Author: James Butterfill, Max Shannon, Alex Schmidt, Satish Patel
Source: CoinShares
Translation: Shan Oppa, Golden Finance
Growth and sustainability issues: The Bitcoin mining network grew by 90% in 2023, raising questions about its environmental sustainability and profitability, especially the efficiency of the network and energy costs.
Mining dynamics and computing power trends: The "difficulty" adjustment mechanism of Bitcoin mining ensures the inelasticity of supply. After the halving, miners with higher costs may be in trouble due to reduced direct income. This paper evaluates the average production cost per Bitcoin after the halving, showing that the average cost is $37,856.
Improved efficiency of the mining network: Despite the increasing power demands of the network, there have been significant improvements in efficiency. Using random number data helps analyze the efficiency of different mining models. Currently, the network has an average efficiency of 34W/T, which is expected to drop to 10W/T by mid-2026.
Bitcoin Mining and Environmental Impact: Bitcoin mining typically utilizes stranded energy and is often located in remote locations. About 53% of Bitcoin mining energy is now sustainably sourced, Daniel Batten said. Bitcoin mining can significantly reduce emissions from natural gas burning, which is a major environmental concern.
Financial analysis of miners after halving: After the halving in 2024, the production cost and profit structure of miners will change . Our analysis focuses on the different cost structures of listed miners and their vulnerability to the halving.
Conclusion and miner positioning: Most miners will face the challenge of high SG&A costs and need to reduce costs to maintain profitability . If Bitcoin prices remain above $40,000, only a handful of miners are expected to be profitable.
Bit The coin mining network has experienced rapid growth, with computing power increasing by 104% by 2023. This rapid expansion has raised concerns about its sustainability, both from an environmental perspective and the profitability of the mining network. In this paper, we aim to address both of these issues. Listed below are the final results for the average production cost per miner after each Bitcoin halving, which highlights an average production cost of $37,856.
While Bitcoin mining has some similarities with traditional mining in that both consume energy to produce valuable assets, the similarities basically end there. . A unique self-regulating mechanism in Bitcoin mining known as “difficulty” adjustment ensures that supply remains strictly inelastic. At some point in the Bitcoin mining cycle, miners at the higher end of the cost curve will begin to suffer losses, and hashrate will begin to decline because the price increase is not enough to offset the increase in mining difficulty.
Whether the number of miners is 2 million or 2 million, the number of newly created Bitcoins remains the same until the next scheduled halving event. If the network's collective computing power increases significantly, the mining difficulty will adjust upward to maintain target productivity, thereby squeezing higher-cost miners out of the market. Our analysis focuses on the different cost structures of listed miners, and which miners are most vulnerable to the April 2024 halving.
In order to predict the future direction of computing power, our best way is to analyze historical patterns. Qualitative reasoning suggests that growth will be driven in part by Bitcoin’s price: a positive growth outlook may encourage miners to increase their computing power, deeming it profitable. However, this depends on assumptions about future prices.
A review of historical data shows that mining activity increased between halving events. However, because of its exponential growth, identifying a clear cycle is challenging – something we have already done some work on. Since computing power tends to be an unstable number, using deviations from historical data trends will produce more accurate results than purely qualitative methods. A key issue, however, is that most trend lines contain future information, meaning the trend lines we see today would have been different in the past. Therefore, the most reliable method is to calculate a trend line based on out-of-sample data that is not affected by future developments.
The data reveals an interesting regular pattern that occurs between halving cycles, indicating that from a historical perspective at this point in the cycle, the current hashrate peak is not Not uncommon. This trend is illustrated more clearly in the chart below, which clearly demonstrates the cyclical nature of these changes.
Since the first Bitcoin halving in 2012, and subsequent halvings in 2016 and 2020, a pattern has emerged of post-halving hashrate There is usually about a 9% drop from the trend line, which usually lasts about six months. 2020 was somewhat unique, as the period was significantly extended due to China’s mining ban, causing prices to fall 42% below the trend line. Still, this pattern typically involves an initial drop in hashrate, followed by a recovery midway through the cycle, followed by a surge in activity about a year before the next halving.
