It’s a rocky time for Bitcoin miners.
The average cost to mine a Bitcoin just slumped. But it’s little solace for players in such a cutthroat business in a volatile time that may see costs rocket up again.
Miners who have yet to achieve sufficient scale “are likely no longer operating profitably in this environment, and will be forced to go offline if they haven’t already,” Asher Genoot, CEO of mining firm Hut 8, told DL News.
As more miners join the network, it gets more difficult to solve the complex equations that yield payouts. This mechanism may help account for the wild swings in mining cost as miners that aren’t profitable turn off their machines.
Hut 8 posted a net profit of $250.9 million in the first quarter, a whopping 1,350% increase compared to the same period last year.
Net income at Marathon Digital, the biggest mining company with a market capitalisation of $5.8 billion, increased 184% over the same period.
But there’s no guarantee these gains will continue.
While Hut 8 declined to comment on its performance in the second quarter, there’s no getting around that Bitcoin’s April halving slashed the rewards paid to miners in half. That is likely to impact miners’ financials in the three month period ending in June.
According to Hut 8′s first-quarter earnings report, mining one Bitcoin cost the firm an average of $24,594. Here’s how it does it.
Cutting expenses
The biggest operating cost for Bitcoin miners is energy.
According to economic data platform MacroMicro, the average cost to mine a single Bitcoin at the start of June soared to $83,668 — around 37% more than its current price of $60,946.
This week, the cost plummeted to just $45,719.
Many miners have locked in multi-year contracts to protect against energy market fluctuations.
In the first quarter, Hut 8 said it reduced operating expenses by discontinuing unprofitable products and initiated a budget review process to reduce overhead expenses.
Financing debt can also be a big issue.
To remain competitive, mining firms must periodically update their machines to newer, more efficient models. To do this, they often take on debt to fund these purchases.
It’s all about the hashprice
According to Hut 8′s Genoot, the key to determining a miner’s ability to operate profitably is a metric called hashprice — a calculation derived from the Bitcoin network’s mining difficulty, Bitcoin price, and network rewards.
To assess profitability, miners look at the hashprice relative to energy costs and how efficient their mining machines are. By Genoot’s calculations, the hashprice today is around $0.053.
This, he said, means a miner’s energy cost would need to be below $0.065 per kilowatt hour to operate profitably.
Keeping a close eye on the hashprice is one way Hut 8 stays profitable.
Genoot said his firm runs software on its machines that makes them automatically power down when energy prices exceed expected revenue.
This enables Hut 8 to mine when profitable and further control costs in a way smaller operators can’t.
Looking ahead
Miners aren’t just concerned about whether their operations are profitable in the present. They need to plan for future eventualities, too.
The cost to mine Bitcoin is directly linked to the network hashrate — the combined computing power of all machines mining Bitcoin. The amount of Bitcoin a miner generates is generally inline with that miner’s contribution to the hashrate.
Hut 8′s Genoot declined to speculate on the wild swings in Bitcoin and its impact on the industry.
“We are not in the business of predicting Bitcoin price,” he said. “We instead focus on optimising what is under our control.”
Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out to him with tips at tim@dlnews.com.