Author: Kunal Bhasin, CoinDesk; Translator: Deng Tong, Golden Finance
Bitcoin’s economic design forces miners to minimize costs as they undergo a stress test every four years with the halving. Miners seek cheap energy and therefore adopt two strategies: before connecting to the grid and after co-locating directly with generators.
The grid-connected model allows economies of scale because large-scale miners can obtain cheaper energy rates based on the size of the load they bring to the grid and participate in “demand response” and ancillary services, which are enabled by the interruptible nature of this type of computing.
The co-location model feeds on deadweight losses and energy supply and demand mismatches, targeting intermittent renewable energy sources (such as solar and wind) and baseload energy sources (such as hydropower, nuclear power, geothermal energy). Business models such as vertical integration, partnerships, and joint ventures are needed behind the meter to enable miners to participate in energy arbitrage and generate renewable energy certificates (RECs).
Hash Rate as a Commodity
Bitcoin hash rate, the computing power that secures the Bitcoin network, is emerging as a unique commodity with compelling investment potential. Its fungibility, divisibility, durability, and scarcity make it an attractive asset class.
Hash rate provides investment opportunities for individuals to participate in Bitcoin mining without owning the hardware.In addition,derivatives can hedge against price volatility, providing risk management tools for miners and investors.The value of hash rate is tied to the demand for Bitcoin mining, is affected by Bitcoin prices and mining profitability, but is susceptible to regulatory challenges. Despite these challenges, there is a compelling case for Bitcoin hash rate as a new commodity with unique investment and trading opportunities. As the Bitcoin ecosystem develops, the role and importance of hash rate as a tradable asset is likely to grow, attracting further attention and innovation from the capital markets.
Hash Price vs. Hash Cost
Hash price and hash cost are key metrics that influence the Bitcoin mining landscape. Although often confused, they represent different aspects of mining profitability.
Hash price, or the price per unit of hash power, reflects the current market value of mining computing power. It is calculated by dividing the total daily mining revenue by the network hash rate. The higher the hash price, the more profitable the miner.
Hash cost represents the cost of producing one unit of hash power, including expenses such as electricity, hardware, and maintenance. A lower hash cost means a more efficient and profitable mining operation.
The difference between hash price and hash cost determines mining profitability. When hash price exceeds hash cost, miners can earn a profit. Conversely, when hash cost exceeds hash price, they operate at a loss. High hash price attracts more miners, which increases competition and can drive down hash price. Conversely, low hash price can discourage miners, causing network hash rate to drop and potentially driving up hash price.
The availability of ASICs also affects the relationship between hash price and hash cost. These mining machines and current kW/h wholesale electricity prices drive up network hash rate, which increases mining difficulty. In places where ASICs are less readily available, hash power becomes more valuable, so the difference between hash price and hash cost should widen, creating profitable opportunities for miners.
Understanding the relationship between hash price and hash cost is critical for miners to make informed decisions. The difference between hash price and hash cost also affects miners’ ability to raise funds. Miners’ goal is to reduce hash cost to improve profitability, which affects their ability to raise funds. A small hash price-hash cost gap makes miners vulnerable to factors in Bitcoin price, such as energy costs and mining difficulty. Conversely, a larger gap indicates greater resilience. Lenders assessing the risk of lending will scrutinize this gap, putting pressure on inefficient miners seeking funding because they prefer low risk-reward.
For example, Runes, a recently released Bitcoin way to create non-fungible tokens, temporarily increased Bitcoin block space demand, resulting in higher transaction fees and longer confirmation times. During this period, hash price futures traded in positive divergence with spot prices, indicating to the market a high probability of increased future block space demand.
This situation prompted Bitcoin miners to sell hash price futures to lock in future revenue; a decision that proved to be a wise one as block space demand cooled after the halving. The availability of products pegged to hash rate now also provides more financial data points to predict the impact of network events on block space demand and transaction fees.
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