If you’ve been keeping up with the crypto headlines, you might have heard that many Bitcoin miners are having a hard time staying profitable as BTC’s price continues to plummet. Given that the crypto bear market is nowhere close to being over, this has many wondering what it could mean for Bitcoin if miners start to struggle and just how low BTC could go before Bitcoin breaks. Today I’m going to briefly explain what Bitcoin mining is, give you an overview of the current state of the industry, and tell you what it could mean for Bitcoin and the rest of the crypto market.
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Bitcoin Mining Explained
If you’re unfamiliar with Bitcoin mining, here’s what you need to know. In short, Bitcoin mining is how the Bitcoin blockchain stays secure and why it’s technically the most secure payment network on the planet.
As many of you will know, Bitcoin uses a consensus mechanism called proof of work wherein computers, called miners, must expend a lot of computation to add a block to the Bitcoin blockchain. Each block contains transactions along with a reference to the previous block, hence the term blockchain.
Bitcoin miners are incentivized to do the computational work to compete to produce Bitcoin blocks because each block contains a block reward denominated in BTC, Bitcoin’s native cryptocurrency coin. Bitcoin miners also earn the fees for any transactions within the block, which are paid in BTC.
As many of you are aware, Bitcoin block rewards are cut in half every four years. When the first Bitcoin block was mined in January 2009, the block reward was 50 BTCC. At present, the block reward is 6.25 BTC, and sometime in early 2024, the block reward will be cut down to just 3.125 BTCC.
This gradual restriction of new supply combined with the increased demand for Bitcoin from the adoption of Bitcoin has made Bitcoin the five-figure asset it is today. Take a second to consider that Bitcoin was literally worth zero when it began and was given away for free via special websites called Bitcoin faucets.
If you’re wondering why anyone bothered mining Bitcoin when its value was zero, this is simply because it didn’t cost all that much to mine. While Bitcoin mining used to be easy to do using a regular computer, it didn’t require any expensive equipment, and any additional energy costs from mining were often negligible.
Today, Bitcoin mining requires specialized computers called application specific integrated circuits, or ASICs, which can cost tens of thousands of dollars a pop and use a lot of energy both directly and indirectly, as ASICs need lots of space and cooling so they don’t overheat or see a degradation in performance. Make no mistake, however, the total energy use associated with Bitcoin mining amounts to a rounding error on the global scale, and Bitcoin miners emit less carbon than all the world’s clothes dryers.
Bitcoin Mining Fears
If you’re wondering why Bitcoin mining requires much more energy than it used to, it is because of something called Bitcoin difficulty, which exists to ensure the Bitcoin blockchain remains secure as more computers compete to produce new Bitcoin blocks and earn BTC. As the term suggests, the Bitcoin blockchain will automatically make new Bitcoin blocks more or less difficult to mine based on how much computing power is connected to the Bitcoin blockchain at any given time.
The total computing power connected to the Bitcoin blockchain is called the Bitcoin hash rate. And as you can see, the Bitcoin hash rate has gone parabolic over the last eight years, or so. Naturally, so too has Bitcoin’s mining difficulty.
What this ultimately means is that mining Bitcoin continues to be insanely profitable. In other words, mining Bitcoin continues to be worth all the hardware and energy it costs to do so. As I mentioned in the introduction, it seems that many Bitcoin miners are having a harder time staying profitable as BTC’s price continues to plummet. This has many people concerned because if Bitcoin is no longer profitable to mine, then many Bitcoin miners will go out of business. In theory, this wouldn’t be a very big deal because the Bitcoin difficulty would just drop in response to the absence of all that extra hash rate and Bitcoin would carry on as usual. This is essentially what’s been happening since Bitcoin mining became a thing.
In practice, however, this could become a big deal because if too many Bitcoin miners go bust, the security of the Bitcoin blockchain would be reduced, possibly to the point that a bad actor with lots of computational power could execute a 51% attack. For context, a 51% attack involves contributing more than 50% of Bitcoin’s total hash rate to manipulate Bitcoin transactions. If that happened, confidence in Bitcoin would be shaken and BTC could go to zero. For the record, Bitcoin has never suffered a 51% attack and neither has Ethereum .
For that matter, we all know there’s no shortage of fiat-funded entities that are eager to see Bitcoin fall and could even be willing to foot the bill. The Bank for International Settlements certainly falls into this category, especially since it’s the self-described bank for central banks.
Bitcoin Mining Companies
If you look beyond the Bitcoin mining related headlines, you might realize that there are only a handful of Bitcoin mining operations that seem to be in trouble. The one headline that comes to mind here is the one from CoinTelegraph in late June titled “Bitcoin miners sell their entire May harvest.” This article references a report by Arcane Research which specifies ‘public Bitcoin mining firms’. This is a small but significant detail because not all Bitcoin mining companies are publicly traded, and publicly traded Bitcoin mining companies only make up around 20% of Bitcoin’s hash rate. These Bitcoin miners seem to be the ones under stress, and not because Bitcoin mining is unprofitable at current prices.
