDesk that miners’ lackluster revenue is a direct result of bitcoin’s growing hashrate and mining difficulty, relatively stagnant prices and lower-than-normal transaction fees.

The seven-day hashrate average currently stands at 124 EH per second, according to Luxor’s index, and Vera said this is “mainly due to the large volume of Bitmain S19 and Whatsminer M30 coming to the market.”

Of course, it’s not uncommon for miners to see a drop in revenue when hash rates flatten out. But Bitcoin’s hash rate has seen incredible growth in 2020, up nearly 30% this year, as a result of accelerated investment in the industry. Much of this growth has come from ASIC financing, where miners take out loans to buy the best new generation mining equipment.

“There have been a number of North American companies recently making news about purchasing mining equipment, notably RIOT Blockchain and Bitfarms. Foundry has also popped up recently and is offering financing options for ASIC miners,” Thomas Heller, COO of mining media company HASHR8, told CoinDesk.

Recently, Marathon Patent Group purchased 10,000 Antminer S19s, which could bring 1.1EH of hashrate to the mining company’s operations. This is Marathon’s second bulk purchase from Bitmain this year, following a deal with Bitmain in August to acquire 10,500 s19 proASIC miners for $23 million.

Stephen Barbour, whose company Upstream Data provides mining rigs to oil drillers that use emitting natural gas, believes this is bad for the short-term health of the bitcoin mining industry. He told CoinDesk that in some cases, large companies are not always optimizing for profitability because they have financial hedging strategies.

“These guys can lease an old mine that’s operating at a loss and then recapitalize it,” he told CoinDesk, referring to the companies’ ability to take out new loans or bring on new investors when they need to raise capital.

This is Barbour's point, considering one company, RIOT Blockchain. The publicly traded company has bought a large number of ASIC miners this year in an effort to quadruple its hash rate by 2021. According to SEC filings , RIOT had a net operating loss of nearly $15 million as of June 2020. RIOT also posted a similar loss in the first half of 2019, and Marathon Group also recorded a loss of $3.2 million in the first half of 2020.

Northern AG, another publicly traded mining company, had a net income of -$8.7 million in 2019 and -$5.6 million in 2018. Even profitable companies, such as the equally public industrial mining company Hut 8, barely made a profit in 2019 after generating $8 million in revenue , Hut 8 made just $2.1 million after paying debts and other expenses.

Barbour believes that these miners continue to expand regardless of profits in the hope of future loot. However, this activity is sending Bitcoin’s hash rate skyrocketing.

“These guys can get these big loans and financings, and they’re actually operating at a loss, which supports the crazy increase in the hash rate of the Bitcoin network.”

Retail miners feel anxious

Since the size of these large Bitcoin mining farms is irrelevant to profitability, Bitcoin’s hash rate continues to climb while smaller players struggle to keep up with the competition.

It is becoming increasingly challenging for small miners to scramble for hosting and hardware purchases, as prices are lower for larger orders. China still has a large retail mining market, and it can use electricity for less than 0.04 cents (0.28 yuan) during the rainy season in Sichuan province. But outside of China, retail participation in bitcoin mining has declined significantly.”

The rainy season, which provides a lot of cheap electricity to Chinese miners, is coming to an end, and with it, Bitcoin's hash rate has dropped by 12% to 124 exahash. This decline is experienced every year as old machines migrate to regions such as South America, Kazakhstan, Russia and Iran, but it is "only temporary."

The miners who bought these machines had nothing to do with profit but other reasons, such as avoiding capital controls or avoiding sanctions.”

For others trying to turn a profit, Bitcoin ’s recent surge in price to $13,600 will help, and further price gains will expand these miners’ profit margins.

Problems in the Bitcoin Mining Market

Increasing hash rates are always “a terrible thing for miners,” and it could be worse for smaller miners, who don’t have the same economies of scale advantages as larger operations.

But that doesn’t mean it isn’t easy for larger companies to do it. After all, more hardware means more operating overhead, and a lot of debt to pay for the ASIC miners that get funded.

In short, the heavier the vehicle, the less likely it is to slow down and roll over. The era of mining magnates has arrived.

All of these financing operations are part of what the industry calls the ‘discovery phase.’ We’ll see more of these in the short term, but they’ll struggle in the long term, and I think their operations will fracture and decouple.

Like smaller mining operators, they have their own “playbook” and these financial operations are launched with the support of others. While this does not guarantee that these operations can be run despite being profitable, it does mean that the operators face lower risks than their smaller miners.

Still pointed out that not all of these operations are equal, and the likelihood of success for these operations "depends on the interest rate of the borrowing and the cost of the operation." He added that an interest rate of around 10% might be good for some of these miners, while any borrowing above that level would be unsustainable.

Use almost zero profit to gain future growth

But for those companies that are not profitable, you might ask why they are operating, they are essentially “guessing on the price increase of Bitcoin”. They have bought all this new generation mining hardware to get ahead of the bull run and are happy to get in early.

Still, it may all come down to a war of attrition waiting to happen, and price may not matter in the long run. Per Moore’s Law , which states that computer processing will improve exponentially, ASIC mining hardware will continue to evolve toward greater efficiency.

Eventually, older generation mining machines will not be more efficient than newer generation mining machines, so miners who can order machines in bulk will have no advantage. As miners continue to look for the cheapest, nearly free electricity, Barber believes that the resources of large mining farms will eventually be priced out, because the profit-seeking nature of capital proves that the price of resources seems to have no room to rise.

“They’d be better off just buying Bitcoin… because every time there’s cheap electricity, it reduces profitability for other miners. It’s a race to capital with near-zero profits.”