Bitcoin miners have been caught in a pincher, with sky high energy costs eating into their margins on one side, and the falling value of the bitcoins they receive for mining driving down profits on the other.
Vital to the operation of Bitcoin, miners continually process bitcoin transactions keeping the blockchain secure and generating new bitcoins for themselves as a reward. It has been a very profitable endeavor, as in November of 2021, when Bitcoin was trading at $69,000, and energy costs were bottoming out, and each bitcoin earned represented a huge payday.
But today, with energy costs sky-high and each Bitcoin earned worth under a third of that, suddenly miners find themselves liquidating their stashes of Bitcoin just to fuel operating costs.
Publicly traded crypto miners have seen their shares collapse. Argo Blockchain ARB (ARB.U.K.) is down more than 60% for the year. Riot Blockchain (RIOT) and Marathon Digital MARA (MARA) have each fallen almost 80%.
But miners are adapting. Analysts led by Nikolaos Panigirtzoglou at JPMorgan wrote in a note, “The fight for survival among Bitcoin miners has been inducing an increase in mining efficiency and as a result a reduction in Bitcoin’s production cost.”
The analysis team estimates that the cost now to produce one Bitcoin has dropped over the past month, from around $20,000 at the start of June, to $15,000 at the end of last month, and down to about $13,000 now. The decline is coming almost exclusively from electricity consumption.
Miners are deploying more efficient mining rigs, and the reduced electrical consumption is reducing costs.
However the JP Morgan analysis notes, “While clearly helping miners’ profitability and potentially reducing pressures on miners to sell Bitcoin holdings to raise liquidity or for deleveraging, the decline in the production cost might be perceived as negative for the bitcoin price outlook going forward.”
The cost to produce a single Bitcoin is viewed as the lower level of Bitcoin’s price range in a bear market. If Bitcoin were to drop to $13,000, it would represent a one third decline from current prices.
However some feel the current drawdown in crypto may be limited, and help clean up the system.
John Todaro, an analyst at Needham, wrote, “We believe the next 3-4 weeks is critical for the space as the unwinding in crypto markets has severely impacted borrow/lending companies in the space. As weeks progress, we believe the contagion risk declines considerably. Additionally, our analysis indicates that a large portion of leverage has now come out of the crypto ecosystem.”
