The worst days of Bitcoin miners may be over, but several key obstacles remain

The Bitcoin mining industry has been relatively stable compared to the bearish price action and violent decline of exchanges and lending companies.

The network’s hashrate dropped slightly towards the end of 2022, mainly due to an unprecedented snowstorm in the US, and has since rebounded strongly to exceed its previous peak of over 270 EH/s. It was particularly encouraging to see the hashrate holding well above the summer 2022 bottom despite the effects of the FTX crash.

Bitcoin 7-day average hashrate. Source: Glassnode

Despite the recent resilience of various metrics, the mining industry faces many challenges that are likely to limit its growth going forward. Obstacles include low profitability, the threat of efficient new-age machines, and the upcoming Bitcoin halving, which will cut block rewards in half.

BTC mining remains a stressed industry

While the hashrate of the Bitcoin network has improved, miners are still under a lot of stress due to low returns. Bitcoin miners’ profits have shrunk to a third of their peak value. Before the May 2022 price crash, miners were making more than $0.22 daily per TH/s, a figure that has now dropped to $0.07.

The percentage of small miners with breakeven prices above $25,000 has dropped from 80% in 2019 to 2% by 2022, a positive sign of the end of miner capitulation.

The sustainability of medium-sized miners with break-even prices between $20,000 and $25,000 depends on the capital efficiency of the participants. The struggle for them is to survive until the uptrend begins, hoping to take advantage of the next upcycle.

The significant drop in prices for medium-sized machines suggests that demand for them has slowed. According to CoinShares, the reduction in machine prices will allow capital-rich entities to “reduce their capital expenditure by TH/s and increase output without incurring additional ongoing cash costs” by purchasing low-cost hardware. However, this will come at the expense of existing miners, which is likely to limit the growth of the industry as a whole.

Average cost of Bitcoin ASIC miners. Source: Hashrate Index

In addition, firms with weak financials will also not be able to take advantage of the slowdown by raising debt, especially as central banks globally raise lending rates.

The independent research firm, The Bitcoin Mining Block Post, has come to a similar conclusion about the growth of the industry in 2023. Their analysts predict that the price of miners will “move sideways and gradually rise” as it did in 2020.

Pressure from more capable ASICs and the impending BTC halving

The existing Bitcoin mining industry also faces significant challenges from the arrival of new and efficient machines and reduced rewards following a 2024 halving.

As of June 2021, more energy-efficient miners have arrived, offering more than 100TH/s per Joule. This trend accelerated by the second quarter of 2022 with the launch of new hardware equipment that had more than twice the efficiency of existing miners at the time. Breakeven prices on some of these diggers are under $15,000.

Miner launch dates with their power ratings. Source: Hashrate Index

Efficiency gains are likely to level off in the next few years due to microprocessor chip size limitations. The most efficient miner produced by Bitmain, the S19 XP, has a 5 nm chip. Going below this size significantly increases costs and the risk of manufacturing errors.

Still, as more of these types of equipment flood the market, the difficulty of mining for existing players will increase and slowly drive them out. Thus, only competitive miners who can successfully expand and maintain operations will survive this phase.

In addition, miners will also need to prepare for the halving event in March 2024. The CoinShares study indicated that given how the halving will directly affect miners, “a potential strategy for mining companies may be to focus on reducing of operating costs above their cash costs (including overhead, debt, hosting, etc.)’.

Will miners make profits in 2023?

The data above suggests that the worst days of miners capitulating may be over. However, the industry remains under significant pressure where accumulating BTC is challenging.

Miners continue to be prominent sellers in the market. Update from Coinbase Institutional on January 19 cited that “crypto miners have started to be a little more aggressive in selling.”

Bitcoin miners’ one-time supply rate is calculated from the total amount of addresses that have received tokens from mining pools. The indicator recorded a slight increase in miners’ balances since the beginning of 2023. However, the total is still below the lowest levels since 2019, pointing to the challenges of a rapid recovery unless the price is in favor of the miners.

Bitcoin mining delivery in one hop. Source Coinmetrics

The fact that miners continue to sell with little hope of a near-term recovery may dash the hopes of those expecting a parabolic move in 2023. However, the good news is that the worst days of capitulation may be behind us . Although slow and steady, miners can continue to grow, start accumulating again and help the next upward rally.