Bitcoin Mining Is About to Get Tougher With Difficulty Primed for Another Sharp Rise
Miners with higher cost and large debt load will be weeded out by the crypto winter, according to industry experts.
Bitcoin miners are about to face another tough challenge in an already depressed market as the difficulty of mining a bitcoin (BTC) block is set to see another large increase early next week, weighing further on profit margins.
The metric adjusts automatically to keep the time required to mine a bitcoin block to roughly around 10 minutes, depending on the network hashrate, that is, amount of computing power committed to mine and secure the Bitcoin blockchain. The higher the hashrate, the higher the difficulty, which lowers miners' profitability.
Bitcoin miners are about to face another tough challenge in an already depressed market as the difficulty of mining a bitcoin (BTC) block is set to see another large increase early next week, weighing further on profit margins.
The metric adjusts automatically to keep the time required to mine a bitcoin block to roughly around 10 minutes, depending on the network hashrate, that is, amount of computing power committed to mine and secure the Bitcoin blockchain. The higher the hashrate, the higher the difficulty, which lowers miners' profitability.
Margin squeeze for bitcoin miners
It's no secret that the bear market has been rough for the miners, who have seen profit margins shrink as bitcoin prices plunged more than 50% this year, while power prices soared and capital dried up. The shares of publicly traded bitcoin miners have fallen more than 70% this year, on average, according to FactSet data. Meanwhile, one of the largest bitcoin mining data centers, Compute North, filed for bankruptcy last month, citing the severe bear market, supply issues and trouble with its largest lender.
The pain is likely to be exacerbated for the industry from higher network hashrate and difficulty. “With hashprice hovering around the $80/PH/Day range, this difficulty increase will be painful for miners, dropping their revenue by an additional 10%+,” said Vera. The hashprice refers to a metric coined by Luxor that measures revenue per terahash of computing power for miners.
“If hashprice continues to decline, either through difficulty increases or falling bitcoin price, we will likely see some more distressed situations come to market in Q4,” Vera added, noting that miners with high debt load and costs are at most risk in this environment.
However, it's not all doom and gloom. With weaker miners squeezed out, the survivors are set to thrive, according to Chris Brendler, an analyst at Wall Street investment bank DA Davidson. “Miners with higher power costs, less efficient operations, and/or leverage have underperformed while the strongest positioned are set to thrive as the "crypto winter" is already squeezing out disadvantaged players,” said Brendler.
“Although cooler fall weather has recently sent the network hashrate to all-time highs, we're confident this spike is unsustainable without a materially higher BTC price,” he added.
It's no secret that the bear market has been rough for the miners, who have seen profit margins shrink as bitcoin prices plunged more than 50% this year, while power prices soared and capital dried up. The shares of publicly traded bitcoin miners have fallen more than 70% this year, on average, according to FactSet data. Meanwhile, one of the largest bitcoin mining data centers, Compute North, filed for bankruptcy last month, citing the severe bear market, supply issues and trouble with its largest lender.
The pain is likely to be exacerbated for the industry from higher network hashrate and difficulty. “With hashprice hovering around the $80/PH/Day range, this difficulty increase will be painful for miners, dropping their revenue by an additional 10%+,” said Vera. The hashprice refers to a metric coined by Luxor that measures revenue per terahash of computing power for miners.
“If hashprice continues to decline, either through difficulty increases or falling bitcoin price, we will likely see some more distressed situations come to market in Q4,” Vera added, noting that miners with high debt load and costs are at most risk in this environment.
However, it's not all doom and gloom. With weaker miners squeezed out, the survivors are set to thrive, according to Chris Brendler, an analyst at Wall Street investment bank DA Davidson. “Miners with higher power costs, less efficient operations, and/or leverage have underperformed while the strongest positioned are set to thrive as the "crypto winter" is already squeezing out disadvantaged players,” said Brendler.
“Although cooler fall weather has recently sent the network hashrate to all-time highs, we're confident this spike is unsustainable without a materially higher BTC price,” he added.