The “ASIC funding” is reducing the profitability of Bitcoin mining

Profits from bitcoin mining hit rock bottom in 2020.

For much of the year, the cryptocurrency was less profitable than ever. And that’s because Bitcoin’s collective hashrate – or how much computing power is pulsing through the network – has risen to consecutive all-time highs this year.

Learn more: how Bitcoin mining works

According to the hashprice index of the North American Bitcoin mining company Luxor, miners are mining $ 0.096 for every terahash they produce (before the recent price spike, it was still less than around $ 0.08). This time, three years ago, miners could expect to earn around $ 1.40. Their revenue in October 2019, while several sizes smaller than what they were reaping during the 2017 market craze, was still double today’s cash flows at $ 0.16.

In 2020, miners were producing around 90 hexhashes per second (or 83,000,000,000,000,000,000 crypto numbers per second in an attempt to generate new blocks). They are now producing around 124 EH / s, after hitting an all-time high of 157 EH / s in mid-October.

Bitcoin mining is a war of attrition for resources, so of course profit margins are shrinking in a year when Bitcoin’s hashrate is exploding. And ASIC funding could be largely to blame.

The practice, whereby large companies can take out loans to bulk order next-generation hardware, floods the network with a new hashrate. The rise in hashrate has meant more competition than ever for the digital gold rush, and with fewer bits to go, small-scale miners have trouble keeping up.

Luxor Mining pool operator Ethan Vera told CoinDesk that the anemic miner’s revenue is a direct result of Bitcoin’s growing hashrate, its relatively stagnant price, and lower than usual transaction fees.

According to the Luxor index, the 7-day hashrate average currently stands at 124 exahash per second, and Vera said this “is largely due to the fact that Bitmain S19 and Whatsminer M30 are being delivered to the market in large quantities” .

Read More: Bitcoin Miners’ Revenue fell 11% in September

It is not unusual, of course, for miners’ revenues to decline as the hashrate is going vertical. But the stellar rise in Bitcoin’s hashrate in 2020, an increase of nearly 30% this year, is the result of accelerated investments in the sector. Much of this growth comes from ASIC funding, where miners take out loans to purchase the best next-generation mining equipment.

Luxor Mining Hashprice Index: source

The mining finance sector, populated by key players such as Blockfills, Arctos, BlockFi, SBI, DCG and Galaxy Digital, continues to grow. Increased competition has led to lower rates, Vera said, with some miners able to guarantee loans at less than 10% interest. Just a year ago, the common rate was 20%.

“A number of North American companies have recently been in the news for large hardware purchases, most notably RIOT Blockchain and Bitfarms. Foundry has also recently popped up and offers funding options for ASIC miners, ”Thomas Heller, COO of mining media company HASHR8, told CoinDesk.

More recently, CoinDesk reported Marathon Patent Group’s purchase of 10,000 Antminer s-19s, which could pump an estimated 1.1 foreclosures into the mining company’s operations. This is Bitmain’s second wholesale Marathon purchase this year after raising 10,500 ASICs for $ 23 million in a deal with Bitmain this August.

Stephen Barbour, whose company Upstream Data supplies mining rigs to oil drillers that run on ventilated natural gas, sees this as detrimental to the short- and short-term health of Bitcoin mining. In some cases, he told CoinDesk, big players aren’t always optimized for profitability because they have financial pillows.

“These guys can rent an old mine, trade at a loss, and then recapitalize,” he told CoinDesk, referring to these companies’ abilities to take out new loans or woo new investors when they need to bolster the finances.

A look at one such company, RIOT Blockchain, takes stock of Barbour. The publicly traded company bought thousands of ASICs this year in a herculean (albeit quixotic) effort to quadruple its hashrate by 2021. As of June 2020, RIOT posted net operating losses of nearly $ 15 million, according to statements. of the SEC. RIOT posted a similar loss in the first half of 2019 and Marathon reported losses of $ 3.2 million in the first half of 2020.

Northern AG, another publicly traded mining operation, reported net income of – $ 8.7 million in 2019 and – $ 5.6 million in 2018. Even profitable ones, such as public industrial miner Hut 8 himself, have barely made a profit in 2019: After generating $ 83 million in revenue, Hut 8 pocketed just $ 2.1 million after debt obligations and other expenses.

