Is Bitcoin Mining Still Profitable? Miners are suffering

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Anyone who has survived a crypto bear market knows how brutal it can be, especially when it transitions into the seemingly endless crypto winter. Not only will they challenge the most ardent crypto investor, but they can also threaten the crypto infrastructure itself.

At the moment, the cryptocurrency sector is experiencing it all – a solid crypto winter, weak investor sentiment and stress on crypto companies. 2022 saw the most significant failures in the history of this young asset class. The failure not only undermined investor confidence, but also attracted the attention of the US government and regulators.

The first issue was the TerraUSD/LUNA debacle that led to the bankruptcy of Three Arrows Capital and Voyager Digital in May. Then, in November, the implosion of Alameda Research, FTX and FTX.US was the most surprising.

2022 is over, but 2023 is unknown. Will 2023 be a year of rebuilding or more carnage for the crypto industry? A lot will depend on how Bitcoin works. Bitcoin, for the most part, has been highly correlated with the stock market, which has experienced its own struggles over the past year.

Is the Worst Over for Bitcoin?

Bitcoin, along with the entire cryptocurrency industry, is in uncharted territory. Never before has the crypto industry faced such a macroeconomic environment as last year. A major war, supply chain disruptions, labor shortages, and massive government spending, among other factors, have led to the highest US inflation rate in 40 years.

To combat high inflation, the Fed has announced a 25 basis point hike in the federal funds rate in March 2022. This rate hike was followed by six more hikes during the year for a total increase of 4.25%. This increase negatively affected many markets, including the stock and crypto markets.

The goal of the Fed is to slow down economic activity, which in turn contributes to lower inflation. The danger with this strategy is that if the Fed raises rates too high, it can slow down the economy. Some economic experts are already calling for a recession by the end of 2023. If this happens, it will put further downward pressure on share prices and possibly Bitcoin.

The recession of late 2023, if prolonged, could prolong the crypto winter. If the price of Bitcoin falls even further and is sustained for a long time, it will put a lot of pressure on the crypto infrastructure. This situation threatens not only cryptographic projects and exchanges, but also Bitcoin miners.

Another negative force that could affect Bitcoin is a new regulation by the US Congress or other regulators. Major failures in 2022 have caught the attention of US government officials and regulators. They may feel the need to act to protect investors and adopt stricter regulations that will negatively impact the entire crypto industry.

Bitcoin price has held up well against these developments. Bitcoin ended 2022 down nearly 76% from its November 10, 2021 peak. In comparison, Bitcoin has fallen by about 85% in the last two bear markets. However, the price of Bitcoin may not be completely over yet.

Top Bitcoin Mining Companies by Market Cap

The table below lists publicly traded Bitcoin miners ranked by market capitalization.

bitcoinminingimg1
Market capitalization 29.12.22

Is Bitcoin Mining Still Profitable?

It’s no secret that the price of Bitcoin is very volatile. Price swings from bull market peaks to market troughs can exceed 85%. It must be very difficult to successfully run a business whose productivity depends on the price of Bitcoin.

The charts below highlight the challenges these companies face.

Looking at the chart above, as of December 13, 2022, the cost to mine 1 Bitcoin was $1,353 above the spot price. As you can see, this price changes almost every day. If the production cost of 1 bitcoin is much higher than the market price for a long time, this will put pressure on the mining companies.

The chart above shows the daily earnings of Bitcoin miners at their lowest level since late 2020. The chart below shows the average difficulty of the Bitcoin network, which is a relative measure of how difficult it is for the blockchain to mine a new block.

The higher the difficulty, the more energy and computing power miners must expend to be competitive. As you can see from the chart, it peaked a few weeks ago at around 37 trillion.

Currently, for the average home miner, this is a losing proposition for Bitcoin mining. Calculating the profitability of Antminer S19 Pro (ASIC) miner using the cheapest cost of public electricity, you get a net cost of -$1.54 per day. If you live in the most expensive state, you’ll have a net cost of -$21.04 per day.

Is Bitcoin Mining Still Profitable?

