CoinShares Bitcoin Mining Report Full Interpretation: The Entire Mining Industry Is Profitable

The bitcoin mining industry is the world’s last purchaser of electricity, so it tends to cluster around relatively underutilized renewable energy infrastructure. As the industry matures, this could help all kinds of renewable energy projects become profitable, and could drive new renewable energy development in regions that were previously uneconomical.

This month, foreign digital asset management company CoinShares released its latest Bitcoin mining report for the second half of 2019. The report pointed out that most miners are still profitable.

According to CoinShares' estimates, the average marginal cost of the entire Bitcoin mining industry is currently $6,300, based on an electricity cost of 4 cents per kWh, an additional 15% of other operating expenses, and a 30-month depreciation period.

Therefore, at the current Bitcoin price ($7,300), most miners are still profitable. However, after the halving in May 2020, some older models of Bitcoin mining machines, such as Antminer S9, are approaching the end of their service life due to high electricity costs. Unless users can reduce electricity costs to less than 1 cent/kWh, the machine will face shutdown.

Additionally, CoinShares estimates that renewable energy penetration in the energy mix powering the Bitcoin mining network is 73%, making Bitcoin mining more renewable-powered than almost any other large industry in the world.

Miner Revenue

Data shows that Bitcoin miners received a total of $5.5 billion in block rewards in 2018, of which $5.2 billion (94.8%) came from newly minted bitcoins and $284 million (5.2%) came from Bitcoin network transaction fees.

This year, Bitcoin miners are expected to earn a total of $5.4 billion in revenue, of which $171 million (about 3.2%) will come from transaction fees. This proportion has dropped significantly compared to the transaction fee share in 2017 (16.4%) and 2018 (5.2%), mainly due to the decrease in overall Bitcoin transaction demand this year and the decrease in Bitcoin transaction fees due to the increase in the block capacity of the isolated witness.

Network computing power

Since June 2019, the total computing power of the Bitcoin network has almost doubled, from approximately 50EH/s to 90EH/s, and has reached a maximum of 100EH/s+.

During this period, the growth rate of hashrate was slightly lower than the average of the past five years, but still higher than the computing power growth level in the previous six months (as shown in the figure below).

CoinShares noted that over the past year, many new models have been launched with significant hardware improvements.

The main players in the current Bitcoin mining market are Bitmain’s Antminer 15 and 17 series, MicroBT’s Whatsminer 10 and 20 series, Bitfury’s latest Clarke chipset, Canaan Creative’s Avalon 10 series, Innosilicon’s T3 series, and Ebang’s E10 series.

The new machines being delivered now have five times the computing power of their predecessors, which means that although some mining machine manufacturers say sales of previous-generation models remain stable, in terms of total network computing power, companies such as Bitmain and MicroBT have delivered the vast majority of new capacity to the Bitcoin network.

In addition, it can be observed that some older mining equipment has been transferred to Iran for continued use. At the same time, Kazakhstan has gradually emerged as a major mining location that plays an important role in the global mining industry.

It is worth noting that some miners have been using the profits earned from the rise of Bitcoin in the first half of the year to reinvest in the next generation of mining equipment with higher computing power and lower energy efficiency, to ensure that their share of the total network computing power can support the next wave of mining machine replacement. At the same time, they are also preparing for the upcoming (Note: May 2020) block reward halving.

It is well known that most of the newly deployed mining machines are currently launched in China. The reasons for this are rather complicated. However, according to the principle of Occam’s razor, this may be due to the fact that the current major mining machine manufacturers are located in China, the relationship between buyers and manufacturers is close, and the geographical proximity makes the barriers to entry for Chinese miners relatively low.

In addition, CoinShares has learned that it is not uncommon for large Chinese miners to have "VIP" accounts with large mining machine manufacturers. Due to their large purchase volume, these "VIP" miners are able to get the first batch of new mining equipment first. This phenomenon ultimately leads to a situation where China's current share of global computing power may be higher than it was in June 2019.

However, as the new generation of mining machines go overseas in the coming period, CoinShares expects that the proportion of computing power from China will decline to a certain extent.

At the time of writing this report, data showed that China accounted for 65% of the computing power in the Bitcoin network, the highest level monitored since the end of 2017.

Mining machine manufacturers

Mining machine manufacturer Canaan Creative completed its IPO in the United States on November 20 this year, raising US$90 million at a valuation of US$1.33 billion. At the same time, the specific IPO time of Bitmain has not yet been determined, but there are rumors that Bitmain's fundraising target is between US$300 million and US$500 million.

