Bitcoin BTC 0.49% miners’ earnings have now fallen to a six-month low as the cryptocurrency’s price has continued to struggle recently, data shows.
Mining revenue dropped by about 68%
Forbes data shows that Bitcoin mining revenue potential (defined as hash price) is down about 68% from its 2021 peak and 58% from its 2021 average.
There are two things that affect Bitcoin‘s hash price: Bitcoin’s actual price and Bitcoin’s mining difficulty, which affects the likelihood of solving a block and earning a reward of 6.25 BTC (~$187,500). For context, at Bitcoin’s all-time high in November 2021, block rewards will generate around $430,000.
Bitcoin’s mining difficulty adjusts up or down roughly every two weeks, making it easier or harder to mine Bitcoin based on competition on the network. If miners produce blocks too fast in the first two weeks, the difficulty will increase, and conversely, if miners produce blocks too slowly, the difficulty will decrease. This ensures that blocks propagated by miners are close to the 10-minute average that the Bitcoin code targets.
Over the past year, 18 of the 26 Bitcoin mining difficulty adjustments have increased difficulty and only 4 have decreased difficulty. When the difficulty increases, mining Bitcoin becomes more energy-intensive, so the hash price decreases. When the price of Bitcoin falls, so does Hashprice, and right now, the price of Bitcoin is falling while the difficulty is at an all-time high.
During 2021, Bitcoin miners have enjoyed some ultra-high profits. There are two main reasons behind their staggering earnings during this period. The first is high bitcoin prices. During the year, the cryptocurrency reached two different all-time highs and is generally on an uptrend with all but a few segments. Because of this, any income Bitcoin miners earn also appreciates and keeps them highly profitable.
Another reason is the hash rate crash due to China’s crackdown on the mining industry. “Hashrate” is a measure of the computing power currently connected to the BTC network. With this indicator, it is possible to judge how much competition miners are facing now. The higher the Bitcoin hashrate, the more competition miners face, and the less profitable they are. China cracks down on mining, hash rate collapses in June. During the period of low computing power that followed, miners outside of China began to enjoy greater profits as Bitcoin’s mining difficulty plummeted.
However, for several months, the indicator has fully recovered from the crash, and at the same time, the price of BTC has begun to struggle and the general trend is down. Combined, these two factors mean that these miners are significantly less profitable. If the computing power continues to rise and the price of Bitcoin does not rebound significantly, then mining profits will continue to decline in the near future.
Bitcoin mining stocks scale back expansion plans
Most bitcoin mining stocks are down 60% or more in the current market rout as bitcoin mining profitability has declined.
Many large public companies are still mining profitability, and some will continue to do so even if the hash price is halved. Still, some companies like Bitfarms and Core Scientific have withdrawn their hash rate estimates for 2022, a prudent step given the drastic changes in the market. It is not surprising that other miners will do the same in the coming weeks and months.
Previously, Canada-based bitcoin miner Bitfarms reported net revenue of $5 million in the first quarter of 2022, down about 50% from the previous quarter. The company also said on Monday’s earnings call that it would scale back expansion plans for the rest of the year due to logistical and supply chain issues related to rising natural gas prices.
President and COO Jeff Murphy sees the current market challenges as an opportunity for the company to “increase relative market share gains” as capital supply chains and other constraints could slow the network’s growth.
Compared to the previous quarter, Bitfarms’ total revenue fell 33.3% to a total of $40 million. Mining gross margin decreased to 76% compared to 84% in the fourth quarter of 2021. The company’s chief financial officer noted that Biftarms is “acting cautiously” given the current environment.
More sophisticated miners aren’t worried now
In fact, the bear market could be tough for miners who are overleveraged and buying more machines in 2021 than they could plug in during last year’s market frenzy, except for the big mining companies. It will also be brutal for miners with higher operating costs.
According to a report on break-even costs for public miners, among the 10 miners surveyed, the simple average of break-even prices was 13 cents and the median was 11 cents, while hash rate weighted The average is 10 cents. According to the report, the average miner is treading water. But many public and industrial miners have low production costs, and some more established players aren’t worried yet. For example, miners paying $0.06/kWh for electricity are still making decent profits, although they are nowhere near as high as last year’s bull run.
With this in mind, those who make big promises in a bull market but fail to deliver in a bear market will be devoured. When we enter the bottom of a bear market, companies with strong execution will thrive and have the opportunity to buy cheap assets (rigs, farms, etc.).
The analyst noted that a drop in crypto prices would lead to a reduction in mining, but this could happen over a longer period of time. Currently, despite the price drop, no unusual drop in hash rate has been seen, and another week will likely see if miners have been shutting down some of their rigs, suggesting that their profit margins are low. At the same time, analysts also cautioned that just because a mining company is large does not guarantee that they will survive the bear market in a more violent bear market.
