As prices continue to fall, the industry is worried, but there is one group that may be even more anxious.

As Bitcoin once fell to $54,000 (now recovered to $57,000), miners who were already suffering from a sharp drop in profits after the halving have found it even more difficult to survive. According to survey agencies, if Bitcoin reaches 54,000, only ASIC mining machines with an efficiency of more than 23W/T will be able to make a profit, and only five models of mining machines can barely support it.

But miners are undoubtedly partly responsible for this decline. In order to cope with cash flow problems after the halving, mining companies are still continuing to sell off. In just June, 30,000 bitcoins from miners entered the market.

As BTC approaches the shutdown price, miners’ capitulation is coming to an end, but the impact of halving and price changes on them is more far-reaching than imagined.

For Bitcoin, which has a fixed total of 21 million, the importance of miners as direct producers is self-evident. Before institutions poured into BTC, mining companies were the biggest voice controllers in the Bitcoin industry. The business philosophy of mining companies is also very simple. In addition to their own mining and mining machine sales, they provide hosting services for others. The corresponding costs are electricity prices, labor and storage maintenance costs. Since the costs are relatively controllable, the basic price for maintaining the operation of mining machines can be inferred, which is also called the shutdown price of mining machines. Of course, no matter what model, the higher the BTC premium, the higher the profit. Since 2011, the mining industry has made many people rich, and the long history of encryption has also left footnotes of the bitterness of mining companies.

In addition to the growing energy costs, mining rewards are the most important indicator for miners. In order to limit the mining speed and inflation of Bitcoin, the rewards miners receive through mining will be halved at a fixed block height, that is, every time the Bitcoin blockchain generates 210,000 blocks, the Bitcoin block reward will be halved. This process occurs approximately once every four years. In April of this year, Bitcoin has completed its fourth halving, with the mining reward reduced from 6.25 BTC to 3.125.

Every few years, miners’ profits will drop by half, and the input-output ratio will drop rapidly. The mechanism forces the mining industry to be refined, industrialized and scaled. After all, the increase in computing power is more likely to obtain certain profits, which also makes the mining industry a typical heavy asset industry. Due to the decline in profits, after the halving, the shutdown price will rise, and miners will surrender. Simply put, miners surrender means that some miners reduce operations or sell the mined BTC to make a living or hedge risks, which usually leads to a further decline in Bitcoin prices.

This situation undoubtedly also appeared after this year's halving. According to MacroMicro data, the average cost of mining a single BTC soared to $83,668 in early June, and fell slightly to about $72,000 as of July 2. Despite the soaring costs, the total revenue of miners has plummeted from an average of $107 million per day before the halving to $30 million, reflecting the increased difficulty of mining companies.

Data from James Butterfill, head of digital research at CoinShares, shows that during the April halving event, the price of Bitcoin hovered around the average production cost of miners. Among the 14 mining companies identified, half of the well-known mining companies, including Bit Digital and Riot Platforms, had overall production costs higher than the average.

F2Pool, a Bitcoin mining pool operator, also confirmed this conclusion. Based on an estimated energy cost of $0.07 per kilowatt-hour, when the BTC price is $54,000, only ASIC miners with a unit power of 26 W/T or less can achieve profitability. In terms of specific models, six Bitcoin mining machines, including Antminer S21 Hydro, Antminer S21 and Avalon A1466I, achieved Bitcoin break-even at $39,581, $43,292 and $48,240. Other models, such as Antminer S19 XP Hydro, Antminer S19 XP and Whatsminer M56S++, can achieve profitability when Bitcoin prices exceed $51,456, $53,187 and $54,424 respectively.

Break-even points of different mining machines at different energy prices. Source: F2Pool

In this context, as the inscriptions recede, mining companies naturally choose to sell to survive, whether for cash flow reserves or industry migration and exit. Since June this year, crypto mining companies have sold more than $2 billion worth of Bitcoin, a total of about 30,000 Bitcoins, and the number of Bitcoins held by miners has dropped to the lowest level in 14 years.

But fortunately, regardless of the good asset-liability ratio given to mining companies by the stress test of the previous bear market, from the market point of view, as the price of Bitcoin drops, small and medium-sized mining farms have also begun to gradually stop working, the difficulty of Bitcoin mining is rapidly decreasing, and the surrender of miners is about to end. On July 9, BTC.com data showed that the difficulty of Bitcoin mining was reduced by 5% to 79.5T, and the average hash rate of the entire network in the past seven days was 586.72EH/s. In line with this data, since May, the number of Bitcoins sent by miners to exchanges for sale has dropped significantly, and the volume of over-the-counter transactions has dropped significantly. Compared with the previous accumulation of selling pressure, the entire volume of mining companies' over-the-counter trading desks on June 29 has been exhausted.

In addition to the surrender after the halving, integration and mergers and acquisitions have also become the main trend of this round of mining cycle. Upgrading equipment to increase production capacity, developing low-cost energy areas, and merging mining pools all require a huge cash base. Therefore, for small mining companies with unfavorable balance sheets, the best way is to raise funds, or more directly - to be acquired.

From a certain perspective, the acquisition of mining companies is also a gathering of mining pools, which is more practical. As early as before the halving, 10 leading mining companies raised a total of US$2 billion in total proceeds through equity financing activities. Marathon Digital, CleanSpark and Riot Platforms were the companies that raised the most funds in the fourth quarter of 23 years, accounting for 73% of the funds raised. In April of this year, Bradford predicted that the mining industry will eventually be integrated into four core companies: CleanSpark, Marathon, Riot Platforms and Cipher Mining. It is worth mentioning that these mining companies are also the main force in selling BTC after the halving. Taking Marathon as an example, it sold more than 1,790 BTC in May and June.

