The biggest Bitcoin mining companies have been expanding control over Bitcoin’s network, but their stock performance for this year doesn’t necessarily reflect this level of success.
Released on Monday, the September 2024 Bitcoin Mining Report from JP Morgan paints a vivid picture of an industry at a crossroads, grappling with record-low profitability amidst a surge in network hashrate and a volatile Bitcoin price.
It noted that the publicly listed U.S. based mining companies actually saw their piece of the network hashrate expand for the fifth straight month, and actually break records at 26.7 per cent.
Yet, despite this, Bitcoin mining profitability has hit an all-time low, with miners earning an average of USD$43,600 per exahash per second (EH/s) in daily block rewards last month. This represents a sharp decline from the peak of USD$342,000 in November 2021.
Several factors contribute to this drop, including a 9 per cent rise in mining difficulty from the previous month and Bitcoin prices remaining below USD$60,000.
JP Morgan reports that the network hashrate, which measures the total computational power securing the Bitcoin network, has returned to pre-halving levels. This has increased competition between miners and caused a profit squeeze as the cost of mining each Bitcoin has risen with higher energy consumption and operational expenses.
The halving reduced the block reward size by half, dropping from 6.25 BTC to 3.125 BTC in the latest quadrennial event.
“This metric has declined over time as the network hash rate (and mining difficulty) has increased, and tends to move lower during the summer months as miners curtail operations,” the analysts said.
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Largest expense is typically electricity
Bitcoin mining margins are primarily influenced by revenue from mining rewards, operational costs, and the overall market environment.
Miners earn revenue from block rewards and transaction fees. The block reward, currently 3.125 BTC per block, decreases approximately every four years during a halving event. Additionally, miners receive transaction fees from users who include them in their transactions, with the fee amount varying based on network congestion and transaction volume.
Operational costs are a major factor affecting margins. The largest expense is typically electricity, as mining hardware consumes substantial power. Energy costs can vary significantly depending on location and energy source. Miners also face costs associated with purchasing and maintaining specialized equipment, such as ASICs (Application-Specific Integrated Circuits). Moreover, cooling systems are necessary to manage the heat generated by mining hardware, and miners must invest in infrastructure like physical space and maintenance.
The Bitcoin network adjusts mining difficulty approximately every two weeks to maintain a consistent block time of roughly 10 minutes. As more miners join the network, mining difficulty increases, requiring more computational power and subsequently raising operational costs. Conversely, as miners bow out of the market as operating costs push smaller players out, there is a corresponding price decrease.
The price of Bitcoin has a significant impact on mining margins. Higher Bitcoin prices can enhance profitability, while lower prices can compress margins, especially if operational costs remain high. Miners must balance these fluctuations to maintain profitability.
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Two miners have combined 26.7% of entire bitcoin network
Hash rate measures the pace at which miners work to mine Bitcoin’s next block and earn its associated subsidy and fee rewards. When hash rate increases, miners generally use more electricity and more powerful machinery. As a result, mining becomes more competitive, and the entire Bitcoin network becomes more secure.
In August, the 14 publicly listed miners tracked by JP Morgan collectively added another 12 exahashes per second (EH/s) to their mining fleets. Canadian miner Iris Energy Limited (NASDAQ: IREN) led these gains with an additional 5.5 EH/s, and Marathon Digital Holdings (NASDAQ: MARA)—the world’s largest corporate miner—added 3.7 EH/s.
Since the beginning of the year, these miners have increased their hash rate by over 50 per cent. Their total combined hash rate now stands at 175 EH/s, making up 26.7 per cent of the entire Bitcoin network.
Since September began, Bitcoin’s hash rate has reached new all-time highs, while Bitcoin’s price has continued to trend lower—a combination that severely impacts miner profitability. Most public miners have also seen their stock values drop, with CleanSpark Inc (NASDAQ: CLSK) experiencing a 12 per cent decline.
“The aggregate market cap of the 14 U.S.-listed bitcoin miners we track declined 3 per cent since the end of August, and currently trade just shy of 2x their proportional share of the four-year block reward, the lowest level since May ‘24,” JP Morgan wrote.
The Valkyrie Bitcoin Miners ETF (WGMI)—a diversified proxy for the mining industry—has now fallen by 2 per cent year to date, even though the price of Bitcoin itself has risen by 30 per cent.
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