Deciphering the increase in BTC’s computing power during the bear market: Is it due to old production capacity or a decrease in mining costs?

With Bitcoin’s recent decline, you might think that mining activity would also cool down. However, this is not the case.

The combination of falling prices and increasing hashrate shows how complex the economics of bitcoin mining really are. The rising hash rate means bitcoin mining remains profitable, defying speculation that prices have long since fallen below the break-even point.

This may reflect how complex bitcoin mining has become after last year’s 1,400% price surge, which attracted hobbyists to mine in their basements, while the lucrative rewards also prompted big miners to expand their operations by snapping up faster and faster mining machines and opening mining centers in areas with cheap electricity. As bitcoin fell to $6,000, the low price helped them squeeze small miners out of the market .

Genesis Mining CEO Marco Streng said in a phone interview from London:

“There is still massive expansion in mining operations, especially from more efficient mining companies. The expansion is so large that it makes up for the reduction in computing power caused by the exit of inefficient miners.”

As computing power increases, the calculations required to obtain new bitcoins become more difficult - a mechanism designed to limit the number of bitcoins and dominance in the hands of a few miners. Competition for the best technology has become so fierce that miners have become the main customers of semiconductor giants such as Nvidia and TSMC. The business has also become increasingly institutionalized and concentrated in the hands of companies like Bitmain or Bitfury.

While rapid growth in hashrate has coincided with price rebounds in the past, the relationship between the two is not so straightforward. In theory, increased hashrate should increase prices because it means each coin costs more. But computing power may continue to rise because of past capacity expansions , which are sunk costs for miners and have been reflected in higher prices earlier. It is also possible that miners will sell more of their Bitcoin holdings as profits are squeezed.

David Sapper, chief operating officer of Melbourne-based cryptocurrency exchange Blockbid Pty Ltd., said:

“Increased hash rate means that miners will stay in business for a long time because they are happy to accumulate more and more cryptocurrency, even though they may lose money. At the same time, they will have to sell it sometimes to cash out.”

Many analysts have tried to calculate the break-even price for miners, which could provide support for the price of Bitcoin. Bullish research firm Fundstrat Global Advisors estimates that price is $8,000 . Morgan Stanley said that large mining farms can only be profitable if Bitcoin trades above $8,600 , according to CNBC . Researchers at cryptocurrency investment product company CoinShares estimated in a May report that the average marginal cost of Bitcoin is $6,400 . Bitcoin was at that price on Thursday.

The break-even price depends on the efficiency of the mining company . The CoinShares report shows that mining companies that manufacture mining equipment have immediate access to cheaper hardware and can adjust the price of their products to maximize profits.

Researchers Christopher Bendiksen and Samuel Gibbons wrote:

“ Hardware is rapidly improving in efficiency and decreasing in cost. At the same time, miners are gaining access to highly competitive supplies of electricity that is often idle and exhibits a high degree of liquidity.”