The month of October witnessed a spike in the Bitcoin (BTC) hash rate which is driving the metric to a new high of 245 Exahashes per second. These changes led to a sharp decline in the hash price, causing miner profit margins to drop, reaching a low of 66.8 USD/PH (for one quadrillion hashes per second) on October 24, 2022.
According to Luxor Technologies, the “hashprice” is the revenue BTC miners earn per unit of hash rate, which is the total computational power deployed by miners processing transactions on a proof-of-work network.
Not only has volume been inconsistent, Bitcoin’s hash rate increased last week to an average of 269 EH/s. This means that the hard hash rate has been increasing since July 2022.
Several factors, such as the expansion of mining operations, which creates competition among miners, the increased use of ASIC miners, which are more efficient than their alternatives, and the Ethereum Merge, led some Ethereum mining companies ( ETH) to fill the gap of non-operational ETH GPU mining with BTC-specific ASIC miners.
Consequently, the increase in the hash rate led to an adjustment of the difficulty of Bitcoin at a time when the price of BTC was falling. As expected, following the hash rate rally and Bitcoin difficulty rising, the hash price crashed to $0.0657 tera hash per day, thus reducing the level of gains.
Rising mining costs translate to reduced profits
One factor contributing to the low level of earnings is the general increase in BTC mining costs. For example, there has been a sharp increase in the price of electricity in the US. From July 2021 to July 2022 alone, its price increased by 25%, from $75.20 to $94.30 per megawatt hour. Energy prices also tend to rise in winter as people need to heat their homes. The Bitcoin mining industry is already seeing an increase in mining in Kazakhstan due to affordable energy.
Bitcoin miners face other rising costs such as rent, miner acquisition, and installing or upgrading cooling systems. During the 2020-2021 cryptocurrency bull market, Bitcoin mining companies took out loans when BTC and equipment prices were also much higher. This means that the very interests on existing debts could hurt newer, over-leveraged mining companies.
It is evident that the increase in the hash rate and the difficulty of Bitcoin, as well as the decrease in the hash price, lead to a compression of profit margins. The chart below shows a decline in profits in a scenario where hash rate, difficulty, and electricity cost continue to rise.
If the hash rate continues to rise amid a hash price decline, the profit margin will continue to decline, possibly leading some mining companies to close for good.
One possible outcome is that lean mining companies (with fresher balance sheets) like Marathon can buy liquidated equipment and shelf space from bloated mining companies that fail.
Mining companies that remain well positioned while trying to scale can emerge victorious. Mining companies like Core Scientific, Marathon, Riot, Bitfarm and CleanSpark are gearing up for expansion, even as many other miners are encountering profitability struggles.
Is sustainability the answer?
In view of the difficulties discussed, BTC mining companies should adopt sustainable BTC mining models, both for its potential profitability and to relieve regulators. This should include the use of renewable energy sources, increased production capacity and the installation of advanced cooling systems.
Mining companies can improve their operations by using renewable energy from wind, solar and hydroelectric power, while reducing costs and carbon footprint. This approach can lead to more consistency and sustainability in Bitcoin mining energy costs. Norway has managed to capture 1% of all Bitcoin mining through a 100% renewable energy approach.
Bitcoin’s depressed price, Bitcoin’s high hash rate and difficulty, and low hash price all contribute to small profit margins, which may lead to sustainable, decentralized mining practices across the industry. .
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