One of the constituencies affected by the slump in bitcoin prices is its mining community. A decline in bitcoin’s price makes the cryptocurrency less profitable to mine because revenues fall.
Bitcoin mining is a capital-intensive business. It requires significant investments in real estate, mining rigs, electricity, and, in some instances, energy sources. The main source of revenues for miners, after making these investments, are transaction fees from bitcoin’s blockchain and the cryptocurrency itself, which can be sold at periodic intervals when its price skyrockets.
The total mining revenue – a sum of block rewards and transaction fees – for miners has crashed from a high of $74.4 million in October last year to $22.24 million yesterday.
Sagging mining revenue can become a loss-making proposition for small outfits because they do not have the scale to distribute their costs. The previous crypto winter decimated the individual and small mining community.
Big miners fare better in crypto’s volatile price environment because they have the resources and capital to survive a prolonged drawdown better than small miners. But even they have been caught unaware by the rapid descent in bitcoin price since the beginning of this year.
According to a Bloomberg report, publicly listed bitcoin miners have had to write off the value of their bitcoin holdings by more than a billion dollars due to the steep fall in the cryptocurrency’s price.
Stronghold mining – one of the bigger miners in crypto – has restructured its debt in order to “continue as a going concern for at least the next 12 months.” That restructuring involves returning 26,200 bitcoin mining rigs back to the New York Digital Investment Group (NYDIG) to repay a $67.4 million debt and a restructuring of its convertible note to reduce the strike price on its warrants. It’s share price has plummeted by more than 80% this year. Miners are also busy selling their holdings of coins. They sold 6,200 coins – the second highest total for this year – in July.
A Silver Lining
It might be difficult to find a silver lining in the cloud of depression that has engulfed crypto mining. But there are quite a few. For one, there are more avenues to raise debt than previously. Banks and investment firms are willing to finance operations ta crypto miners in exchange for collateral, such as mining rigs. The move towards renewable energy sources for bitcoin mining is also a profitable one for miners. Some of them are making money by shutting down their mining operations and selling power to the grid. While it is still small as compared to the one for commodities, the bitcoin futures market can help miners lock in current prices and hedge for further declines.
Will Things Get Better for Miners?
It is hard to say. There is no predictor for bitcoin price. Some are pointing to metrics related to bitcoin mining to forecast a possible upswing in its price. According to Nik Bhatia, researcher at Bitcoin Layer, the network’s hash rate, or the total amount of computing power devoted to the cryptocurrency, must bottom out before its price begins rising again. While it has declined significantly as compared to earlier this year, the network hash rate keeps fluctuating, meaning it hasn’t reached a bottom yet.
An earlier post by Erik Norland, senior economist at the CME Group, pointed to miner revenue as a possible metric. “…bitcoin’s bull markets have usually been preceded by long periods of reduced miner revenue per transaction. It seems that miners charging less to match trades was a prerequisite to bitcoin sustaining rallies in past bull markets,” he wrote. Miner revenue has waned since last October. It picked up steam late August this year.
Miners still have a long way to go before bitcoin price hurts them. The breakeven bitcoin price for Canadian crypto miner Hut8 was $18,000 in March this year. Riot Blockchain had a breakeven price of $10,000 and Marathon mining was comfortably placed at $5,000.
Bitcoin price flirted with the $18,000 range at the beginning of July but has climbed steadily since. As of this writing, it is at $23,367.368, down 2.43% from its price 24 hours ago.