The Future of Bitcoin Mining: Are Miners on the Brink of Exit?
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The recent decline in Bitcoin prices has significantly impacted miners, leading to a phase of mini-capitulation where they are compelled to liquidate their accumulated bitcoins after other funding avenues have dried up.
Mining can be understood as the process of converting fiat currencies, like dollars, into Bitcoin. Miners invest in hardware, such as ASIC miners, using dollars, and they cover electricity costs with various fiat currencies. Their earnings, in turn, are derived from the bitcoins mined based on their hashing power.
With the fall in Bitcoin prices, profit margins have been squeezed, rendering many mining operations unprofitable. For instance, the Antminer T17, released in 2019, is no longer viable with current costs—$0.075 per kWh for electricity and a 3% pool fee. Bitdeer, a cloud mining service, recommends miners shut down their devices to prevent losses.
Collin Wu, in his weekly mining newsletter, cites F2Pool statistics indicating that the latest Antminer S19 has become unprofitable at a price point of approximately $10,000. Given that Bitmain’s miners are among the most efficient, this threshold is likely applicable across the market. Observing the implications of a price drop below this mark would be intriguing.
The pressing question is how long miners can operate at a loss before they initiate large-scale shutdowns of mining farms. There has been a noted decline in hashrate since the peak on May 21, but a total capitulation trend is not evident in the long-term data.
A shift in operational financing strategies has become apparent.
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The HOLD Strategy
In recent years, many miners adopted a "HODL strategy," refraining from selling their mined bitcoins.
This strategy makes sense, as miners typically bet on price increases. Mining involves a long-term commitment to converting invested capital into Bitcoin at a lower cost. Unlike investors who can sell at any moment, miners are in it for the long haul.
To sustain their operations without selling their bitcoins, miners have turned to two key funding sources:
- Public Stock Offerings: Many North American miners, including Core Scientific, Marathon Digital, Riot Blockchain, Bitfarms, Hut 8, Hive, and Argo Blockchain, have issued shares, leveraging their mining operations and bitcoin reserves. This approach has proven effective, with mining stocks reaching record highs over the past year.
- Fiat Loans: Some miners have taken out loans in fiat currencies, using their bitcoins as collateral.
This strategy allowed miners to gather significant bitcoin reserves while funding their operations without liquidating their holdings. Arcane Research highlighted the substantial bitcoin reserves held by listed miners in mid-May.
Strategy Fails in a Bear Market
However, as noted by Compass Mining, miners soon learned that this strategy is only effective until it ceases to be so. Share prices for miners faced pressure throughout the year, and after the price crash in May and June, many stocks plummeted—some by as much as 80% or more.
Bitcoin-backed loans are coming due as the value of collateralized bitcoins has diminished. Insolvency issues have surfaced among platforms like Celsius and Babel Finance, prompting a more conservative lending approach.
A liquidity crunch is unfolding, forcing miners to seek alternative funding sources, such as selling bitcoins.
This represents a minor capitulation: In May alone, Core Scientific liquidated 2,598 bitcoins, while Riot Blockchain and Argo Blockchain sold 250 and 427 BTC, respectively. Collin Wu reported that publicly traded miners sold a total of 4,411 bitcoins in May, amounting to nearly $90 million.
This figure is approximately four times what they sold in the early months of 2022, when their average was around 1,115 bitcoins each. Nonetheless, these miners still retained 46,594 bitcoins by the end of May, with Marathon holding just over 9,000 coins without selling any.
While June's total figures are not yet available, indications suggest that the trend persists. Bitfarms recently disclosed its adjustment to its HODL strategy to enhance liquidity and strengthen its balance sheet, selling 3,000 bitcoins for roughly $62 million, part of which was used to repay bitcoin-backed loans. Bitfarms now holds 3,349 bitcoins, and it plans to sell some mined coins to cover expenses.
Bitfarms is likely not the only miner adopting this approach, although not all are publicly disclosing their actions. Comprehensive data on listed miners may not be available until July.
The Dark Figures
Determining the total number of bitcoins still held by miners presents challenges. While major publicly traded miners will disclose their holdings, smaller and private miners remain less transparent.
According to CompassMining, the three largest publicly traded miners—Marathon, Core Scientific, and Riot—account for just over 45 exahash, which is nearly a quarter of the current hashrate of just above 200 exahash. Thus, a significant number of miners may not be publicly listed.
Onchain analyses can provide some insights, but they can be complex to interpret. Coinmetrics highlighted that when a mining pool finds a block, it distributes the mined bitcoins to participating miners, referred to as "1-jump miners." For instance, on June 1, 2022, the ViaBTC pool disbursed 223 bitcoins to 60 individual addresses.
Approximately 2.9 million Bitcoin addresses received bitcoins via these mining pools, holding a total of 2.6 million bitcoins, which accounts for 13.6% of all mined bitcoins. Many of these coins have remained untouched since their mining, dating back to the inception of mining pools in 2010 or 2011.
Through further analysis, Coinmetrics has narrowed the count to about 28,000 addresses that collectively hold around 55,000 bitcoins.
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In recent weeks, the total value held by miners has significantly decreased from around 75,000 to 55,000, indicating a more substantial liquidation of coins than previously reported among listed miners. Conversely, miners have been accumulating bitcoins throughout the year, with their holdings only dropping to April levels in June.
Data remains somewhat unclear, as it lacks information on how many miners continue to hold or liquidate coins mined in 2021. Nonetheless, two major findings are evident:
- The miners' HODL strategy has faltered, resulting in increased sales of coins since May compared to previous months and years. They are compelled to sell partly due to the impending repayment of bitcoin-backed loans. The significant liquidation of their amassed bitcoins may partly explain the sharp price decline in June.
- Despite the challenges, miners continue to hold substantial quantities of bitcoins, hoping for price recovery while striving to minimize their sell-off. Holding bitcoins remains a critical strategy for them, but if the downturn persists, they may be forced to increase their sales.
They would be ready to revive the HODL strategy whenever the market conditions improve.
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