Mining Bitcoin in winter

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Bitcoin farm in russia

Some of you are developing an allergy to the color red. The more you check your wallet, the worse it gets. We feel you, but think of those who have invested millions in bitcoin mining hardware (rigs) and end up mining bitcoin in winter…

 

Last year, bitcoin mining was shaken by a mining ban in China, the biggest miner at the time. Now the mining world is in turmoil again because of high energy costs and falling crypto prices.

 

What is bitcoin mining ?

Mining a Bitcoin means creating a block in the blockchain to ensure the integrity of the network.

 

A block has a maximum size of 1mb, so not even one picture of your phone.

You need to solve a “puzzle” to create a new block and you’ll get 6.25 Bitcoins in reward for your work.

 

All miners are competing to “solve” the puzzle of the block, and the network currently allows the creation of 900 Bitcoins per day.

 

Every four years, the mining reward is divided by 2 (an event called “the halving”)
Today you get 6.25 Bitcoins per block, in 2024 you’ll get only 3.125, in 2028… until 2140.

 

In order to keep the same Bitcoin production, the network adapts the mining complexity every two weeks.
The more miners you have, the more complex (and expensive) it becomes.

Complexity can also decrease. For example the medium mining price dropped from $24 000 in June to $13 000.

 

Only 21 million Bitcoin can be mined. Forever.

19 million were already mined, but between 2.7 million and 3.8 million have been lost.
Some guys never recover losing hard drives worth hundreds of millions… Like this guy who threw away 7 500 Bitcoins by mistake.

Oopsy Daisy.

 

The bitcoin mining business model

The biggest expense for miners is electricity, representing more than 90% of the total cost.

What started as a side hustle for some geeks is now a big industry.

The mining started in a garage, generously pumping the parents’ or neighbours’ electricity.

Now huge companies mine, directly negotiating electricity prices and even buying power plants.

 

In the beginning, companies would sell their Bitcoin when mined to pay for the operations.

However, the model changed as cryptos democratized and businesses had access to more and cheaper capital.

Cheaper capital meant that they did not have to sell the Bitcoin mined. They could keep it and burn investors’ money, or take loans backed by Bitcoins.

 

The idea is: you get cash and keep your Bitcoin, so if the price is stable, you can pay easily, if it goes up, you make more money.

If it goes down…

You better not be the last one selling your Bitcoin.

 

To prevent such scenario, some miners are betting against Bitcoin price drops with financial derivatives. Another gamble to protect you from the first.

 

To give you some numbers, below a table from Arcane Research showing the rates of Bitcoin mined vs sold.

Bitcoin mining vs keeping

Mining profitability is impacted by three main factors :

  • Bitcoin price
  • Electricity price. For example, older rigs aren’t profitable at more than 5 cents / kWh. Newer rigs could absorb the next halving and still be profitable with electricity being at 8 cents (with a bitcoin price around $30 000).
  • Mining difficulty, the less miners or mining rigs connected, the more profitable you are.

 

Side note here, during the pandemic and the chip shortages, profits were at record highs. Bitcoin price was up, energy price plummeted on anticipation of recession and no one could buy new rigs because of the chips.

 

Another business model that has developed is mining hosting. For example, Compass Mining allows you to buy a rig and they manage it. The mined Bitcoins belong to you.

Other Bitcoin numbers

  • In 2019, 75% of the Bitcoins were mined in China. Now China has only 21% of mining capacity.
  • The US is now the first mining country with 37.5%.
  • Bitcoin production in the US is consuming as much as Huston.
  • Worldwide consumption in 2021 was 127 TWh. That’s more than all of Norway’s electricity consumption.
  • In the US, Bitcoin mining is responsible for price increase of electricity of 6%. Democrats want to implement more control on the amount of electricity miners consume.
  • Marathon Digital Holdings, one of the largest mining companies has now 33 000 rigs and plans to have around 200 000 rigs within two years. They currently run their mining farms thanks to coal power plants…