This cycle is logical: To remain competitive in anticipation of the halving, miners have increased capital expenditures, pushing hashrate significantly above trend. After the halving, miners’ direct income decreased, affecting their capital expenditure cycle. The current cycle is no different. It is worth noting that the peak in hashrate growth usually occurs about four months before the halving, which may be due to the "Bitcoin craze" that caused the mining difficulty to spike, which in turn forced out the miners and mining machines with higher production costs. The current mining difficulty is at an all-time high and is consistent with the “relative” peaks observed in previous cycles.
What is the future of Bitcoin’s computing power? Using historical trends as a guide, we might expect hashrate to return to the trend line around 450EH/s (exahash per second) by the halving in April 2024. After six months, it could drop further to 410EH/s. Thereafter, the trend line predicts a sharp increase in computing power to approximately 550EH/s by the end of 2024.
This halving may eliminate those at the higher end of the cost curve, giving those with ample liquidity the opportunity to purchase hardware at a discount. This scenario depends heavily on whether the price rises above the average cost of production per miner, and may require a significant price drop, or a significant drop in transaction fees, such as a drop in ordinal usage.
There are a variety of mining equipment currently used for Bitcoin , covering a range of power consumption levels, computing power and resulting efficiencies. Historically, this diversity has made it challenging to determine the overall effectiveness of mining fleets. Karim Helmy of CoinMetrics has conducted some noteworthy research using random number data for hardware fingerprinting. Without delving too deeply into the technical details, we found that each miner model leaves a distinct “steam trail” on the Bitcoin blockchain. This unique signature can then be analyzed to determine the distribution of different mining models within the network.
Since the efficiency of each mining model is measured in W/T (watts per terahash), the overall efficiency of the entire Bitcoin mining fleet can be calculated . Given the rather linear progression of this path, future trends can also be predicted. Currently, the network has a weighted average efficiency of 34W/T. Efficiency has improved by 8% this year alone and by 28% over the past three years. Based on these trends, it is expected that efficiency levels could be as low as 10W/T by mid-2026 as chip designs continue to improve and more efficient mining hardware comes online.
Bitcoin mining always pursues the cheapest energy, which often results in the utilization of stranded energy, i.e. energy that cannot be easily sold to the existing grid. Typically, this involves renewable energy projects located in remote areas. Therefore, there is a growing trend to use sustainably sourced electricity for Bitcoin mining operations. According to estimates by Daniel Batten, approximately 53% of the energy used to mine Bitcoin is now sustainably sourced. This ratio already exceeds that of the financial sector, which, as Daniel Batten points out, estimates that only about 40% of its energy consumption comes from sustainable sources.
Although computing power has increased significantly recently, in stark contrast, network efficiency continues to decrease (i.e. increase).
The new level of detail in CoinMetrics’ random number data means we can estimate annual electricity costs that are very close to Cambridge University’s estimates.
The data highlights that network power demand has reached a record high of 115 terawatt hours (TWh) on an annual basis, growing this year despite significant efficiency improvements 44%. However, this growth is relatively modest compared to the growth in computing power due to increasing efficiency.
Daniel Batten's study of the emissions intensity of the mining industry shows emissions have fallen significantly, although some of the data sources used are difficult to track. Since 2021, emissions have dropped from nearly 600 grams of CO2 per kWh to just 299 grams of CO2 per kWh. This decrease can be attributed to a significant increase in sustainable energy use, from 33% in 2021 to 52% today. This is reflected in part by the ERCOT (Texas) grid fuel mix, where a large portion of Bitcoin mining takes place, with the share of renewable energy in total energy production rising from 20% in 2017 to 20% in 2017, according to IEEFA. % to grow to 31 % in 2023.
As a recent BBC report highlighted In that way, natural gas flaring is becoming a growing problem. The report draws attention to the fact that oil drilling in the Gulf and the associated practice of burning excess natural gas poses a greater threat to millions of people than previously understood. While combustion is more environmentally friendly than emissions as it can reduce CO2 equivalent emissions by 92%, according to Mesa Solutions, its widespread use remains a concern. Images from SkyTruth dramatically illustrate the extent of this global problem, with yellow dots vividly marking areas of flare activity.
