While Bitcoin’s price has dropped to around $20,000 from the all-time highs of $69,000, mining difficulty hasn’t dropped much. During the same time, mining revenues have also fallen to $18 million from the peak of $62 million.
The anomaly is because miners have refused to cease operations, keeping the computing power intact.
But why?
Bitcoin Mining Economics
Bitcoin mining is profitable only when the mining costs remain below the value of BTC rewards. The Bitcoin hash rate – a measure of total computing power or calculations made each second on the network – depends on several factors and helps in determining mining costs.
As more miners enter the networks, the protocol automatically adjusts every two weeks to make the calculations more difficult, thus, increasing the hash rate. Miners must bring in more efficient systems and electricity to achieve the same output. These conditions result in increased costs.
When some miners or computation power leave the network, the hash rate and difficulty fall. With the reduced network load and hash rate drop, the electricity consumption drops as fewer machines are now required. Costs start moving downwards as well due to less electricity expenditure.
Therefore, the lesser the competition or the number of miners in the network, the more the profit.
The correlation between hash rate and energy use make hash rates a good indicator of costs. In addition, other factors like GPU efficiency, location, maintenance, electricity rates, and scale all play a role in determining overall costs.
However, the costs were justifiable when Bitcoin was trading above $50,000. With the fall in price of Bitcoin, the value of BTC rewards for miners has plummeted.
Leveraged Mining
One of the factors that have substantially increased costs is debt. When Bitcoin was at its peak, miners used their BTC and mining equipment as collateral to finance high-interest loans. An estimated $4 billion of these loans have been given out.
Babel Finance, Foundry Networks, BlockFi, and many more readily dispatched loans with mining rigs as collateral.
Publicly listed firms have borrowed around $2.16 billion in loans, including a credit line of$37 million secured by Bitfarms.
Financing pressures mining operations as interest payments eat up the…
