As Bitcoin Falters, Crypto Miners Brace for a Crash

Last year, like the price of bitcoin has risen to $ 68,000, the miners were having a great time. Its profits, according to some estimates, were just under 90 percent, and many of them decided to expand their operations at a frantic pace, preparing for an even bigger bonanza in 2022.

That unexpected did not come. Over the past few months, cryptocurrency markets have plummeted, with the price of bitcoin at the time of writing. At the same time, the price of electricity has skyrocketed worldwide due to rising demand and the war in Ukraine. That’s a problem for bitcoin miners, who use energy-consuming mining computers, called ASICs, to coin cryptocurrency by solving complex mathematical problems. Energy can account for 90 to 95 percent of a miner’s overhead, according to Bitfury CEO Valery Vavilov in a 2016 interview with Reuters.

In some parts of Europe, energy tariffs have risen so dramatically that bitcoin mining can cost up to $ 25,000, says Daniel Jogg, CEO of Enerhash, a company that manages blockchain data centers. “Some operations worked without profit,” he says. Texas, a hotbed of cryptocurrency mining, has been dealing with an intense heat wave that has pushed the price of energy up 70 percent (from 10.6 cents to 18.4 cents per kilowatt hour) in the last twelve months. The United States currently accounts for 37.84 percent of global cryptographic mining activity, according to Cambridge University, following the 2021 mining ban on China’s former cryptographic power. “The problem now is the price of raw energy, but also the volatility of the price of energy,” says Alex Brammer, vice president of business development for cryptographic mining infrastructure company Luxor Mining. “It’s very difficult to model what energy prices are going to be.”

To this problem is added a growing number of miners who have joined the network since last summer, which in turn has reduced the individual production of miners. In short, miners are paying more for minting fewer bitcoins and their coins are less valuable. While miners continue to make profits, they are declining, says Sam Doctor, head of strategy for digital asset investment bank BitOoda, who estimates that margins are now between 60 and 73 percent. “Even miners who use newer mining platforms, which are conveniently profitable, are making less money than before,” he says. The oldest ASICs of the S9 generation, which still make up a third of the mining platforms in use worldwide, are no longer profitable in most cases, the doctor adds. “Now, with the rising price of energy, miners who do not have a fixed-price energy contract may be pressured on both sides.” The doctor says that most miners, including large mining companies, do not have such contracts, because to get one requires a “stronger credit” than most of them currently.

Despite the still staggering margins, the miners are at a difficult juncture. Most listed mining companies, including industry leaders Riot, Marathon and Core Scientific, have seen their market capitalization fall by more than 50 percent. Both Riot and Core Scientific lost their bullish revenue estimates and conservatively revised their expansion plans.

The fear is that if these negative trends are not reversed, this could be just the beginning of an industry-wide unrest. In the two years leading up to the crash, miners were struggling to buy ASIC cars to produce more bitcoins. The epitome of this shopping bonanza is Marathon, one of the top three U.S. miners. Which bought 78,000 ASICs from Bitmain in December. 2021 for a record $ 879 million; which came on the heels of another purchase of 30,000 Bitmain ASICs for $ 120 million in August 2021. Marathon’s plan was to run 133,000 platforms by the first half of 2022, but in May the company had only 36,830 ASICs operational, after facing installation problems. , adverse weather events at one of its Montana facilities and delays in obtaining a power contract with the Texas power grid. The value of inactive or yet to be delivered ASICs could soon fall below the price that Marathon – and other mining companies – paid for them near the peak of the bitcoin bull race, as ASIC prices are often correlated with bitcoin. Marathon spokesman Charlie Schumacher says the company has paid for most of its newer mining platforms “well below the current market rate,” except for state-of-the-art platforms like the 78,000 it ordered in December. He says Marathon’s “light asset model,” by which it partners with hosting services rather than building its own infrastructure, protects the company from the problems the industry is experiencing.

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