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Difficulty and price action are flushing older hardware out of the Bitcoin mining industry

Under the current conditions, it’s upgrade-or-die for many miners

The recent increase in Bitcoin’s hashrate has taken mining difficulty to unprecedented levels. Mining a block on the Bitcoin network has never been as hard as it is today.

This comes at a time where the economy is struggling: rate hikes are losing the battle against inflation, a global recession is gaining momentum, and electricity prices are skyrocketing with winter coming in the northern hemisphere.

With Bitcoin price going down while difficulty is increasing, older, less efficient hardware is quickly losing its profitability.

Let’s dive into what this means for the industry, and how miners using this obsolete technology can get out of this unfavorable situation.

How ASIC development impacts miners

Years ago, the first ASIC miners were powerful machines, but not as efficient. They could easily beat GPUs in hashrate but their electricity consumption was incredibly high.

With the advance of technology, ASICs producers developed newer models not only more powerful, but also more energy-efficient. These new miners produced more hashes per second and needed less energy than their predecessors to do it.

Miners who equipped these new miners gained a competitive advantage, as their higher hashrate increased their chances of finding a block. Meanwhile, reducing their power consumption allowed them to reduce their electricity costs. This unlocked more capital to invest into expanding their operation and acquiring even more hashrate.

As larger miners started replacing their hardware with new, more efficient machines, those mining with older ASICs started losing their share of the global hashrate, and therefore, their mining profitability.

Why older hardware is becoming obsolete

During the bull market of 2021, a couple of factors coincided to keep older ASICs profitability.

First and foremost, Bitcoin price reached a new all-time high, so earning only a few thousands sats a day would add up to be a considerable reward in fiat currency still.

The Bitcoin mining crackdown imposed by the Chinese government was also a huge advantage for the remaining miners, as roughly half of the global hashrate suddenly went offline, leading to the plummet of mining difficulty.

As a result, many miners plugged their old S9s and were actually turning a profit with their old hardware.

Now, the tables have turned. Hashrate has skyrocketed at a time where Bitcoin is down 72.46% from its all-time high. This has dropped mining profitability to record lows, which is flushing less efficient hardware out of the industry.

In fact, at the latest known average prices in the United States, only the Bitmain Antminer S19XP would be viable to run, making about $1.37 net per day.

ASIC miner profitability at $0.12 per kWh

How miners can improve their profitability

The situation is critical for many miners, who have few options to avoid low profitability to push them out of the mining process.

Upgrading hardware

The logical solution would be to upgrade their old hardware, replacing it for newer and more powerful models that are more energy-efficient, thus improving their margins.

However, this would involve greater capital losses, as their older hardware has no resale value. It also requires significant upfront investment to acquire new ASICs, which many miners may not have.

Chasing cheaper electricity

If miners can’t improve efficiency, they might as well reduce costs. The best way to do this would be to acquire cheaper electricity, which is mining’s most significant expense.

There are many ways to pay less for the same amount of electricity including:

  • Moving to a region with lower prices.
  • Producing electricity in-site.
  • Signing exclusive deals with energy producers.

Although some miners may manage to pull these off, these options are out of the reach of the average Bitcoin miner running a couple of ASICs at home.

Plus, depending on the ASIC model, the breakeven electricity price may not be achievable even after doing all of the above. For example, to run an S9 at a profit, one would have to pay under $0.03 in power bills — a price only possible in some countries in Africa and Eastern Europe.

Breakeven prices for ASICs.

Acquiring hashrate in the open market

Finally, another viable option consists of buying hashrate from another miner on the open market. This allows miners to maintain their mining operation running without any long-term commitments or significant investments in infrastructure, logistics, or new hardware.

Nevertheless, this option also has its setbacks. While there are platforms that enable hashrate exchanges, these are centralized and involve significant counterparty risk, leaving a gap in the industry.

This gap is exactly what the Lumerin Hashpower Marketplace aims to fill: providing a decentralized, peer-to-peer hashpower marketplace that enables miners to buy and sell their hashrate in the open market.

What to expect for the mining industry

Mining profitability is the result of many elements, but there are three of them that stand out in terms of relevance:

  • Mining difficulty
  • Electricity prices
  • Bitcoin price

So, what lies in store for the mining industry in the near future? Let’s look into each of these points separately.

Hashrate is sitting at all-time highs and showing no signs of slowing down. Therefore, we can expect difficulty to continue growing in the near future. This would keep putting miners under pressure, given it has a negative impact on profitability.

Electricity prices are also likely to keep increasing with the increase in demand and winter quickly approaching. Particularly in Europe, where the closure of gas pipelines and the conflict between Russia and Ukraine heighten the situation.

That leaves us with Bitcoin price, which has proven time and again to be unpredictable. That said, with the global economy in recession and relentless inflation leading to rate hike after rate hike, Bitcoin price fluctuation remains a risk, at least in the short term.

Photo by Matthew Henry on Unsplash

As you can see, the situation is critical for the mining industry. Effective treasury and risk management will become crucial for the survival of many miners, especially those with older hardware.

In that scenario, we hope that the Lumerin Hashpower Marketplace will provide a helpful resource for miners to weather this storm, enabling them to keep their operation running.

Do you want to learn more? Sign up for the Lumerin Explorer Program to enjoy early access and be among the first people in the world to mine Bitcoin with decentralized hashrate contracts!

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