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Bitcoin mining

Collateral damage: Bitcoin miners are taking a heavy hit amidst the FTX crisis

The market reaction to the world’s third largest exchange is pushing miners down with it

The cryptocurrency industry is still shocked by the FTX situation. The fall of yet another industry leader has dealt a massive blow to the market’s sentiment, which we are seeing reflected in prices.

Since the situation unraveled, the crypto market capitalization fell by 15.35% to $852.7B.

Amidst the chaos reigning over the industry, there’s one sector that’s particularly affected, and it’s Bitcoin miners. Indeed, Bitcoin dropped below $17K for the first time since November 2020 — almost exactly two years later — and has taken mining revenue to new lows.

Let’s dig deeper into it.

Bitcoin mining margins become thinner

To say 2022 was tough for miners would be the understatement of the decade. After mining profitability boomed last year, many miners contracted debt to buy thousands of ASIC miners at a premium to grow their hashrate, hoping to take advantage of the favorable market.

Photo by Kanchanara on Unsplash

Unfortunately, things went wrong very quickly.

Bitcoin mining profitability depends on several factors, but the two most relevant are price action and mining difficulty.

Bitcoin’s price has a directly proportional correlation with mining revenue: the higher it is, the better the mining profits. Difficulty, on the other hand, has an inversely proportional correlation: the higher the difficulty, the less miners earn for the same amount of hashrate.

After the recent events, Bitcoin price is now 75% below its all-time high, sitting at $16.7K. At the same time, mining difficulty has increased dramatically over the year, now at 36.76T — only 0.20% below its all-time high and likely to keep increasing.

As you can see, the situation is less than ideal. Miner revenue per TH/s, also known as hashprice and an indicator of mining profitability, has dropped to $0.57. These are historically low levels.

Now, the miners who borrowed to buy expensive ASICs are now selling them at a discount to fulfill their obligations, as they’re not making enough from mining to cancel their debt.

Miners are caught in the middle

Recent events only prove the importance and need for proper risk management and long-term business strategies in the mining industry.

If 2022 taught us something, it is that there’s excessive overleveraging in the space. And as experience has shown, when a big player falls, the entire industry is affected, even if they aren’t using leverage themselves.

Miners are not an exception. Those caught red-handed were the most affected. We’ve already seen Compute North file for bankruptcy.

Core Scientific and Argo Blockchain are also in trouble. The former already announced that it can’t fulfill their debt obligations, while the second has failed to raise liquidity and saw its shares plummet 40% as a consequence. And this was before the FTX crisis that led Bitcoin to drop under $16K.

Other miners, like Hive Blockchain, have been more austere with their books, which has allowed them to navigate the storm more calmly. Nevertheless, they’re still affected by the market’s recent crash, and although it may not be a killing blow, it’s still a tough one to take.

There is much to learn

If 2021 made us believe we were crypto geniuses, misled by massive gains in the most bullish market in this space’s history; 2022 brought us back to Earth and reminded us that success takes time, commitment, and over all things, diligence.

Debt and leverage are no longer options. If we are to build a sustainable, viable, and successful industry, what we need is financial responsibility.

Only time will tell us the true consequences of what happened this year. But it’s clear that the industry leaders’ fall from grace hits directly into the market’s confidence, which will take years to build back. And we have to learn from our mistakes to do it.

The sooner we start, the better.

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