The bitcoin mining industry has been relatively stable compared to the bearish price action and turbulent aftermath of exchanges and lending companies.
The network hash rate declined slightly towards the end of 2022, primarily due to an unprecedented snowstorm in the US, and has since recovered strongly, surpassing its previous peak above 270 EH/s. It was especially reassuring to see the hashrate holding well above the lows of the summer of 2022 despite the effects of the FTX crash.
Average bitcoin hash rate over 7 days. Source: glassnode
However, despite the recent resilience of various indicators, the mining industry faces many challenges that are likely to limit its growth in the future. Barriers include low profitability, the threat of next-generation efficient machines, and the upcoming Bitcoin halving that will cut the block reward in half.
BTC mining remains a busy industry
Even though the hashrate of the Bitcoin network has improved, miners are still under a lot of stress due to low profitability. Bitcoin miner earnings are down to one-third of their value from their peak. Before the price crash in May 2022, miners were earning more than $0.22 per day per TH/s, and now this figure has dropped to $0.07.
The percentage of small miners with a break-even price above $25,000 has fallen from 80% in 2019 to 2% by 2022, which is a positive sign that miner capitulation is ending.
The sustainability of average miners with a break-even price of $20,000 to $25,000 depends on the capital efficiency of the participants. The fight for them is to survive until the start of a bullish trend, hoping to capitalize on the next bullish cycle.
A significant drop in prices for mid-size cars suggests that demand for them has slowed down. According to CoinShares, lower hardware prices will allow wealthy businesses to “reduce their TH/s capital costs and increase productivity without incurring additional ongoing cash costs” by purchasing hardware at a low cost. However, this will come at the expense of existing miners, which is likely to limit the growth of the industry as a whole.
Average price of Bitcoin ASIC mining machines. Source: hashrate index.
Moreover, firms with weak financial performance will also not be able to take advantage of slower growth by increasing debt, especially as central banks around the world are raising interest rates on loans.
Independent research firm The Bitcoin Mining Block Post came to a similar conclusion about the growth of the industry in 2023. Their analysts predict that the cost of miners “will move sideways and gradually increase”, as it did in 2020.
Pressure from more powerful ASICs and upcoming BTC halving
The existing bitcoin mining industry is also facing significant challenges due to new and efficient machines and declining rewards following the halving in 2024.
Since June 2021, more energy efficient miners have emerged offering over 100 TH/s per joule. This trend accelerated towards the second quarter of 2022 with the launch of new hardware that was more than twice as efficient as existing miners. The break-even prices of some of these miners are below $15,000.
Dates of launch of miners with indication of their power. Source: hashrate index.
Efficiency gains are likely to flatten out over the next few years due to microprocessor chip size limitations. Bitmain’s most efficient miner, the S19 XP, has a 5nm chip. If the size is smaller than this value, it greatly increases the cost and the risk of manufacturing errors.
However, as more and more such hardware enters the market, the difficulty of mining for existing players will increase and gradually crowd them out. Thus, at this stage, only competitive miners who can successfully expand and maintain their activities will survive.
In addition, miners will also have to prepare for the halving in March 2024. A study by CoinShares found that given how the halving will directly impact miners, “a potential strategy for mining companies could be to focus on cutting operating costs beyond their cash costs (including overhead, debt, hosting, etc.) “.
Will miners be able to make a profit in 2023?
The data above suggests that the worst days of miner capitulation may be behind us. However, the industry remains under significant pressure, making hoarding BTC challenging.
Miners continue to be big sellers in the market. An update from Coinbase Institutional on Jan. 19 states that “crypto miners have become more aggressive in selling.”
The bitcoin one-step supply metric is calculated based on the total number of addresses that received tokens from mining pools. The indicator has recorded a slight increase in the balance of miners since the beginning of 2023. However, the total is still below the 2019 lows, indicating problems with a quick recovery if the price is not favorable to miners.
Single hop bitcoin miner supply. Source Coinmetrics
The fact that miners continue to sell with little hope of recovery in the short term could shatter the hopes of those who expect parabolic growth in 2023. However, the good news is that the worst days of surrender may be behind us. Although miners are slow and steady, they can continue to rise, start accumulating again and help set up the next bull run.
This article does not contain investment advice or recommendations. Every investment and trading step involves risk, and readers should do their own research when making a decision.