Last year, if The price of bitcoin soared to $68,000, miners had a blast. By some estimates, their profits hovered just below 90 percent, and many of them decided to expand their operations at breakneck speed, bracing for even bigger profits in 2022.
That windfall did not materialize. Over the past few months, the cryptocurrency markets have fallen, with the price of bitcoin hovering at $30,630 at the time of writing. At the same time, electricity prices skyrocketed around the world due to a rebound in demand and the war in Ukraine. That’s a problem for bitcoin miners, who use energy-hungry mining computers called ASICs to coin cryptocurrency by solving complex math problems. According to Bitfury CEO Valery Vavilov in a 2016 interview with Reuters, energy can make up 90 to 95 percent of a miner’s overhead.
In some parts of Europe, energy rates have risen so dramatically that mining one bitcoin could cost up to $25,000, said Daniel Jogg, CEO of Enerhash, a company that operates blockchain data centers. “Some operations were performed without profit,” he says. Texas, a cryptocurrency mining hotspot, is struggling with an intense heatwave that has sent energy prices soaring by 70 percent in the past 12 months — from 10.6 cents to 18.4 cents per kilowatt hour. The US currently accounts for 37.84 percent of global crypto mining activity, according to the University of Cambridge, following a 2021 mining ban in previous crypto powerhouse China. “The problem now is the price of energy on a gross basis, but also the volatility of the energy price,” said Alex Brammer, vice president of business development at crypto mining infrastructure company Luxor Mining. “It’s really hard to predict what energy prices will be.”
That problem is compounded by a growing number of miners who have joined the network since last summer, which in turn has reduced the output of individual miners. In short, miners pay more to store fewer bitcoins, and their coins are less valuable. While miners are still making a profit, it is shrinking, says Sam Doctor, chief strategy officer at digital asset investment bank BitOoda, which estimates margins are now in the 60 to 73 percent range. “Even miners using newer mining rigs – which are comfortably profitable – are making less money than before,” he says. Older S9-generation ASICs, which still make up a third of mining rigs in use worldwide, are no longer profitable in most cases, Doctor added. “With the price of energy rising, miners who don’t have a fixed-price energy contract could face pressure on both sides.” Doctor says most miners, including larger mining companies, don’t have such contracts because it requires getting “stronger credit” than most of them currently have.
Despite the still dazzling margins, miners are in a difficult position. Most publicly traded mining companies, including market leaders Riot, Marathon and Core Scientific, have seen their market capitalization fall by more than 50 percent. Both Riot and Core Scientific have missed their rising revenue estimates and have conservatively revised their expansion plans.
The fear is that if these negative trends don’t reverse, it could just be the start of an industry-wide slump. In the two years before the crash, miners were scrambling to buy cartloads of ASICs to produce more bitcoin. The epitome of this buying bonanza is Marathon – one of the top three miners in the US – who bought 78,000 ASICs from manufacturer Bitmain in December 2021 for a record $879 million; that came on the heels of a new purchase of 30,000 Bitmain ASICs for $120 million in August 2021. Marathon’s plan was to run 133,000 rigs by the first half of 2022, but as of May, the company only had 36,830 operational ASICs, following installation problems, adverse weather at one of its Montana facilities, and delays in concluding a power contract with the Texas power grid† The value of inactive or deliverable ASICs may soon fall below the price Marathon — and other mining companies — paid for them near the peak of bitcoin’s bull run, as ASIC prices generally correlated with that. from bitcoin. Charlie Schumacher, a spokesman for Marathon, says the company has paid for most of its newer mining rigs “well below the current market rate,” except for the latest generation rigs, such as the 78,000 it ordered in December. He says Marathon’s “asset-light model,” where it partners with hosting services instead of building its own infrastructure, protects the company from the challenges the industry faces.
