Bitcoin Miners Fall On Hard Times

Although exchanges and hedge funds have received a lot of press in recent months, we shouldn’t forget about the ongoing troubles for bitcoin miners.

The often-overlooked heroes who power bitcoin and other proof-of-work cryptoassets are currently bleeding money, and the ramifications could be systemic.

Lot of Work, Little Pay

As a brief refresher, bitcoin is secured by a proof-of-work consensus mechanism. This sounds fancy, but in a roundabout way, all it means is that people dedicate computer energy to verify the legitimacy of the blockchain. In return, they receive new bitcoin as a reward.This process of verifying and rewarding is known as mining, and the people securing bitcoin are known as miners.Because bitcoin has become so valuable, mining has become an extraordinarily profitable enterprise, with multiple mining firms worth hundreds of millions and even billions of dollars.However, these profits have been decaying this year due to two factors:

1. High competition: A profitable sector inevitably becomes more competitive over time. This is the case with bitcoin mining, with hash rates (a measure of the energy currently mining) sitting near all-time highs for most of the year. As bitcoin mining gets more competitive, it becomes more difficult to earn bitcoin rewards, making mining less profitable.

2. The Bear market: The profit from bitcoin mining is naturally correlated with the price of bitcoin. It’s much easier to make money when bitcoin is $60,000 versus ~$17,000, as it is now.

Unfortunately, these factors have taken a toll on miners, and especially those who overleveraged themselves during the bull market.

Combine overleverage with a hostile atmosphere, and you get Core Scientific posting a $435 million loss in Q3 and warning that they could go under soon, Compute North going bankrupt, Iris Energy defaulting on a $108 million loan, and Argo Blockchain shares recently falling 50%.

Consequences

Although bitcoin miners may seem like an area of the market that isn’t worth thinking about, in reality, the rippling impact of struggling miners can impact crypto prices. Think about it, what is the first thing that miners will sell to cover their debts?

…The bitcoin they mine.

We’re not sure how much bitcoin is in miners’ hands ready to be sold, but it’s certainly a lot, and it looks increasingly likely that miner capitulation is coming soon.