Bitcoin Miners Predict a Crash

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Miners enjoyed having a great time last year as Bitcoin’s price surged to $68,000.

According to some estimations, their earnings were hanging just below 90%, and most of them opted to maximize their profit at a breakneck rate in anticipation of an even bigger jackpot in 2022.

That reward has not materialized. Cryptocurrency markets have plummeted in recent months, with Bitcoin’s price sitting at $31,579 at the time of writing. At the very same time, due to a resurgence in demands and the conflict in Ukraine, electricity prices soared around the world. This is a challenge for Bitcoin miners, who utilize high-energy mining computers known as ASICs to create Bitcoin by resolving complex mathematical puzzles. As per the CEO of Bitfury, Valery Vavilov, during a 2016 interview with Reuters, electricity can account for at least 90% of a miner’s cost.

According to Daniel Jogg, CEO of Enerhash, a business that runs blockchain data centers, power rates have risen so substantially in some regions of Europe that mining a single Bitcoin can cost up to $25,000 in some areas. Some operations were operating at a loss, he said.

Texas, a Bitcoin mining hub, has been dealing with a severe heatwave that has led electricity prices to rise by 70% in the last year, from 10.6 cents to 18.4 cents per kilowatt an hour. Following a mining ban in prior crypto powerhouse China in 2021, the United States now accounts for 37.84 percent of worldwide crypto-mining operations, as per the University of Cambridge.

According to Alex Brammer, VP of corporate development at crypto-mining equipment startup Luxor Mining, the problem is not just the price of electricity on a gross basis but also its unpredictability. It’s quite difficult to predict what energy prices would be in the future.

Since last summer, a rising number of miners have joined the system, which has resulted in individual miners’ outputs being lowered. In essence, miners are spending more to produce fewer Bitcoins, lowering the value of their currency. While miners are still making money, it is declining, according to Sam Doctor, chief strategy officer for cryptocurrency investment bank BitOoda, who puts margins at 60 to 73 percent.

Even miners who utilize more modern mining rigs, which are profitable, are making less money than before, he stated. Doctor adds that outdated ASICs from the S9 series, which still account for a third of all mining rigs in operation throughout the world, are no longer economical in most circumstances.

Miners who do not possess a fixed-price electricity agreement may now be pressed on both sides as the price of energy rises. Most miners, specifically more prominent mining companies, do not have such contracts, according to Doctor, because obtaining one demands better credit than most of them now have.

Bitcoin miners are in a difficult situation, despite the nevertheless impressive margins.

The market capitalization of most publicly traded mining businesses has plummeted by more than 50%, including industry heavyweights Riot, Core Scientific, and Marathon.

Core Scientific and Riot both fell short of its optimistic sales forecasts and have scaled back plans for expansion.

The danger is that if these unfavorable patterns continue, this might be the start of a larger industry-wide downturn. Miners were eager to buy truckloads of ASICs to grind out more Bitcoin in the two years leading up to the meltdown. Marathon, one of the three leading miners in the United States, bought 78,000 ASICs from supplier Bitmain for a staggering $879 million in December 2021, following up with another acquisition of 30,000 Bitmain ASICs worth $120 million in August 2021.

Marathon had planned to run 133,000 units from the first part of 2022, but as of May, it only had 36,830 operating ASICs due to installation issues, poor weather at one of its Montana plants, and delays in getting an electricity contract with Texas’ power system.

Because ASIC rates are often associated with Bitcoin prices, the cost of idle or yet-to-be-delivered ASICs could soon fall just below the amount that Marathon, and other mining businesses, paid for them around the height of Bitcoin’s bull run.

The Bottom Line

The takeaway from this is that should Bitcoin mining (which accounts for a substantial portion of the market cap) become obsolete, it could have a detrimental effect on the price of Bitcoin overall.

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