Colin Harper
‘A Race Toward Zero’: With Hashrate in the Clouds, Bitcoin Mining Is Less Profitable Than Ever
- Bitcoin mining profitability is in the basement, seeing all-time lows in 2020.
WE RECOMMEND THE VIDEO: Worst Ways to Gift Cryptocurrency [you can keep your bitcoin papaya]
In the gifting cryptocurrency livestream, andreas answered the question, \ "what are the worst ways to gift crypto? \" in this 2 minute video, he explains the 3 worst ...
- Conversely, bitcoin's hashrate has surged throughout 2020, propelled in part by mining farms financing new hardware to boost their operations.
- Bitcoin's hashrate has taken a dip as China's wet season comes to an end, but mining professionals predict this will only be temporary, and it has only improved profit margins so much.
Bitcoin mining profits have been rock bottom in 2020.
For much of the year, the cryptocurrency has been less profitable to mine than ever. And that’s because Bitcoin’s collective hashrate – or how much computing power is pulsing through the network – has surged to consecutive all-time highs this year.
Subscribe to Blockchain Bites, our daily update with the latest stories.
According to North American bitcoin mining company Luxor’s hashprice index, miners are extracting $0.096 for every terahash they produce (before the recent price spike, it was lower still at roughly $0.08). This time three years ago, miners could expect to make roughly $1.40. Their revenue in October of 2019, though several magnitudes less than what they were raking in during 2017’s market mania, was still double today’s cash flows at $0.16.
Coming into 2020, miners were producing approximately 90 exahashes a second (or 83,000,000,000,000,000,000 cryptographic numbers a second in an effort to generate new blocks). Now, they are producing roughly 124 EH/s, after hitting an all time high of 157 EH/s in mid-October.
Bitcoin mining is a resource war of attrition, so naturally revenue margins are dwindling in a year when Bitcoin’s hashrate is exploding. And ASIC financing could largely be to blame.
The practice, whereby big operations can take out loans to bulk-order newer-generation hardware, floods the network with fresh hashrate. The surge in hashrate has meant more competition than ever for the digital gold rush – and with fewer bits to go around, small-time miners are having trouble keeping up.
Bitcoin’s hashrate and mining revenue are inversely proportional
Luxor Mining pool operator Ethan Vera told CoinDesk the anemic miner revenue is a direct result of the Bitcoin system’s growing hashrate, its relatively stagnant price and lower-than-usual transaction fees.
According to Luxor’s index, the seven-day hashrate average is currently resting at 124 exahashes a second, and Vera said this “is largely due to Bitmain S19s and Whatsminer M30s being delivered to the market in large quantities.”
It’s not unusual, of course, for miner revenue to decline when hashrate is going vertical. But Bitcoin’s stellar increase in hashrate in 2020, a nearly 30% increase this year, is the result of accelerated investment in the industry. Much of this growth comes from ASIC financing, wherein miners take out loans to buy the best new-generation mining equipment.
The mining finance industry, populated by key players including Blockfills, Arctos, BlockFi, SBI, DCG and Galaxy Digital, continues to grow. Increased competition has led to lower rates, Vera said, with some miners being able to secure sub 10% interest loans. Just a year or so ago, the common rate was 20%.
“A number of North American companies have been in the news recently for large hardware purchases, particularly RIOT Blockchain and Bitfarms. Foundry has also popped up recently and offering financing options for ASIC miners,” Thomas Heller, the COO of mining media firm HASHR8, told CoinDesk.
Most recently, CoinDesk reported on Marathon Patent Group’s purchase of 10,000 Antminer s-19s, which could pump an estimated 1.1 exhashes into the mining company’s operation. This is Marathon’s second bulk purchase from Bitmain this year after it scooped up 10,500 ASICs for $23 million in a deal with Bitmain this August.
Stephen Barbour, whose company, Upstream Data, provides oil drillers with mining rigs that run on vented natural gas, sees this as detrimental to Bitcoin mining’s short-to-near-term health. In some cases, he told CoinDesk, the big players aren’t always optimized for profitability because they have financial cushions.
“These guys can rent out an old mine, operate at a loss and then recapitalize,” he told CoinDesk, referring to these firms’ abilities to take out new loans or woo new investors when they need to shore up finances.
A look at one such firm, RIOT Blockchain, makes Barbour’s point. The publicly traded company purchased thousands of ASICs this year in a herculean (if quixotic) effort to quadruple its hashrate by 2021. As of June 2020, Riot had net operating losses of nearly $15 million, according to SEC filings. Riot clocked a similar loss in the first half of 2019, and Marathon posted $3.2 million in losses for the first half of 2020.
Northern AG, another publicly traded mining operation, had a net income of -$8.7 million in 2019 and -$5.6 million in 2018. Even the profitable ones, like the likewise public industrial miner Hut 8, barely eked out a profit in 2019: after generating $83 million in revenue, Hut 8 pocketed just $2.1 million after debt obligations and other expenses.
Disregarding profit, these miners continue to expand in hopes of future spoils, but this very activity is sending Bitcoin’s hashrate skyward, Barbour argues.
“These guys can get these big loans and they are effectively operating at a loss, and it’s propping up the hashrate.”
Retail miners feeling the heat
As these big mining farms scale irrespective of profit, Bitcoin’s hashrate pumps, and smaller players are having a hard time keeping up with the suped-up competition.
“It’s becoming increasingly challenging for small miners to compete for both hosting and hardware purchases, because lower prices are available for those orders with larger volume,” Heller said.