The combination of rising energy prices and falling cryptocurrency prices has made it much more difficult to make a profit from mining Bitcoin (BTC). In 2023, BTC experienced a recovery after a series of unpredictable events such as the FTC crash, Terra Luna crash, macroeconomic conditions, and Binance's guilty plea.
BTC rose by an average of 0.39 in July 2023 and showed a huge recovery in the last few months of the year, trading at around $38,000. On February 13, 2024, BTC reached the $50,107 level for the first time since December 2021, with a market cap of $982.72 billion.
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What is Bitcoin Mining?
Bitcoin mining is the process of verifying Bitcoin and recording it on the blockchain.
Bitcoin miners use powerful computers to perform complex mathematical functions called hashes. The computing power required to mine Bitcoin is extremely high, but Bitcoin miners receive 6.25 BTC as a reward, approximately $143,000, for mining each transaction block on the blockchain.
While technically anyone can mine Bitcoins, the majority of Bitcoin mining is carried out by companies operating large-scale commercial mining facilities that have data centers with specialized servers.
These mining farms are often built near affordable energy sources such as dams, oil and gas wells, or solar energy farms.
How has the profitability of Bitcoin mining changed over time?
Aspects of the Bitcoin mining business are similar to mining physical assets such as gold or silver. The higher asset prices rise, the more profitable mining becomes and the less efficient miners have to be to make money.
However, Chris Kline, co-founder and chief operating officer of Bitcoin IRA, points out that there are several factors to consider beyond the price of Bitcoin itself when it comes to the profitability of Bitcoin mining.
“Besides price, the profitability of crypto mining can be determined by a few different factors, notably rising electricity tariffs and rising gas and energy prices, coupled with rising transaction prices,” says Kline.
Bitcoin mining requires almost 139 terawatt hours (TWh) of electricity per year, which is more than Norway's annual energy consumption. The more expensive electricity becomes, the less profit miners can make.
Despite the pressures of rising electricity prices and falling Bitcoin prices, there are at least some trends that are moving in the right direction for Bitcoin miners.
Bitcoin mining equipment
The price of Bitcoin mining equipment is an important factor in profitability. Prices for high-end and mid-range application-specific integrated circuits (ASICs), the specialized chips made for Bitcoin mining, have reportedly fallen about 70% from their all-time high in 2022, with units selling for around $10,000 to $18,000 became.
“GPU costs are falling rapidly, leading to greater mining profitability,” says Kline.
Additionally, Andy Long, CEO of cryptocurrency miner White Rock Management, says lower Bitcoin prices are causing less efficient miners to cease operations as they start losing money. On the other hand, fewer miners overall means more efficient miners start earning more Bitcoin when prices fall.
“The genius of the system is that the difficulty mechanism keeps block production going automatically, with a new block being created on average every 10 minutes. So with lower prices, some miners will throw in the towel. But there will always be efficient miners with powerful equipment who continue to secure the network,” says Long.
Bitcoin network hashrate
To mine Bitcoins, all computers connected to the Bitcoin network make millions of attempts to complete hashes every second of the day. A hashrate measures how many calculations can be performed per second, and this measurement can be billions, trillions, quadrillions, and even trillions. For example, a terahash is equal to 1 trillion hashes per second.
Bitcoin mining profitability is quantified as hash price, measured in dollars per terahash (TH) per second over the last 24 hours. Putting it all together, the acronym for this measurement is USD/TH per second per day.
The hash price calculation includes variables such as network difficulty, Bitcoin price, Bitcoin block subsidy, and transaction fees.
During the crypto market boom in December 2017, Bitcoin's profitability peaked at around $3.39/TH per second.
Bitcoin's hash price was as high as $0.412/TH per second at the end of October 2021. While Bitcoin mining profitability has fallen, overall mining activity remains near all-time highs.
The network's hashrate is currently around 520.0 million TH per second, up from 7.6.5 million TH per second in early August 2017.
Bitcoin mining companies
As Bitcoin mining profitability declined in 2022, the stock prices of leading crypto miners have also declined. Fortunately, Canaccord Genuity analyst Joseph Vafi says the most efficient Bitcoin miners are still making significant profits from their rigs.
“Most of the leading mining companies in our coverage have relatively new fleets that can remain profitable at a much lower BTC price than current levels, supported by a breakeven price of $7,000 to $9,000 for most of them for incremental hashrate production,” says Vafi.
Vafi's top Bitcoin mining stocks include Argo Blockchain (ARBK), HIVE Blockchain Technologies (HIVE), Hut 8 Mining (HUT), and Iris Energy (IREN).
“Overall, despite the sharp decline in BTC spot price, the mining model remains highly profitable for most leading miners,” says Vafi.
Canaccord Genuity has an “Outperform” rating on each of the four mining stocks mentioned.
Other major public Bitcoin miners include Marathon Digital (MARA), Riot Blockchain (RIOT), Canaan (CAN), and Bitfarms (BITF).
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Bottom line
Several variables come into play when calculating the profitability of Bitcoin mining.
While many of these variables have worsened during the crypto winter of 2022, the downturn has helped rid the market of the least efficient miners and allowed the top performers to increase their market share in anticipation of what they hope to achieve next cyclical upswing in crypto prices and crypto mining profitability in the coming years.
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