Bitcoin mining companies, like almost every other crypto company, borrowed billions to rapidly expand their operations. With rising interest rates, supply chain issues, and increasing energy costs, many Bitcoin miners are needing to make much bigger monthly debt payments than expected. As a result, they’ve had to sell some of their BTC holdings to make ends meet. It’s possible that this cell pressure contributed to the massive crash in the crypto market in May after Terra collapsed, but I suspect that many large Bitcoin sales are taking place over the counter, so they don’t affect spot price.
It’s important to point out that most publicly traded Bitcoin mining companies still have massive BTC treasuries according to the buy Bitcoin worldwide website, specifically around 45,000 BTC in total, with Marathon Digital alone holding almost 10,000 BTC.
This is a bit of a double-edged sword because, on one hand, it suggests that publicly traded Bitcoin miners are still overwhelmingly holding rather than selling, but on the other hand, it means they could do some serious damage to Bitcoin’s price if and when they start to sell out of necessity. This selling can be easily tracked using Glassnode’s minor net position change indicator. As you can see, Bitcoin miners as a whole aren’t currently selling, but it looks like the positive position change is starting to trend down.
Although there does seem to be a correlation between the Bitcoin holdings of Bitcoin miners and the Bitcoin price, it’s unclear what the causal pathway is. Is the price of Bitcoin crashing because Bitcoin miners are selling, or are Bitcoin miners selling because the price of Bitcoin is crashing? The answer seems to be both. Note that even if all publicly traded Bitcoin mining companies sold their BTC holdings it would create less than a billion dollars of cell pressure which the Bitcoin market would almost certainly be able to absorb especially if most of these BTC sales were happening over the counter.
How Low Can BTC Go For Bitcoin Miners?
This begs the question of how low BTC prices could go before Bitcoin miners are forced to sell regardless of whether they’re publicly traded or not. This depends on several factors, and the first is the efficiency of the Bitcoin mining machines they’re using.
It was a summary of an extremely comprehensive Bitcoin mining report put together by Coinshares. In that report, coin shares actually managed to estimate which Bitcoin miners are the most popular, and the answers are the Antminer S19 and the Antminer S9, the second of which is a much older model of machine.
The second factor to consider in this calculation is the cost of energy, which varies significantly from country to country. According to Cambridge University, almost 75% of Bitcoin’s hash rate is coming from three countries: the United States, China, and Kazakhstan.
Obviously, the cost of energy varies significantly even within the United States, which is why it’s fantastic that Cambridge University shows us which states house the majority of Bitcoin’s hash rate, with Georgia, Texas, and Kentucky accounting for more than half of the US-based hash rate.
According to the energy cost sites for these states, the average energy cost for companies is around 7-8 cents per kWh. I’m sure that the cost for big energy consumers like Bitcoin miners is actually slightly lower. Let’s say 6-7 cents to be conservative.
As for China and Kazakhstan, the global petroleum prices website puts their energy costs at 8 cents and 4 cents per kWh, respectively. The thing is that it’s likely that the energy costs for Bitcoin miners are much lower in China as well. This is because the coin share report notes coal, gas, and hydro as being the three primary energy sources for Bitcoin miners around the world. According to World of Meters, China consumes half of the world’s coal, so it’s likely that that’s where Bitcoin miners are using coal for energy. Coal-based energy costs just 3 cents per kWh, which puts it on par with the cost of renewable energy sources such as nuclear wind and solar. This also makes it possible for Bitcoin miners to operate less efficient machines and still be profitable. It’s likely this is where all those S9s are too.
Given that most Bitcoin miners are using the Antminer S19, we can plug in its parameters along with the average energy costs for Bitcoin miners around the world, which is roughly 5 cents per kWh overall, into a profitability calculator to determine how low BTC can go before they all start to struggle. As you can see, Bitcoin could fall as low as $8,600 before there’s any cause for concern on the Bitcoin miner side. This is consistent with the $8,000 break even figure given by Arcane Research in a recent Bloomberg article.
Meanwhile, applying the same calculations to the parameters for the Antminer S9 reveals that it stops being profitable to mine BTC when the price drops below $19k, which would explain why there are lots of sources which suggest Bitcoin mining stops being profitable around this level. Even though that’s not strictly true.
Ethereum Mining Effects
This all assumes that Bitcoin miners are actually paying for the energy they’re using. It looks like there are lots of Bitcoin mining operations that are making use of free or extremely cheap excess energy, be it from renewables or from natural gas flares.
Some Bitcoin miners are even setting up their own energy sources, and a few have gone as far as outright buying their own power plants. This cuts much of the cost out of the equation and therefore makes Bitcoin mining worth doing regardless of BTC’s price and the hardware being used. This relates to something else that’s often overlooked when it comes to Bitcoin mining, and that’s the fact that most Bitcoin mining operations aren’t just mining BTC.
