Bitcoin miners are bulking up their reserves in anticipation of next year’s halving event. Riot blockchain is reported to have purchased 7.6 EH/S of mining machine capacity for $162.9 million. HUT8, a Canadian bitcoin company, is pursuing a merger with U.S. Bitcoin Corp. The combined entity will have total hash rate, or computing power deployed to mine bitcoin, equal to 7.5EH/s. EH refers to exahashes and is equal to one quintillion hashes per second, meaning the total computing power is capable of producing one quintillion hashes per second of computations.
CleanSpark has purchased mining machines that can generate 8EH/s from Bitmain, the world’s biggest manufacturer of bitcoin mining machines. Bankrupt miner Core Scientific is also planning to spruce up its mining capabilities, according to its bankruptcy filing. Even controversial stablecoin Tether is getting in on the bitcoin mining action.
The preparations for next year’s halving are elaborate but they rely on the assumption that bitcoin price, which is in doldrums currently, will skyrocket next year. But that is only possible, if the worthless token can survive until next year.
An Existential Crisis
Most previous halving events have generally proved to be positive for bitcoin price because investors flock to a supposedly valuable and scarce asset. Bitcoin’s low liquidity conditions have made it easy to propagate this illusion.
But that it is no guarantee for next year. The cryptocurrency is in the middle of an existential crisis after regulators choked off the crypto ecosystem and began decimating its main players. Even though it is up since the beginning of this year, bitcoin price’s trajectory has had more downs than ups. Liquidity and trading volumes in its ecosystem have swung to new lows after regulatory crackdowns.
That crisis finds echoes in the bitcoin mining ecosystem. Major players are selling off their bitcoin holdings to fund operations. Miner sales provide an artificial bump in price that subsides immediately after the transactions are over. But the underlying conditions – absence of regulatory clarity and criminal elements in crypto – still remain.
An Efficient Bitcoin Mining System
Investments in bitcoin mining equipment are profitable only if the operations are efficient. That efficiency itself is a function of four factors.
The first one is the price of machines to mine the cryptocurrency. The average cost of machines fell last year amid a deepening crypto winter that plunged bitcoin prices. But there is precedent that equipment prices fall before a halving event before they rise as the actual event approaches. That means miners can expect increased costs next year.
The second factor influencing bitcoin mining efficiency is the difficulty of bitcoin network. It is at record levels right and shows no signs of abating. Transaction fees are another factor that determine the efficiency of bitcoin mining operations. There is good news on that front. The development of bitcoin ordinals, and subsequent improvements, recently have enabled the cryptocurrency to accommodate more transactions in a single block, boosting transaction fees for miners.
Marathon Digital CEO Fred Thiel provided context and figures during Marathon Digital Corp’s latest earnings call. He said their typical average reward jumped from 0.2 to 0.5 bitcoin to 6.25 bitcoin thanks to the spurt of activity generated by bitcoin ordinals.
The Energy Equation
The fourth and, possibly, the most important factor determining bitcoin price efficiency is energy cost. Bitcoin mining has been criticized as an energy hog because it consumes as much energy as entire geographies. Renewable energy can make a difference to the overall stats but that picture, at least for bitcoin mining, is mixed.
According to the International Energy Agency, China will account for almost 55% of global additions of renewable power capacity in 2023 and 2024. But miners will not benefit from those additions because the country has banned proof-of-work mining.
Even in the U.S., which has emerged as a hub after the Chinese crackdown, the picture is mixed. Texas, a leader in renewable energy generation, has become a major center for bitcoin miners. Increasingly, however, it wants a share of profits from the activity. The federal government is also on the bitcoin miner’s case: they barely escaped punitive taxation this year and reports have characterized the escape as a temporary reprieve.
The Energy Information Administration has forecast increased prices for energy generated using fossil fuels for next year, meaning miners will have to continue dealing with significant energy costs. [According to a CCAF report last year, 62.4% of energy for bitcoin mining comes from fossil fuels].
Mining Profits from Bitcoin
According to JP Morgan, the cost of mining bitcoin next year will jump to $40,000, up from a range of between $19,000 to $7,200 this year. Miner plans to bolster their capital requirements are preparation this increase. HUT8, which had the highest price for bitcoin production, is pursuing a merger with USBTC to ensure economies of scale and diversification of its business. It has also received a credit line of $50 million from Coinbase. But those moves are no guarantee against liquidity failure.
The company has also acquired high performance clusters of Compute power in anticipation of the boom in artificial intelligence applications that requires massive data crunching capabilities. Unfortunately, the ASIC machines devoted to its bitcoin mining operations are useless in this context.
Other firms, like Marathon Digital, have branched out into alternate jurisdictions, like the UAE, to safeguard themselves from the regulatory risk that follows bitcoin everywhere. However, regulatory arbitrage for bitcoin mining is hardly a successful strategy.
That brings us to the main point of bitcoin mining. To mine bitcoin, you need a node. The node is a valuable part of the bitcoin’s payment network that could, one day, transform into a valuable low-cost service for transfers across international borders. To that end, efforts by bitcoin miners to diversify their operations are not entirely useless. However, attaching their profits to the price of a worthless token creates regulatory uncertainty in their operations.
Recent developments, such as the development of bitcoin ordinals, have held out hope that transaction fees on its network can replace the unsteady hand of speculation. To that end, the sooner that that bitcoin, the cryptocurrency, is shucked off its network, the more stable that profits for bitcoin mining will become.