- This week, Bitcoin hashrate hit a new all-time low.
- The price drop is due to intense competition and the recent market sell-off.
- This could force many small mining companies into bankruptcy.
Fierce competition and a sudden plunge in Bitcoin prices have caused miner profitability to fall to historic lows, squeezing many miners who have been struggling to survive since the "halving" event in April.
Bitcoin’s hash price, a measure of miners’ revenue, fell to an all-time low of less than $40 per petabyte of hash on Monday, the same day global market concerns about the economies of Japan and the United States sent the price of bitcoin below $50,000.
The hash price is an estimate of miners’ income that takes into account the computing power used to mine Bitcoin.
Wolfie Zhao, partner at BlocksBridge Consulting, said the drop could be a fatal blow to many bitcoin mining businesses.
Since the Bitcoin mining reward halved in April, much of the industry has been operating at a loss.
Wolfie Zhao told DL News : "Whoever can hold on longer will be the winner."
“Many small miners have no cash reserves, are not profitable and may be forced to close.”
Halving
The supply of bitcoin is capped at 21 million. As of Wednesday, there were more than 19.7 million bitcoins in circulation.
Miners are rewarded in Bitcoin for appending blocks of transactions to the Bitcoin ledger.
The more computing power a miner has, the greater their chances of winning. But there’s a problem: as more computing power is added to the network, winning becomes more difficult, and miners are caught in a never-ending computing arms race.
In addition, the Bitcoin network automatically and irreversibly halves the rewards given to miners every four years. The most recent so-called halving took place on April 20, the fourth halving in Bitcoin’s history.
While Bitcoin supporters have welcomed the supply reduction, arguing that a lower supply of new coins is a catalyst for higher prices, analysts are predicting a fiasco for miners.
“If it remains at the current level ... at the time of the halving, a large number of mining operations or mining equipment will become unprofitable and will be shut down,” Haris Basit, chief strategy officer at bitcoin mining company Bitdeer, told DL News in December , when bitcoin was trading just over $42,000.
Winners and Losers
While the price of Bitcoin has surged to an all-time high of $73,000 this year, the hash rate and mining difficulty have also increased in tandem.
“For many miners, even public miners, large public miners, this is really below the break-even point,” Wolfie Zhao said.
“It’s just the raw cost of the mining business. A lot of companies have corporate overheads.”
Wolfie Zhao said that so far, two types of miners have been able to avoid the pain: large public companies that raised billions of dollars from investors before the halving, and companies located in areas with cheap energy, such as Texas.
Wolfie Zhao said that large companies that raised funds through equity financing are using the funds to pay for operating expenses and have not sold Bitcoin this year.
“They’re betting it will appreciate in value over the long term,” he said.
“Private, small-scale mining companies are under pressure and they don’t have as many financing options, so they don’t have as much cash reserves.”
Wolfie Zhao estimates that hash prices for many miners would need to rise by about 50% to reach a level that miners are comfortable with.
“Either the hash rate pulls back and has a big correction, or the price of Bitcoin continues to rise,” he said.