World Bank estimate , by 2022, approximately 139 billion cubic meters of natural gas will be burned globally. This amount is equivalent to the total natural gas consumption in Central and South America combined. According to Mesa Solutions' Data Currently, the traditional practice of burning methane results in emissions of 59 grams of carbon dioxide equivalent (CO2e) per 1,000 British Thermal Units (BTU). By comparison, using a modern turbine generator emits only 22 grams of CO2 equivalent per 1,000 BTU. This represents a 63% reduction in emissions and is three times more polluting than a gasoline-powered car.
The main challenge with flaring is that the energy it involves cannot be stored or transported economically, so it is often burned off. This often occurs in remote areas without access to power grids or pipelines. We believe that Bitcoin mining can significantly reduce emissions from combustion. This is because the mining hardware, as well as the necessary generators, can be packed in containers and run in these remote locations, far from established power grids.
Also, torch combustion usually Can lead to a higher incidence of methane leaks. This phenomenon occurs when a small portion of the natural gas fails to burn completely and escapes into the atmosphere, which is especially common in windy conditions. In contrast, turbines are known to have one of the lowest methane leak rates, significantly reducing the risk of such an event.
Currently, natural gas combustion emits approximately 406 million tons of carbon dioxide every year. However, if all the natural gas currently burned were used for Bitcoin mining, these emissions could be reduced to about 152 million tons of carbon dioxide. Since global flaring currently accounts for 1.1% of global CO2 emissions, Bitcoin mining could reduce global flaring emissions to just 0.41% of global emissions.
As of now, only about 120 megawatts (MW) of Bitcoin mining capacity are known to be harnessing energy from stranded natural gas. Therefore, if Bitcoin mining expands its use of this wasted flare gas, it has huge potential to significantly reduce global emissions.
In this research article, we The weighted average of production costs and cash costs for the third quarter of 2023 are estimated to be approximately $16,800 and $25,000 per Bitcoin, respectively. After the halving event, which is expected to occur in April 2024, these costs are likely to drop to $29,300 and $38,100 respectively. Riot looks best positioned to handle these changes thanks to its efficient cost structure and long runway. Our analysis of public and private miner financial statements assumes a Bitcoin price of $40,000, with much of the upcoming pain for miners likely stemming from bloated selling, general and administrative expense (SG&A) costs.
Our approach to financial analysis for the third quarter of 2023 includes the development of an adjusted consolidated income statement. The standardization applies to the mining operations of 14 miners, 13 of which are publicly listed entities, accounting for 21% of all Bitcoin mining power as of December 2023, and approximately 28% after the halving. The network hashpower is 450 EH/s. Our data for the third quarter of 2023 is primarily derived from publicly available information in SEC filings, website production reports or estimates when necessary.
Our approach includes:
Income cost represents self-mining income cost, mainly electricity cost.
SG&A eliminates non-cash expenses such as stock-based compensation, one-time payments.
Interest expense only considers debt interest and does not include lease fees or other financial charges.
After the halving event, the direct costs of production and operating breakeven changed dramatically, reaching $29,300 and $38,100 respectively. This change is the result of the block subsidy being halved. Our methodology for forecasting revenue and expenses is as follows:
Hashrate market share is disclosed by each company The pre-compute power determination, expressed as a percentage of our estimated 450 network EH/s at halving, is down about 10% compared to 500 EH/s.
Production costs are calculated using a bottom-up approach, including fleet efficiency, electricity costs, kilowatt-hours used (using 2023 Utilization was flat in Q3) and the number of Bitcoins mined.
Assume SG&A expenses remain consistent with Q3 2023 as the company's expenses are not expected to be material due to the halving Variety.
Interest expense is determined as the sum of the outstanding principal amount (amortized if possible) multiplied by the periodic interest rate.
Our comprehensive methodology ensures standardized and comparable financial analysis before and after the halving to effectively guide our operational decisions .
On average, every ten minutes, Bitcoin The network then has the miner correctly calculate ("guess") the hash (a pseudo-random 64-bit alphanumeric value) to generate a block, and the rest of the network verifies its correctness. Miners with more hash power (more rigs, resulting in more computing power) control a greater proportion of the network hash power and therefore have a greater chance of creating a block and receiving the block subsidy (currently 6.25 BTC, But will be halved in 2019) Around April 2024, due to the "halving", the price will be 3.125 Bitcoin) plus transaction fees. Miners are essentially in an arms race to buy and plug in as many machines as possible.