Regardless of profit, these miners continue to expand in hopes of future loot, but this very business is sending Bitcoin’s hashrate skyward, Barbour argues.

“These guys can get these big loans and they’re actually operating at a loss, and it’s backing the hashrate.”

As these large Bitcoin mining companies scale regardless of profit, Bitcoin’s hashrate pumps and smaller players find it difficult to keep up with the stiff competition.

“It is becoming increasingly difficult for small miners to compete for both hosting and hardware purchases, because lower prices are available for higher volume orders,” Heller said.

Vera said: “There is still a large retail market in China that can access energy of less than $ 0.04 cents during the rainy season in Sichuan Province. But outside of China, mining al detail has decreased significantly “.

That rainy season, which provides cheap gushes of energy to Chinese miners, is coming to an end, and with it, Bitcoin’s hashrate has taken a 12% hit at 124 exahash. Heller said this decline, which occurs every year, will be “only temporary” as older machines migrate to areas such as South America, Kazakhstan, Russia and Iran.

Read more: Iran is ripe for Bitcoin adoption, even as the government opposes mining

The miners who buy these platforms don’t care about profit, says Vera. “They have other reasons,” he said, “such as avoiding capital controls or avoiding sanctions.”

For others looking to make a profit, bitcoin’s recent price hike to $ 13.6K will help a little, and further upward price action would broaden these miners’ profit margins.

The price may only be part of the solution, though; addressing the competitive discrepancy may also require new market tools to shift hashrate distribution. At least, that’s the idea behind Compass, a HASHR8 service that pairs retail miners with mining farms to house their equipment. Compass wants to make it easier for these miners to find a facility, thereby lowering the barrier to entry to the process and (hopefully) finding the cheapest setups for individual miners.

Something like Compass can help smaller miners get into the game. Or maybe the problem will resolve itself when the market does its thing.

“I think in the long run you will see more of these huge operations fail,” Barbour told CoinDesk.

A pumping hashrate is always “a terrible thing for miners,” Barbour said, and it might be a little worse for little boys, considering “they don’t have the advantage of economies of scale like older kids do,” Barbour continued. .

But that doesn’t mean it’s easy for big players either. After all, more hardware means more operating overhead, plus a mountain of debt to pay for funded ASICs.

To sum up the situation with an idiom, the bigger they are, the harder they fall. And Barbour thinks the time of the mining giants is coming.

“I think all these funded operations are part of what I call the ‘discovery phase’ for this industry. I think we will see more in the short term, but they will struggle in the long term and I think their operations will break and shatter. “

He went on to say that unlike small mining operators like him who have their “skin in the game”, these funded operations were launched on someone else’s back. While this doesn’t guarantee that these businesses will be run despite the profits, it does mean that traders have less at stake than their small business counterparts.

Read More: Marathon Brings New Bitcoin Mining Facilities Online, See Itself Become Cash Flow Positive

However, Vera stressed that not all of these deals are created equal and that the likelihood of success “depends on the interest rate and operating cost of the loan.” He added that interest rates around 10% are likely to be favorable for some of these miners, while any higher loans could be unsustainable.

For those businesses that aren’t profitable, however, you may be wondering why they are operating. Barbour told CoinDesk that they are essentially “speculating [the price ripping upward]”; they have ordered all this next-generation hardware to anticipate the bull run and are betting that this race will come as soon as possible.

Again, however, it could all boil down to a pending friction game, Barbour says, and price may not matter much in the long run. Per Moore’s Law, which states that computer processing improves exponentially, ASIC mining hardware will continue to improve towards maximum efficiency.

In the end, Barbour argues, next-generation things won’t be much more efficient than the older generation, so miners who can order machines in bulk won’t have an edge. As miners continue to seek out cheaper and near-free electricity, Barbour believes the mega-operations will eventually be discounted because the benefit won’t be there to justify using the capital.

“They’d better buy bitcoin … Whenever there is a push for cheap power, it reduces profitability for everyone. It’s a race to zero,” Barbour said.