Is It Still Profitable? Bitcoin Mining Economics Explained - Aliens: AI Crypto News & Markets Updates
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Is It Still Profitable? Bitcoin Mining Economics Explained

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Blockworks

Fri, Jul 01, 2022

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Public miners sold more than 100% of their production in May, with many citing debt servicing and increased expenses Bitcoin miners are generally considered to be the most committed hodlers because their business model relies on bitcoin remaining an appreciating asset Bitcoin’s bear market has put intense stress on mining profitability.

That’s because miners haven’t stopped or slowed down production — when the network increases total computing power, the protocol makes mining more difficult and thereby expensive.

The fact that many miners are selling BTC at a low is a good indicator that costs are too high.

Bitcoin miners are generally considered to be the most committed hodlers because their business model relies on BTC remaining an appreciating asset.

For example, miners took major profits when bitcoin was on its bull run during the winter and spring of 2021.

But it isn’t necessarily a sign of capitulation — when miners go out of business, exit the network and sell their bitcoin.

To understand how and when miners are forced to capitulate, we need to explain hash rate mechanics and its role in determining bitcoin mining costs.

Because hash rate correlates with miners’ energy use, it provides a rough indicator of total cost.

So even if a calculator states that miners can make a profit at a specific bitcoin price, hash rate and kilowatt price, it doesn’t factor in loan servicing.

For deeper analysis into Bitcoin’s hash rate and financial news concerning public miners, check out our full report by Ryan Swanson on The State of Bitcoin Min(ing) .

Many miners took out substantial loans during the last bull cycle to finance the expansion of their mining operations.

So if miners are struggling to service their loans, they could be forced to liquidate their bitcoin and hand over their machines to the lender.

The miners’ payment problems put pressure on lenders’ balance sheets, but miners also risk losing their deposited BTC collateral.

The fragility of some lenders’ balance sheets means they also need the miners to stay in business so they can continue making loan payments.

But by keeping unprofitable miners in business, some speculate this act is effectively keeping the Bitcoin hash rate artificially high, meaning the cost of mining bitcoin does not drop to an affordable level.

Despite unusually heavy bitcoin selling from miners in May and June, the hash rate reached an all-time high of 266 million terahashes per second on June 7, according to Blockchain.com, and is just over 208 million at the time of writing.

Most miners share rewards with a mining pool that distributes revenue based on the hash rate contribution of each participant.

Miners must continue adding hash rate to maintain and increase their revenue share.

Because the total bitcoin reward is roughly the same every 10 minutes, miners that survive a shakeout get a larger cut.

Miners who remain in the game not only regain a profitable balance sheet, they gain more bitcoin at a discounted price.

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