A high hash rate, high electricity costs, and the price of BTC hovering around $20,000 for months are making things difficult for Bitcoin miners.
October saw a spike in the Bitcoin hash rate, taking the metric to a new high of 245 exhashes per second. These changes caused a sharp drop in hash price, resulting in declining profit margins for Bitcoin.
Miners hit a low of $66.8 per petahash on Oct. 24.
According to Luxor Technologies, “hash price” is the revenue BTC miners earn per unit of hash rate, which is the total computing power deployed by miners processing transactions on a proof-of-work network.
Bitcoin hash price index. Source: Luxor Technologies
Not only was the volume inconsistent, but the Bitcoin hash rate increased to an average of 269 EH/s last week. This means that the difficulty of the network will increase from July 2022.
Bitcoin market price vs Bitcoin difficulty. Source: Blockchain.com
The expansion of mining operations, which creates competitiveness of miners; the increased use of ASIC miners, which are more efficient than their alternatives; and the Ethereum merger led to various Ethereum mining companies filling empty rack space of non-operational ether
GPU miner with BTC specific ASIC miner.
Therefore, the increase in the hash rate led to an adjustment of the difficulty of Bitcoin at a time when the price of BTC fell. As expected, after the hash rate spike and hard rise, the hash price fell to $0.0657 per terahash per day, which reduced the level of profits.
Bitcoin price vs hash rate. Source: Glassnode
Rising Mining Costs Translate to Compressed Profits
One factor contributing to the depressed profit level is the overall increase in BTC mining costs. For example, there was a sharp increase in the price of electricity in the United States. From July 2021 to July 2022 alone, the price of electricity increased 25%, from $75.20 to $94.30 per megawatt hour. Energy prices also tend to go up in winter because people have to heat their houses. 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 hosting fees, acquiring miners, 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 much higher, meaning interest on existing debt hurt new mining companies the most and survivors.
It is clear that increasing the hash rate and difficulty of Bitcoin, as well as lowering the hash price, will lead to reduced profit margins. The chart below shows declining profits in a landscape where hash rate, difficulty, and electricity cost continue to rise.
Mining expansion plans for large public BTC miners. Source: Luxor
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 go out of business permanently.
One possible result is that lean mining companies (cooler balance sheets) like Marathon can buy liquidated equipment and rack space from bloated mining companies that fail.
Mining companies that stay lean while trying to scale may emerge victorious. Mining companies like Core Scientific, Marathon, Riot, Bitfarm and CleanSpark are gearing up for expansion, even as many miners find profitability difficult.
Related: Bitcoin Public Miners Hash Rate Booms, But Is It Really Bearish For BTC Price?
Is sustainability the answer?
In view of the difficulties discussed, BTC mining companies should adopt sustainable BTC mining models to facilitate both profitability and regulatory potential. 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, simultaneously reducing costs and their carbon footprint. This approach can lead to more consistency and sustainability in Bitcoin mining energy costs. Norway managed to reach 1% of all bitcoin mining through an enf