The newly raised funds can help Canaan Creative repay short-term debts and increase investment in R&D and production capacity to make up for the technology and output gap with Bitmain.

On the other hand, judging from the previously released financial reports, Bitmain has made a series of wrong management decisions, including tape-out failures, hardware overcapacity, redundant personnel, and most importantly, holding its own BCH tokens.

According to a recently leaked internal memo from Bitmain, the aforementioned factors caused Bitmain to be under tremendous financial pressure in early 2019.

In addition, during the replacement cycle of mining equipment, Bitmain's market share continued to decline. According to CoinShares' estimates, the total computing power share of Bitmain machines in the second half of the year has slipped from 70% to around 66%. In 2017, Bitmain said that their total computing power share was about 75%.

Laws and regulations

With the exception of Norway (note: Norway should become a mining powerhouse due to its cold weather, well-connected society, political stability, very cheap electricity and huge untapped hydropower potential), almost all Western countries have a benign, or at least non-destructive, approach to cryptocurrency mining.

In addition, Afghanistan, Pakistan, Algeria, Morocco, Bolivia, Ecuador, the Republic of Macedonia, Nepal, Vanuatu, Bangladesh, Venezuela, Vietnam and Saudi Arabia are all countries that actively oppose Bitcoin mining.

The shift in Chinese policy is the biggest regulatory development in the bitcoin mining sector since CoinShares’ last report. China listed mining as an industry to be phased out in April, but removed it from the list in November.

On the surface at least, this seems like a welcome development for Chinese miners. However, China’s apparent embrace of the industry needs to be viewed with caution. While China recently announced that it would elevate the development of “blockchain” to the level of a national strategy, it did not consider distributed cryptocurrencies as part of that strategy.

It’s worth noting that China still prohibits the use of Bitcoin for transactions or retail payments, and prohibits banks and financial institutions from using it for any purpose.

Besides China, other major mining countries are Russia, Iran and Kazakhstan. Although large-scale mining does occur in Iran, the authorities are currently taking increasingly strict measures to restrict miners.

In Russia and Kazakhstan, bitcoin mining is permitted even though trading is still prohibited at the national level, highlighting the internal conflicts of interest between different factions in certain countries, such as central banks seeking to restrict or ban the use of bitcoin and power companies seeking to profit from excess electricity resources.

ROI break-even point

Due to the increased lifespan of mining hardware, CoinShares increased the median depreciation period for mining rigs from 18 months to 30 months.

Certain groups of miners with cheap electricity of less than 3 cents/kWh and brand new next generation mining equipment (which may have a depreciation period of around 3-4 years) can mine Bitcoin for less than $4,000.

If miners can get preferential or timely pricing on the purchase of their mining equipment (for example, if the miner is a mining machine manufacturer or a VIP customer), the total mining cost will be lower.

CoinShares believes that at the current Bitcoin price, the entire Bitcoin mining industry is profitable on average, that is, it can generate a positive ROI when using previous-generation hardware such as Ant S9 (electricity costs need to be less than 3 cents/kWh) or when using next-generation hardware (electricity costs can be higher than 5 cents/kWh).

Overall, capital expenditures (i.e. mining machine purchase costs) in total mining costs have increased as miners have invested in large amounts of hardware over the past six months.

We calculate that capital expenditure as a percentage of total costs has risen from 38% in June 2019 to 44% at the time of writing (calculating total costs at 5 cents/kWh and depreciating over 18 months).

The following chart lists the current cost structure according to the depreciation period of the machine:

Average cash flow break-even point

This equilibrium point is what miners call the “shutdown coin price”.

While ROI is important, prices below the ROI threshold will only eliminate new mining capital, while prices below the cash flow breakeven point will directly lead to mining shutdowns and reduce the overall network computing power. At 4 cents/kWh and an additional 15% operating expenses, CoinShares estimates the average cash flow breakeven point in the current market to be $3,900.

However, the model here is based on hashrate rather than difficulty, which means that it tends to overestimate the cash flow (and ROI) breakeven point as hashrate grows.

Power consumption

According to CoinShares estimates, total electricity consumption across the entire Bitcoin mining industry is approximately 6.7 gigawatts (GW), a figure that represents a 43% increase compared to levels in June 2019.

On an annual basis, Bitcoin mining is estimated to consume about 61 TWh of electricity, while the global aluminum smelting industry consumes about 900 TWh of electricity per year.

It is worth noting that improving the mining efficiency of mining machines will not affect the total power consumption of the network, but can only increase the computing power per unit of power consumption, which is equivalent to a reduction in the power consumption ratio.

