In this article, we would like to explore the economics of bitcoin mining and help you better understand this industry.
Firstly, here is the simple economics of a bitcoin mining company:
Mining Companies' Profit =
(Block Rewards + Transaction Fees) - (Electricity Costs + Mining Equipment Costs)
On the revenue side, the block rewards (subsidy for miner to secure the Bitcoin network) & transactions fees are largely dependent on the hash rate (computing power) each mining company controls. The more hash rate you control, the more bitcoin rewards you will likely produce.
This has led to an arms race among mining companies to acquire the most advanced mining equipments especially after each bitcoin halving event. A halving is when the Bitcoin network reduces its block reward by 50% every 4 years. The last halving took place on 19 April 2024, reducing the reward from 6.25 BTC to 3.125 BTC per block.
As of 31 May 2024, the total hash rate of the Bitcoin network stands at 595 EH/s. The largest bitcoin mining company Marathon Digital (symbol: MARA, marketcap US$5.3bn, ADTV US$47.5mn) controls 29.9 EH/s (as of 30 April 2024), accounting for only 5% of total bitcoin's hash rate, suggesting the bitcoin mining is a highly fragmented.
Source: The Block, CoinMetrics
On the cost side, electricity accounts for approximately 70% of total cash-cost, on weighted-average basis. Securing cheap energy is critical for mining companies' profitability. The average electricity price for mining farms globally currently sits at below US$0.08/kwh, however mining operations located in areas with abudant energy supply such as Texas or Russia can access electricity as low as US$0.02~0.03/kwh, leading to significant cost savings.
Regarding to the mining equipment, there are several key suppliers in the market including Bitmain, MicroBT, Canaan (Symbol: CAN, marketcap US$297.5mn, ADTV US$10.5mn), Innosilicon etc. The performance of each model is measured by hash rate (computing power) and energy efficiency.
Below are the top 10 most profitable bitcoin mining machines at an average electricity cost of US$0.06/kwh. Bitmain's Antminer S21 series and MicroBT's Whatsminer M66S models have topped the list, indicating an average mining cost of US$32-36K per bitcoin vs. industry average of US$45-50K.
Source: hashrateindex.com/rigs
Mining equipment suppliers typically launch new, more powerful models ahead of each bitcoin halving event. The new models are sold through a mix of spot and forward contracts. Securing spot machine allocations depends on the strength of a miner's relationship with suppliers and their financial resources. In some cases, suppliers may also provide payback period guarantees for their long term clients.
After installing the mining machines in the farm, active management of the fleet is crucial. Unlike traditional natural resource miners who must keep operations running even in unfavorable market conditions due to high fixed cost, bitcoin mining farm operators enjoy greater flexibility. As Bitcoin mining is essentially operating a data center full of ASIC computing machines, which can be easily switched on and off as needed.
The average lifespan of the bitcoin mining machine is around 4 years, matching the 4-year bitcoin halving cycle. When bitcoin pricedrops below mining cost, miners can simply turn off the machines and sell the ASIC chips, or graphic cards on the secondary market. Cnversely during the late stage of bull market when mining demand is high, skillful miners may choose to sell the machine at higher price than the acquisition cost to capture the full upside of the cycle before exiting ahead of a potential bear market comes.
Source: hashrateindex (Antminer S19 price trend)
Additionally mining operators can dynamically manage their operations based on energy pricing. During peak consumption seasons, they may also choose to temporarily turn off the data center, and sell their pre-secured cheap energy at much higher market rates to make short term profit.
Overall, the flexibility and dynamic management capabilities of bitcoin mining operations are a key advantage over traditional mining industries. Experienced miners can capitalize on market cycles and energy price fluctuations to optimize profitability, making bitcoin mining a highly adaptable business model.
Last but not the least, regulatory risk is one of the key factors that mining companies closely monitor. A prime example is the 2021 crypto mining ban implemented by Chinese government, which forced Chinese miners to hastily relocate their equipment to overseas facilities. More recently, during Canaan 's Q1 2024 investor call, the management discussed their decision to exit Kazakhstani market after the local government changed the bitcoin mining policies, resulting in a doubling of electricity cost for miners, and a requirement to sell all mined bitcoins through designated exchanges. As a result, more and more miners are eyeing the North America market where the government policies are more consistent.