Miners have been under pressure from the one-two punch of rising energy costs and falling token prices, but they may finally be getting a break. The problem is that it may come at the expense of Bitcoin prices.
Miners, who form the foundation of the Bitcoin universe, take enormous amounts of energy to generate the currency, keeping blockchain transactions secure and running smoothly. In return, they are rewarded with tokens that they sell or keep.
This is the most profitable business in a bull market. Miners were smiling when Bitcoin traded at a high of $69,000 in November 2021. Eight months later, the crypto market has collapsed: Bitcoin fell below $20,000 on Thursday.
Energy prices are soaring, contributing to the highest inflation in four decades, so the bitcoin mining business is suddenly more tactful. Many miners are now selling more of their tokens to cover operating costs or repay debt—a departure from the usual strategy of hoarding bitcoin on the balance sheet during the last bull market.
Shares of publicly traded crypto miners have fallen.
(ticker: ARB.UK) stock has lost more than 60% this year.
( MARA ) each retreated about 80%.
But if Bitcoin miners are anything to go by, they can adapt. At least, they seem to be becoming more effective.
“The fight for survival among Bitcoin miners is increasing mining efficiency and resulting in a decrease in Bitcoin’s production costs,” said analyst Nicolas Panigirtzoglou.
wrote in a note on Wednesday.
The bank’s team of analysts estimates that Bitcoin’s average production cost is a major factor in miners’ profit margins, with token prices falling sharply over the past month. The cost of mining one bitcoin was around $20,000 in early June, $15,000 by the end of last month and currently $13,000, analysts said.
According to analysts, the decline in production costs comes entirely from electricity consumption. He cites the Cambridge Bitcoin Power Consumption Index, which shows a clear drop in network demand over the past month and a half.
The dynamics of electricity demand and bitcoin’s hashrate—computational power used in the mining process—”are consistent with a strong effort by miners to protect their profitability by deploying more efficient mining rigs rather than a mass exodus of less efficient miners,” the Panigirtzoglou group said.
But it’s not all good news.
“While clearly helping miners’ profitability and reducing pressure on miners to sell bitcoin holdings to increase liquidity, a drop in production costs could be perceived as negative for bitcoin’s price outlook,” analysts at JP Morgan said.
Why? Bitcoin’s production costs are viewed by some market participants as the bottom end of Bitcoin’s price range in a bear market. And bitcoin is deep in a bear market, having its worst quarter since 2011 — the year it broke $1 for the first time. Yet a drop to $13,000 is a drop of over a third from current prices.
However, there are reasons to believe that the intense pressure on digital assets is nearing its end – the correlation of cryptos to stocks could put prices under the gun.
The recent decline has been exacerbated by fissures in the crypto industry, including the meltdown of stablecoin Terra and the failure of hedge fund Three Arrows Capital. On Wednesday, major crypto lender Celsius Network said it has filed for Chapter 11 bankruptcy as it seeks to restructure.
“We believe the next 3-4 weeks will be critical for the space as the unraveling in crypto markets has severely impacted lending/lending companies in the space,” John Todaro, an analyst at Needham, wrote in a note on Wednesday.
“As the weeks progress, we believe the risk of contagion will decrease substantially,” Todaro said. “Furthermore, our analysis indicates that much of the leverage has now moved out of the crypto ecosystem.”
Write to Jack Denton at [email protected]