Bitcoin Miners’ Worst Days May Be Over, But Some Key Hurdles Remain

The Bitcoin mining industry has been relatively stable against falling prices and the tumultuous fallout from exchanges and lending companies.

The network hashrate dipped slightly towards the end of 2022, mainly due to an unprecedented blizzard in the United States, and has since recovered strongly to surpass its previous peak above 270 PE/s. It was particularly encouraging to see the hashrate holding well above summer 2022 lows, despite the aftermath of FTX’s collapse.

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7-day average Bitcoin hash rate. Source: Glassnode

However, despite the recent strength of various metrics, the mining industry faces many challenges, which will likely limit its growth in the future. Obstacles include low profitability, a threat from new-age efficient machines, and the upcoming Bitcoin halving that will cut block rewards in half.

BTC mining remains a struggling industry

While Bitcoin’s network hashrate has improved, miners are still under a lot of stress due to low profitability. Revenues from Bitcoin miners have fallen by a third of their value from the peak. Prior to the May 2022 price crash, miners were earning over $0.22 per day per TH/s, a figure that has now fallen to $0.07.

The percentage share of small-scale miners with breakeven prices above $25,000 has abandoned from 80% in 2019 to 2% by 2022, which is a positive sign of an end to the miners’ capitulation.

The sustainability of mid-sized miners with breakeven prices between $20,000 and $25,000 depends on the capital efficiency of the participants. The struggle for them is to survive until the uptrend begins, hoping to benefit from the next bullish cycle.

The significant drop in prices for medium-sized machines suggests that their demand has slowed. According to CoinShares, the reduction in machine prices will allow capital-rich entities to “reduce capital expenditure per TH/s and increase production without incurring permanent additional costs” by purchasing equipment at low prices. However, this will come at the expense of existing miners, which will likely limit the growth of the industry as a whole.

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Average price of bitcoin ASIC mining machines. Source: Hashrate Index

Moreover, companies in fragile financial condition will also not be able to take advantage of the slowdown by increasing debt, especially as central banks around the world raise interest rates for borrowers.

Independent research firm, The Bitcoin Mining Block Post, came to a similar conclusion about the industry’s growth in 2023. Their analysts predict that the cost of miners will “move sideways and gradually increase” as it did in 2020.

Pressure from higher-performing ASICs and the upcoming BTC halving

The existing Bitcoin mining industry is also facing significant challenges related to the arrival of new efficient machines and reduced rewards after being halved in 2024.

Since June 2021, more energy-efficient miners have arrived, offering more than 100TH/s per joule. This trend accelerated in the second quarter of 2022 with the launch of new hardware equipment that had more than twice the efficiency of existing miners at the time. The breakeven prices of some of these miners are below $15,000.

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The launch dates of the miners with their nominal powers. Source: Hashrate Index

The increase in efficiency will likely level off over the next couple of years due to limitations in microprocessor chip size. The most efficient miner produced by Bitmain, the S19 XP, has a 5nm chip. Going below this size greatly increases the cost and the risk of production errors.

Yet, as more and more of these types of equipment flood the market, the mining difficulty for existing players will increase and slowly drive them away. Thus, only competitive miners capable of successfully expanding and sustaining their operations will survive this phase.

On top of that, miners will also need to prepare for the March 2024 halving event. CoinShares research highlighted that, given the direct impact of the halving on miners, “a potential for mining companies could be to focus on reducing operating expenses above their cash costs (including overhead, debt, accommodation, etc.).”

Will miners make a profit in 2023?

The above data suggests that the worst days of miner capitulation may be over. However, the industry remains under considerable pressure, under which the accumulation of BTC is difficult.

Miners continue to be strong sellers in the market. An update from Coinbase Institutional on January 19 cited that “crypto miners have started to be a bit more aggressive in selling”.

The Bitcoin miners one-hop supply metric is calculated from the total number of addresses that have received tokens from mining pools. The indicator has recorded an uptick in miner balance since the start of 2023. However, the total amount is still below 2019 lows, highlighting the challenges of a quick recovery in conditions unless the price favors miners. minors.

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Supply of bitcoin miners to a hop. Source Coinmetrics

For miners to continue selling with little hope of a near-term recovery could dash the hopes of those expecting a parabolic run in 2023. Still, the good news is that the worst days of sellout may be behind we. Although slow and steady, miners can continue to grow, start accumulating again, and help stage the next bullish rally.