Text size
Miners seem to use less power to produce cryptocurrencies.
Mark Felix / AFP via Getty Images
Bitcoin
Miners have come under pressure from a one-to-punch of rising energy costs and falling token prices, but they can finally take a break. The problem is that it can come at the expense of Bitcoin prices.
Miners, who form the bedrock of the Bitcoin universe, draw huge amounts of energy to produce the currency, keeping blockchain transactions secure and running smoothly. In turn, they are rewarded with tokens they can sell or keep.
It can be a very lucrative business in a beef market. Miners laughed in November 2021, when Bitcoin traded at a record high of $ 69,000. Eight months later, the crypto market crashed: Bitcoin was below $ 20,000 on Thursday.
Energy prices are skyrocketing, contributing to the highest inflation in four decades, so the Bitcoin mining business is suddenly much more difficult. Many miners now sell most, if not all, of their tokens to cover operating costs or to repay debt – far from the usual strategy of hoarding Bitcoin on the balance sheet in the recent bull market.
Shares of listed crypto miners have almost collapsed.
Argo Blockchain
(ticker: ARB.UK) the share has lost more than 60% this year.
Riot Blockchain
(RIOT) and
Digital Marathon
(MARA) has each retreated almost 80%.
But if Bitcoin miners are anything, they may be adaptable. At the very least, they seem to be getting more efficient.
“The struggle for survival among Bitcoin miners has induced an increase in mining efficiency and as a result a reduction in Bitcoin’s production costs,” analysts led by Nikolaos Panigirtzoglou at
JPMorgan
wrote in a note Wednesday.
The team of analysts at the bank estimates that the average production cost of Bitcoin – a key factor in miners’ profit margins, along with symbolic prices – has fallen sharply in the past month. The cost of extracting a single Bitcoin was around $ 20,000 in early June, $ 15,000 at the end of last month, and is currently around $ 13,000, analysts said.
The decline in production costs comes almost exclusively from electricity consumption, according to analysts. They cite the Cambridge Bitcoin Electricity Consumption Index, which shows a clear drop in network demand over the past month and a half.
The dynamics of power demand and Bitcoin’s hashrate – the computing power used in the mining process – are in line with “a strong effort by miners to protect their profitability by distributing more efficient miners rather than a mass exodus of less efficient miners,” the Panigirtzoglo group said.
But it’s not just good news.
“While it clearly helps miners’ profitability and potentially reduces the pressure on miners to sell Bitcoin holdings to provide liquidity or to reduce borrowing, the decline in production costs may be perceived as negative for the bitcoin price outlook going forward,” said analysts at JPMorgan.
Why? The production cost of Bitcoin is seen by some market participants as the lower edge of Bitcoin’s price range in a bear market. And Bitcoin is deep in a bear market, having reached the worst quarter since 2011 – a year in which it took $ 1 for the first time. Still, a move down to $ 13,000 will still be more than a third fall from current prices.
However, there are reasons to believe that the acute pressure on digital assets may be nearing an end – although the cryptocurrency’s correlation to equities may keep prices below par.
The recent fall in prices has been exacerbated by cracks in the crypto industry itself, including the meltdown of stablecoin Terra and the failure of the hedge fund Three Arrows Capital. On Wednesday, the controversial major cryptocurrency lender Celsius Network said it had filed for Chapter 11 bankruptcy while trying to restructure.
“We believe the next 3-4 weeks are critical for the space as the settlement in the crypto markets has seriously affected loan / lending companies in the area,” John Todaro, an analyst at Needham, wrote in a note on Wednesday.
“As the weeks go by, we believe that the risk of infection decreases considerably,” Todaro said. “In addition, our analysis indicates that a large part of the influence has now come out of the crypto ecosystem.”
Write to Jack Denton at [email protected]