The more rigs a miner has for self-mining, the larger the megawatt data center required. This massive capital expenditure will either be funded by cash, equity, or debt, the latter of which could hurt miners' overall production costs through higher interest payments and put them at risk during a Bitcoin downturn. This is evident, for example, when Core Scientific entered Chapter 11 in late 2022, based on Q3 2023 filings, or when Mawson failed to pay its Marshall loan (these examples are not exhaustive).
Amount of Bitcoins produced per unit of miner Economic and cost structure is indispensable. For miners to achieve the same Bitcoin production as before the halving, they would need to double their market share, or the amount of fees collected each time considering the network hashrate has grown at a CAGR of about 53% over the past three years. , which is very challenging. Blocks need to fully compensate for the reduction in block subsidies caused by the halving.
The cost structure of a Bitcoin miner is a function of two inputs: energy and equipment. Public miners we track consume an average of 4.7 cents per kilowatt-hour of energy. This energy is purchased on the wholesale market, most likely in the spot or futures market, or negotiated with an energy supplier through a power purchase agreement (PPA) contract, which typically provides a fixed price for the energy but often also involves take-and-pay No terms negotiated. However, miners have more control over their machine fleets, and they are able to reduce energy bills by investing in more efficient machines that consume less power per hash.
Among the public miners we track, the efficiency of the entire mining fleet is also expected to drop from 29W/T to 26W/T at the halving. An example of how miners are upgrading their fleets to increase efficiency (i.e. lower W/T) can be seen in the latest machine deals from CleanSpark and Iris Energy, where each purchased a 4.4EH/s and 1.4EH/s Bitmain Antminer respectively. The S21 miner has an efficiency ratio of 17.5W/T and a price of approximately $14/TH (dollars per terahash).
The matrix below shows that although the T21 is a newer model, the S21 outperforms all other rig types in every power and hashrate price scenario, Because it has higher computing power (impacting revenue) and lower power consumption (impacting expenses).
The figure below shows the changes in fleet efficiency before and after the halving. Note that while most miners are improving their overall fleet efficiency (W/T), their direct cost structures are not improving. This is because, as mentioned earlier, miners need to increase their electricity and energy consumption to mine the same number of Bitcoins. Before and after the halving, the weighted average cost of electricity per Bitcoin accounted for approximately 68% and 71% of the cash cost structure, respectively, with small increases mainly attributed to slight increases in scale and energy prices.
We define runway as the cash and Bitcoin reserves miners can use to repay cash operations The number of days spent. There is no standard money management strategy across the industry. Some people accumulate as much of their output as possible, also known as "HODL," while others do not and choose to sell Bitcoin as they are produced. Well-capitalized miners with larger Bitcoin balances, such as Riot, may command higher equity premiums in a bull market. However, a combination of low runway and high cash costs puts miners like Stronghold at risk of a Bitcoin price downturn.
We believe Riot, Marathon, Bitfarms and Cleanspark are at the top of the halving Best location. One of the main problems faced by miners is the huge SG&A costs. For miners to break even, the halving may force them to cut SG&A costs, otherwise they may continue to lose money and have to liquidate their HODL balances and other liquid assets.
Note: Iris Energy and Cormint data are based on second quarter 2023 filings, management meetings and monthly production reports
Our analysis shows that Riot appears to be best equipped to handle the complexities of the halving event, mainly due to its longer runway , lower debt and power costs and selling and administrative expenses (SG&A). Much of the pain miners will experience is likely to stem from huge SG&A expenses that may need to be cut to remain profitable.
Overall, unless Bitcoin prices remain above $40,000, we believe only Bitfarms, Iris, CleanSpark, TeraWulf, and Cormint can continue to be profitable. All other miners will likely eat into their runway, ultimately forcing further share price dilution as they are likely to raise equity or convert debt.
Note: Iris Energy is based on Q2 filings, Cormint is based on Q2 data
Errata: Marathon's hashrate growth estimates and associated cash cost per Bitcoin were underestimated - revised to reflect 33 EH, lowering cash cost per Bitcoin to $43,370.
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