The cryptocurrency bear market has caused a significant drop in the profitability of bitcoin mining (BTC) as bitcoin mining expenditures exceed the bitcoin price.
The profitability of bitcoin mining is closely related to the decline in the price of bitcoin, and it has been declining since late 2021 and reached a multi-month low in early July 2022.
According to data from crypto-tracking website Bitinfocharts, the profitability of BTC mining fell to $0.07 per day per 1 Terahash/s (THash/s) on July 1, 2022, touching the lowest level since October 2020.
The decline in the profitability of BTC mining has caused some big changes in the cryptocurrency mining industry.
Low bitcoin prices fueled selling pressure as miners were pushed to sell their bitcoins to continue mining and pay for electricity. The majority of large cryptocurrency miners like Core Scientific have had to sell a large amount of Bitcoin in order to survive the tough market conditions.
The increasing unprofitability of BTC mining has also led to a significant drop in the demand for crypto mining hardware, causing many miners to sell their mining hardware at a discount.
Since the lower prices of ASIC and GPU miners may spark more interest from new miners, it is important to remember that the price of mining hardware is just one of the many factors behind the profitability of BTC mining.
What is the profitability of bitcoin mining and how is it defined?
Bitcoin mining is an economic activity that involves the production of the digital currency Bitcoin using the computing power of GPU-based miners or specially designed ASIC miners.
Bitcoin mining profitability is a measure that determines the degree to which a bitcoin miner makes a profit based on a large number of factors, including the price of bitcoin, mining difficulty, energy cost, type of mining hardware, and others.
Factor 1: Bitcoin Price and Block Rewards
The price of bitcoin is one of the most obvious factors affecting the profitability of bitcoin mining as the value of bitcoin is directly proportional to the profits made by the miners.
Bear markets are generating more interest in the price of BTC from miners because they risk losing money if BTC drops below a certain price level.
Miners must also take into account the amount of block reward or the amount of BTC given to miners for mining a single block on the BTC blockchain. Bitcoin’s original block reward was as high as 50 BTC before it was reduced to the current 6.5 BTC after three historic block reward halvings.
Halving Bitcoin is a key part of the BTC protocol, with the goal of reducing the amount of new coins entering the network by halving the block reward every 210,000 blocks or roughly every four years.
Factor 2: Characteristics of Bitcoin Miners
Bitcoin mining profitability largely depends on the choice of BTC miner and related characteristics including hash rate, power consumption and price.
Hash rate is the processing power of a miner, measured in hashes per second (H/S). Higher hash rates include representations in kilohashes per second (KH/S), gigahashes per second (GH/S), terahashes per second (TH/S), exahashes per second (EH/S) and so on.
A miner’s hash rate is the speed at which he can solve crypto-mining puzzles to mine bitcoin. The faster the speed, the more BTC is mined in a specific time frame. As BTC’s hash rate is constantly breaking new heights, Bitcoin makers are regularly producing new miners that support higher hash rates, while older miners seem outdated.
Another important feature of a BTC miner is its power consumption. With global energy costs rising, a miner’s ability to consume less energy is essential.
The price of the actual mining hardware is also an important expense when calculating the profitability of bitcoin mining. Both GPU and ASIC miners are getting cheaper amid the bear market this year, but the new leading miners are still costing more than $11,000 at the time of writing.
Factor 3: Mining difficulty and hash rate
Bitcoin mining difficulty is a measure of how hard it is to mine a block of BTC, with more difficulty requiring additional computing power to verify transactions and mine new coins.
Grid’s difficulty soared in 2022, constantly crashing to all-time highs. Bitcoin mining difficulty adjustment occurs every 2016 blocks, or roughly every two weeks, as Bitcoin is programmed to self-adjust in order to maintain a target block time of 10 minutes.