21 Aug 2022
Bitcoin miners are forced to look for cheaper electricity
2022 has been a reality check for many bitcoin miners after the super-profitable 2021. This article discusses how mining profitability has changed and explains how only miners with access to exceptionally cheap energy will survive in the long term.
A bitcoin miner turns electricity into bitcoin. Therefore, the most precise way of measuring bitcoin mining profitability is to look at miners' break-even power prices. The break-even power price is the revenue per MWh of energy fed into a bitcoin mining machine. If this number is lower than the price the miner pays for this MWh, the miner should turn off its machines.According to Bitooda's estimates from 2021, the median power price in the bitcoin mining industry is $40 per MWh. This median price might have increased slightly due to inflation, but at the same time, as I will explain in this article, miners with higher electricity prices have been forced out of the industry. Therefore, I view the median power price of $40 per MWh as reasonably accurate.Looking at the chart, we see that during 2021, if you had access to energy at $40 per MWh, using this unit of energy to mine bitcoin yielded an excellent profit. During the height of the bull market in October 2021, directing one MWh of energy into the Antminer S19 - an energy-efficient bitcoin mining machine - gave you a revenue of $500. If you paid only $40 for this MWh, you had a profit margin of 1,150%. Even older and less energy-efficient models like the Antminer S9 could make massive profits during this golden era of bitcoin mining.These extreme profit margins naturally led many newcomers to enter the industry, and the existing players also ramped up their bitcoin production capabilities. These miners can now only look back at 2021 with nostalgia as profit margins have collapsed due to the plummeting bitcoin price and more hashrate coming online.Most of the big and publicly traded bitcoin mining companies use newer and energy-efficient models, which still run with decent profit margins. Operators of older generation models have reasons to worry as their machines have either dipped below positive cash flow territory or operate close to the margin.The 6-year-old Antminer S9 is our proxy for an inefficient machine, and we see that it needs exceptionally cheap electricity to run profitably. Older models like these made up a significant part of the Bitcoin mining network during the bull market of 2021, but this bear market has likely forced miners to unplug most of these machines. Unplugging older models like the Antminer S9 may be why Bitcoin's hashrate hasn't grown since April. According to CoinShares Research, the Antminer S9 produced around 25% of Bitcoin's hashrate in December 2021, when running this machine yielded significant profits. With the profitability of running this machine plummeting, you now need exceptionally cheap electricity to run such a machine profitably.Bitcoin miners who don't have access to almost free energy at below $20 per MWh are now forced to upgrade their machines into more energy-efficient ones, like the Antminer S19 series. Several of the big publicly listed miners are awaiting massive delivery of these machines. For example, Marathon, in its efforts to rapidly increase hashrate, ordered 78,000 Antminer S19 XP in December. This machine is significantly more energy efficient than most other models on the market and will reduce Marathon's bitcoin production cost.Still, in the long-term, the only solution to survive as a miner is getting access to cheaper electricity. Bitcoin mining is an exceptionally competitive industry, and miners with higher electricity prices will gradually be squeezed out of the industry. This means that as the industry matures, the average electricity price in the industry will gradually decline. In the long-term, the only miners who survive will be those who use stranded and undervalued energy or are getting paid to serve as 'energy tools'.An example of a miner lowering its electricity cost by helping solve energy problems is Riot Blockchain, which earned $9.5 million for helping stabilize the Texas electric grid. Other energy problems bitcoin miners can help solve and thereby lower their energy costs are monetizing stranded renewable energy, mitigating natural gas flaring, and selling their waste heat output to district heating systems or food producers. We will soon publish a research report explaining this, so stay tuned.Our hypothesis is that in the long-term, the ultra-competitive dynamics of the bitcoin mining industry will force miners to help solve such energy problems to lower their energy costs.