Hashrate up, price down: A look into the current state of the Bitcoin mining landscape
Mining profitability keeps dropping, but hashrate does nothing but increase
Historically, and excluding very few exceptions, Bitcoin’s hashrate has followed profitability closely, mainly driven through price. In other words, the higher the price of Bitcoin, the more hashrate went online to mine it.
This trend continued during the last bull market, where both Bitcoin and hashrate reached new all-time highs, even after the great hiccup in hashrate following the Chinese crackdown on Bitcoin mining. Until today.
Now, these two factors have finally decoupled. Hashrate has been growing consistently, while Bitcoin price keeps falling to new yearly lows.
Let’s dive into what’s causing this unprecedented divergence between the two factors, and what possible outcomes this may lead to.
Hashrate reaches peak demand
To explain the consistent increase in Bitcoin’s hashrate, we have to go back to the last bull run that led Bitcoin to a new all-time high. From March 2020 to November 2021, Bitcoin saw one of the most spectacular rallies in history, and so did mining revenue.
Back then, hashprice, also known as miner revenue per terahash per second, peaked at $0.42 per TH/s — about 740% higher than what it is today.
The high profitability led by Bitcoin’s price action and the unique opportunity that represented the Chinese crackdown on mining drove miners’ sentiment through the roof.
Even corporate and publicly traded miners gave into the mining FOMO. Yet, reluctant to sell their BTC reserves, they decided to contract debt to acquire more hashrate instead.
Everyone wanted to mine Bitcoin, and hashrate demand surged like never before.
Chip shortages create a supply crunch in the market
The meteoric rise of hashrate demand coincided with a global logistics and supply chain crisis — likely resulting from the pandemic — and significant semiconductor chip shortages, creating massive bottlenecks in the ASIC manufacturing industry.
Soon enough, major ASIC miner manufacturers were sold out, striking multi-million deals with many Bitcoin mining industry leaders. This led to a considerable spike in ASIC prices.
But that didn’t stop miners. Quite the contrary. In face of the shortage, they entered long-term deals with manufacturers, pre-ordering new ASIC miners at a premium to be delivered as they were produced.
With Bitcoin rallying, these deals seemed like good news for these miners. But against all sentiment, things were about to change.
Bitcoin crashes, and troubles begin
2022 started off with the wrong foot for Bitcoin, with several factors contributing to the reversal of its bullish momentum.
First, it was the relentless inflation, leading to a historically hawkish Fed. As a result, many investors exited the market, taking refuge in high-paying US treasury bonds and a strong dollar.
Then, it was the massive loss of confidence, driven by the collapses of Terra Luna, Celsius, and Three Arrows Capital, among others, eventually leading to the debacle of the third-largest cryptocurrency exchange and major player in the industry, FTX.
Bitcoin saw tremendous amounts of capital exiting the market after each and every one of these events, failing to hold its price supports. And with every leg down, mining revenue suffered. The context of war between Russia and Ukraine didn’t help, as it led to a sharp increase in energy costs, especially in Europe, which is highly dependent on Russian natural gas for power generation.
Miners’ profit margins were becoming thinner and thinner, but they were still locked into the long-term deals they had signed for the acquisition of new ASICs. With debt obligations closing in, many started selling their Bitcoin reserves to fulfill them.
But Bitcoin couldn’t recover, and with the prolongation of this cumbersome situation, miners had to turn to desperate measures. Some of them managed to stay in business by liquidating some of their capital. Others turned to mergers and acquisitions. And those who couldn’t make it had to declare bankruptcy or default on their debt.
And while all this happened, new batches of ASIC miners were still being delivered.
Hashrate soars as Bitcoin struggles
While the mining industry was going out of whack, ASIC manufacturers kept producing and delivering new machines in accordance with the deals signed back in 2021.
However, with most of the Bitcoin mining industry focusing on damage control, the activation of these miners was delayed. This responded to many reasons, from failing to provide the proper rack space or hosting for the machines to political sanctions to third parties.
This forced miners to find their pre-ordered rigs a new home. The secondary market for ASIC miners spiked, as they were selling at a discounted price given the low mining profitability. As more solid, profitable miners acquired these distressed assets and fired them up, hashrate began to grow again.
Putting even more pressure on mining profitability.
What’s next for the mining industry?
As you can see, except for a few exceptions, the Bitcoin mining industry is a very delicate situation. We’ve already seen miners go bankrupt, default on their debt, or liquidate their productive capital just to barely remain in business.
Now, this could all go away with a swift Bitcoin recovery, but as things stand, that seems unlikely in the short term. So, it’s likely that we’ll see more capitulation in the coming months until we reach a balance between hashrate and profitability that is sustainable for miners to stay in business.
In any case, it’s clear that the mining industry needs additional tools for proper risk management and raising capital. That’s why we’re building a new, decentralized hashrate marketplace that will allow them to add predictability to their operations and obtain more comprehensive, granular control over their resources.
Interested in learning more? Visit us at lumerin.io
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