Bitcoin Mining Performance Is Beginning To Recover
It seems like after an 18 month run of terrible Bitcoin mining revenues, they are finally begin to climb back to a profitable level. Gross margins on mining are beginning to come back, which makes it more feasible for operations to increase their capital expenditures.
With Bitcoin’s price making a bit of a recovery and giving some room for miners to earn more, the industry is starting to make a bit of comeback. There are several factors that play into the profits of miners, but usually the key factors are the price of Bitcoin, the quality of equipment, and the price of electricity.
An Industry in a Downturn
Miners have been earning less per unit deployed for a while now. When combined with the growing hash rate (up 1700% since early 2017) that is required to mine effectively, this means that it has become a lot more onerous to operate in the mining industry. In fact, many miners ceased operations in the last few quarters because of cash flow hiccups or growing capital expenditure requirements.
Bitmain’s recently released S15 has brought a higher rate of return to the mining industry that has helped to mitigate some of the losses from Bitcoin’s currently low price. It is often necessary to make continued investments into mining operations in order to keep up with competitors. There is a constant race for more efficient equipment, because every operation wants to maintain a certain share of the coinbase reward.
Mining income was a total of $195 million in February 2019 and $210 million in January. Both of these represent a significant drop from the all-time highs of $951 million seen in December 2017. The rapid downturn in Bitcoin’s price in mid-November also made it very risky to be a miner at that time.
One interesting quandary surfaces where if the price of Bitcoin drops too low, network performance begins to suffer because of the lack of incentive for miners to maintain the network. It can become a self-fulfilling prophecy in that less hash power is devoted to mining when prices are down, so fees go up and the speed goes down. The result is a worsening state of the network, which may lower the inclination of the marginal buyer to purchase the coin.
Cheap electricity has been one way that miners have sought to mitigate the decreases in revenue. There has been a market shift from a focus on mining equipment, to a focus on finding cheap electricity. The result has actually been a “banding together” of sorts between the mining farms.
The Risks Of Mining
The main risk with Bitcoin’s price at this time is that it may fall below $3,000. If it were to do so, no amount of cheap electricity would be able to compensate for the fact they would potentially be operating in the red.
Many miners purchase short Bitcoin futures in order to hedge against potential losses, but at this point, the demand for short future could be so strong that there wouldn’t be enough counterparties to take the long positions in the trade.
The mining industry has continued to advance in risk management and self-governance over the last several years, but in an interview, CoinDesk’s CEO, Xun Zheng, summed it up well:
“This industry is always about making a bet after all. There are always risks from multiple aspects, especially from the markets side in this bearish time.”