In the long run, only the value of the block rewards generated when mining (coin price) and the cost of available electricity (electricity price) will affect the total power consumption of the network.

Geographical distribution of miners

In most cases, miners are concentrated in hilly or mountainous areas with advanced technology and relatively small populations, and these areas are dotted with abundant rivers.

Among these regions, the main mining centers include: Washington and New York in the United States; British Columbia, Alberta, Newfoundland and Labrador, and Quebec in Canada; Iceland; Northern Scandinavia (Norway and Sweden); the Caucasus (Georgia and Armenia); the Siberian Federal District in Russia; Yunnan and Sichuan in China. Some small mining centers have also been found in other regions, such as Austria, Montana in the United States, and Guizhou in China.

The remaining major mining areas that do not meet the above geographical conditions are Iran, Kazakhstan, Xinjiang and Inner Mongolia in China. Minor mining areas that do not meet the above geographical conditions (or cannot be determined whether they meet the conditions) include: Florida, Texas and Arizona in the United States; Western Australia and New South Wales in Australia; Belgium; Belarus; Northwestern Federal District of Russia; Argentina; Venezuela.

Please refer to the following map for details:

Mining Energy Composition

CoinShares makes the assumption that miners, wherever they are located, use the same mix of electricity generation (fossil/nuclear or renewable) as the average reported for their region.

However, this is a conservative estimate because in other fossil/nuclear-power-dominated regions, such as New York and Texas in the United States, a large number of miners use renewable energy.

Instead, miners in Kazakhstan mine coal.

From the geographical distribution of miners, we can see that CoinShares divides the geographical areas of Bitcoin miners into two parts.

The first part is the hydroelectric area and the second part is the non-hydroelectric area.

In other regions, miners use fossil, nuclear, solar, and wind energy, with some (such as Iran) using natural gas as the main source, and others (such as Kazakhstan, Xinjiang, and Inner Mongolia) using coal as the main source, supplemented by a small amount of wind or hydropower. Although there are miners that use solar as the main source of power, this is still relatively rare.

According to estimates, 65% of global mining activities take place in China (accounting for 65% of the total network computing power), Sichuan alone accounts for 54% of the total network computing power (of this computing power, nearly 90% consumes renewable energy), and the remaining 11% is roughly evenly distributed between Yunnan, Xinjiang and Inner Mongolia.

Of the remaining 35% of miners, an estimated 31% of the hashrate is evenly distributed between Washington, New York, British Columbia, Alberta, Quebec, Newfoundland and Labrador, Iceland, Norway, Sweden, Russia's Siberian Federal District, Kazakhstan, Georgia, and Iran. Currently, 73% of the total network hashrate consumes renewable energy, and the remaining 27% consumes fossil energy, nuclear energy, etc.

Considerations and uncertainties

Because bitcoin mining is a highly private industry, there may be uncertainty in some of the estimated data reported by CoinShares.

In addition, due to seasonal changes in electricity prices, some miners will experience periodic nomadism, that is, migrating between different regions during the rainy and dry seasons, which may lead to an overestimation of renewable energy penetration.

in conclusion

The Bitcoin mining network continues to move along its five-year trendline in terms of efficiency gains and hashrate growth. The recent period has been one of relatively benign price action for Bitcoin and massive expansion of the network’s total hashrate by miners through the investment of next-generation mining equipment.

CoinShares believes that most of the new equipment has been deployed in China, but over time, new equipment will steadily enter non-Chinese markets and achieve equal geographical distribution.

Moreover, miners are still largely confined to regions dominated by cheap hydroelectric power, such as Scandinavia, the Caucasus, the Pacific Northwest, eastern Canada and southwestern China.

CoinShares believes this is a direct result of extremely low electricity prices in these regions, especially in areas where hydropower is relatively underutilized.

However, CoinShares has observed an increase in miners moving into coal-based regions, such as Kazakhstan. After some setbacks, Texas has also reemerged as a major potential mining region.

Finally, combining estimates of global mining locations and regional renewable energy penetration, CoinShares calculated that the Bitcoin mining industry is powered by renewable energy.

Currently, renewable energy accounts for 73% of the energy structure of Bitcoin mining, which is about four times the global average.

Overall, CoinShares believes that its findings reaffirm the view that the Bitcoin mining industry is the world's last electricity buyer, so it tends to cluster around relatively low-utilization renewable energy infrastructure. As the industry matures, this may help various types of renewable energy projects turn profitable and can drive the development of new renewable energy in previously uneconomical areas.