Monthly BTC production of the top ten listed mining companies, source: Farside Investors

On the other hand, these four companies have lived up to expectations. In June, CleanSpark acquired micro-miner GRIID Infrastructure for $155 million, which is expected to increase its power capacity by 400 megawatts. CleanSpark also acquired a total of 60 megawatts (MW) of Bitcoin mining farms in rural Georgia for $25.8 million.

Back in May, a more controversial acquisition was also taking place. Riot Platforms acquired 9.25% of Bitfarms' shares on May 28, becoming the company's largest shareholder. Finally, Riot purchased 1.5 million shares on June 5, increasing its shareholding to about 12%. Due to high shareholder holdings and concerns about corporate governance, it requested to add independent directors to Bitfarms' board of directors. Subsequently, Bitfarms opposed it and even announced on June 10 that it had approved the adoption of a shareholder rights plan "poison pill" to prevent acquisitions by peers and competitors.

Cipher Mining purchased 16,700 mining machines as early as January this year, and installed the latest generation of mining machines Avalon A1466 at the Bear and Chief Mountain factories in Texas in the second quarter.

Other mining companies are also trying to take various measures to improve the efficiency of mining machines and increase their chances of survival in bad cycles. In the past 6 months, Iris Energy has reduced its average energy consumption by 15% to 25 J/TH, while TeraWulf's efficiency has increased by 11% to 24.6 J/TH. Core Scientific has also escaped bankruptcy marketing and currently leads with an efficiency of 24.23 J/TH.

But in any case, overall, the concentration of mining companies is an inevitable trend. In addition to seeking regional differences or improving efficiency to obtain lower costs, small and medium-sized mining companies have weak competitiveness in the long run. It is normal for the gradual increase in shutdown prices to trigger a wave of liquidation.

The industry is highly cyclical and the uncertainty of profit is increasing. Against this background, even the leading mining companies are trying to overcome difficulties through strategic diversification. Among them, some companies are inevitably planning to start a new business. The hot new star AI has become a forced landing place for mining companies eager to transform.

Unlike previous cycles, among the world's four largest mining companies, their stock prices have not outperformed the rise in Bitcoin this year, but the growth of medium-sized mining companies has been quite obvious. The core reason is the integration of the AI ​​wave. In recent months, many Bitcoin mining companies have begun to replace some mining equipment with equipment for running and training artificial intelligence systems.

As we all know, AI, especially the training of large models, is a scenario that consumes high computing power and high energy. However, before the emergence of GPT, data center operators and mining companies were not friendly to this business, believing that the business efficiency was not high enough. However, after the emergence of GPT, everything changed quietly. One striking data is that the energy consumed by ChatGPT queries is 10 times that of Google searches.

Based on this premise, AI companies began to seek warehouses with cheap energy and large computing power equipment. However, the approval of data centers is strictly regulated in all countries. For example, in North America, it may take several years from initial approval to completion of construction. There are very few sites with power exceeding 100 megawatts and high-voltage substation transformers in place. A few years ago, 80% of data center loads were focused on only 6 to 7 markets. However, Bitcoin mining companies with cheap electricity, suitable physical space and computing power infrastructure naturally meet this demand.

Mining companies have already started to enter this field by renting space equipment and operating their own computing power. Core Scientific, which had announced bankruptcy proceedings, signed a 12-year contract with artificial intelligence startup CoreWeave in June to provide more than 200 megawatts of GPUs. CEO Adam Sullivan said in an interview, "There are a lot of invitations from AI. AI companies are actively bidding and starting to subscribe to mining facilities at a price higher than the market price in the crypto field. After announcing the AI ​​infrastructure transaction, top private equity firms are also increasing their financing and cooperation intentions."

A typical example of self-operation is Hut 8, which received a $150 million investment from Coatue this year to build artificial intelligence infrastructure. It has previously purchased the first batch of 1,000 Nvidia GPUs and expanded the GPU-as-a-service model. Bit Digital is not to be outdone, saying it has reached an agreement with a customer to provide it with 2,048 Nvidia GPUs within three years.

Of course, even the transformation to AI is not as easy as imagined. Not all mines can be converted into compliant data centers, and more importantly, the cost of building or reusing data clusters to accommodate AI computing is not cheap. The capital expenditure required for AI operations is about 20 times that of Bitcoin mining. Therefore, as long as the mining business is profitable, small and medium-sized mining companies will continue.

But the effect of transformation is significant. Taking the above-mentioned enterprises as an example, Core Scientific expects to increase its estimated cumulative revenue by US$1.225 billion within the two-year contract timetable, and 6% of Hut 8's sales come from artificial intelligence, and Bit Digital's AI revenue has accounted for 27%. The expected benefits can also be seen in the stock price. Core Scientific stock price rose 25.33% in the past January, Bit Digital rose 31.25%, and Hut 8 soared 67.41% during the month.

Overall, whether it is active change or forced transformation, the defense battle of mining companies has just begun, and the acquisition wave is only in a very early stage. In the long run, given the cyclical nature of mining, diversified transformation to broaden income sources is the only way for mining companies. In addition, regarding the price impact brought by the halving, various signals indicate that surrender has come to an end. The relevant machine prices are strongly supported, and there is also ETF to absorb them. There is no need to worry about short-term adjustments. Obviously, the reason for the sharp decline is the limitation of market liquidity.

From an industrial perspective, the mining industry, which once occupied the top, has gradually moved away from the power center of encryption, and the richest people have also ushered in a transformation in their survival. Where will the layers of historical strokes eventually fall, and the context of encryption will continue.