Many of them also mine Ethereum ‘s ETH along with other proof-of-work altcoins. As many of you will know, Ethereum will soon be transitioning from proof-of-work to proof-of-stake in a process known as the merge. Ethereum ‘s merge has been rescheduled many times since Ethereum ‘s inception and has even been rescheduled twice this year.
It’s safe to say that this has kept Ethereum miners on their toes, especially since Ethereum developers have been late in delaying Ethereum ‘s difficulty bomb, which, as the term suggests, makes Ethereum blocks abnormally more difficult to mine in order to force Ethereum miners to transition to proof-of-stake.
Even though Ethereum ‘s difficulty bomb was delayed again in early June, the mostly successful merge on Ethereum ‘s Ropston test net seems to be why eth took such a nasty dip on that day and why ether has been struggling ever since. At first glance, this doesn’t make much sense, because you’d think a successful test run of the merger would result in a rally. Upon closer inspection, however, it’s clear to see how this could be a wake up call to Ethereum miners that the merge is imminent and they need to adjust accordingly.
Just a few days before the Ropston merger, publicly bitcoin copy trading and mining company have sold 10,000 ETH to purchase additional Bitcoin mining machines, which makes sense given that a proof-of-stake Ethereum means no more proof-of-work mining profits for the company.
Now here’s where things get a bit scary. A research report from the Kraken cryptocurrency exchange in September last year noted that Ethereum miners were holding almost 20% of ETH’s circulating supply. While it’s likely that this figure has declined since that time, it’s probably still incredibly high. What this means is that we could see a lot more demand for ETH coming from Ethereum miners as they follow hive’s lead in acquiring as many Bitcoin miners as they can to make up for the missing income. Something many publicly traded Bitcoin mining companies will need to do to keep paying back debts.
As much as I want to say that Ethereum miners will start staking instead. This seems unlikely for two reasons. First, staking is a very different industry to mining, and the cost of expanding a mining company’s scope to include staking may not be worth the expense, especially if money is already short. Second, Bitcoin mining machines, such as the popular Antminer S19, are now up to 50% less expensive than they were during the crypto bull market, assuming a 15k BTC and a 5 cents per kWh energy cost. The effective yield on an Antminer S19 investment is nearly 20% per year compared to the 5% offered by ETH staking, making it a no-brainer.
It seems that ETH could very well see lots of sell pressure from Ethereum miners when the merge comes around. The silver lining is that Ethereum ‘s transition to proof-of-stake will make it more attractive to institutional investors, who may just manage to offset this price pressure.
In addition, Ethereum ‘s transition to proof-of-stake may also reduce costs for ASIC manufacturers and free up more chips and other computer bits for Bitcoin-specific mining machines. The cryptocurrency and crypto trading news website Cryptoslate speculates that the cost of GPUs could also crash enough to make mining other ASIC-resistant altcoins like XMR much more profitable.
Rising Energy Costs And Mining
Anyhow, the last thing that needs to be discussed about Bitcoin mining is the elephant in the room, and that’s the fact that energy costs have been rising rapidly around the world. We could see many mining operations taken offline by decree as governments try to ration energy going into the winter. We shouldn’t have turned off those nuclear plants, should we?
In a worst-case scenario, we could see even more governments forcing Bitcoin miners to surrender their own off-grid energy sources in the name of the greater good, which, given the events that have unfolded over the last couple of years, would not be all that unprecedented.
Even if radical energy sanctions like these did happen, Bitcoin wouldn’t be beaten. There will always be someone somewhere mining BTC regardless of its price. The Bitcoin blockchain will continue chugging along. This is important to keep in mind as we approach the next Bitcoin halving because you can bet that lots of Bitcoin miners will be wiped out if BTC’s price is anywhere below $20k.
The real question is whether Bitcoin’s hash rate will drop so low that it becomes easy to corrupt. If you ask me, the answer is “no chance in hell.” Bitcoin mining has become a multi-billion dollar industry, and it’s something that’s starting to be done by the public sector as well. Recall that El Salvador is mining Bitcoin with volcanic heat, and the island nation of Tonga has plans to start doing the same sometime next year.
As Bitcoin’s adoption continues, we will inevitably see BTC start becoming a part of central bank balance sheets, and at that point, it won’t be too much of a leap for BTC to become the world’s reserve currency. If that happens, it will be in the national interest of every country to mine as much BTC as possible, not only because it earns them passive income in the form of hard currency but because it would further secure and decentralize the Bitcoin blockchain, which is what they would all want.
If this seems a little far-fetched, well, I don’t blame you. It sounds crazy until you consider how quickly the dollar has been disappearing from central bank balance sheets and how much alternative currencies and assets are starting to pop up.
[This article is a transcription of a video made by Coin Bureau]
Original video: https://youtu.be/GeZXuAchiBw]