As the crypto winter drags on, it will test even the strongest Bitcoin mining companies. Companies with strong balance sheets can withstand a fall in bitcoin prices much longer than companies with weak balance sheets.

On December 21, 2022 Core Scientific Inc. (OTCMKTS: CORZ ), one of the largest mining companies in the United States, has filed for Chapter 11 bankruptcy. The company is still producing and is cash-flow positive, but not enough to cover the financing debt on the leased equipment.

In its October filing, Core said “operational performance and liquidity were severely impacted by the prolonged decline in bitcoin prices, higher electricity costs” and “higher bitcoin global network hash costs.”

Core Scientific is not the only mining company. Compute North filed for Chapter 11 bankruptcy in September. Compute North provides GPU and ASIC miner hosting and mining infrastructure. bitcoin miner Marathon Digital Backgrounds (NASDAQ: MARA ), reported a $39 million impairment charge related to Compute North in its third-quarter filing.

Greenidge Build Management (NASDAQ: GREE ), a vertically integrated bitcoin miner and power generator, posted a net loss of more than $100 million in its second-quarter filing. It is now in debt restructuring talks and the board is actively discussing the possibility of filing for voluntary bankruptcy.

And then there is Argo Blockchain (NASDAQ: ARBK ), which emerged from bankruptcy after receiving a $100 million bailout from Galaxy Digital.

Can Bitcoin Mining Giants Survive The Protracted Crypto Winter?

Many mining companies may fall victim to this long crypto winter in the coming months. Consolidation is another possible outcome, as larger mining companies absorb weaker miners.

This graph shows the estimated total cost of mining 1 Bitcoin for each company. Total cost includes production costs such as electricity, overhead and interest. These numbers fluctuate from quarter to quarter.

As you can see, the more leverage a company has, the higher the spot price of Bitcoin. If the price of Bitcoin remains low for a long time, excessive leverage can kill the business. Firms that financed their aggressive expansion plans with bitcoin debt are now feeling the pressure.

As the cryptocurrency winter drags on, access to capital dries up, forcing some companies to liquidate assets to service their debt. Companies with strong balance sheets can use this opportunity to grow by profiting from the misfortune of others.

How harsh this crypto winter will be for cryptominers will depend on how long it lasts and how low the price of Bitcoin remains. Power costs are another area that can negatively affect miners. As with almost everything in this highly inflationary environment, energy costs have risen. Whether energy costs are an issue varies from company to company. Some companies agree on the price of fixed electricity units, and they can get electricity credits when they reduce their electricity consumption.

If the price of Bitcoin does not recover sharply, there will be many victims. Companies that take on too much debt and fail to prepare for an extended crypto winter will struggle to survive. In addition, smaller, less established businesses and individual miners may also suffer.

What is the macroeconomic outlook for 2023?

2023 is just days away and the months ahead are uncertain for Bitcoin. The global macroeconomic climate is sure to play a significant role in Bitcoin’s performance.

Economists’ global forecasts for the next 12 months range from a soft landing with no recession to a mild to moderate recession by the end of 2023. Which of these experts is proven right will have a significant impact on the path Bitcoin takes in 2023. ..

As for the United States, the economic situation has improved somewhat. Inflation continues to decline slowly, but inflation in specific sectors such as food is still very high. Although the unemployment rate is expected to rise in a delayed response to higher interest rates, the US labor market remains strong.

The global economy will almost certainly slow down in 2023 as the effects of rising interest rates are felt. The most significant risk for miners is the crypto winter, which is much longer than the normal Bitcoin cycle.

The big questions now are: How much will global economies slow? How will markets react to the slowdown? And how much pain can bitcoin mining companies endure?

FAQ

Q

Is Bitcoin Mining Still Profitable?

A

  1. Many variables contribute to this. For a home miner, this is probably not profitable at the moment. Commercial miners can still profit from it, but only with fairly low electricity costs and low leverage.

Q

Can Bitcoin Mining Companies Survive the Prolonged Crypto Bear Market?

A

  1. Many mining companies may go bankrupt, but many companies with strong balance sheets may survive.

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