Last year was a harvest year for crypto miners. This year, they are being hit from all sides. Crypto prices are plummeting. The miners’ electricity bills are rising. Almost no one wants to buy their equipment.
This is a sharp change in direction from 2021, when crypto prices soared and many mining companies went on shopping sprees – mostly debt-financed – to increase the amount of mining devices they have. But this year, crypto prices have plummeted and major crypto projects and entire companies have been wiped out. This has reduced the profit that miners can make from mining digital currencies – and from reselling the equipment.
Meanwhile, electricity prices – needed to run the powerful computers used for mining – are rising. Russia’s war with Ukraine has hurt the world’s energy supplies, while an extreme heat wave has boosted demand for energy from families wanting to cool their homes.
Shares of crypto mining company Marathon Digital Holdings, Riot Blockchain and Core Scientific have all fallen 55% or more this year.
“I don’t think we’ve reached peak mining pain yet,” said Amando Fabriano, director of mining at Galaxy Digital.
Mining machines have become a hot commodity
Bitcoin miners build and run powerful computers that process Bitcoin transactions. These computers throw out random numbers in the hope of finding the right combination that solves a certain formula; Whoever does this before everyone else receives as a Bitcoin reward that was minted following the process.
This made mining very profitable when Bitcoin was on the rise. Ahead of the coin’s peak in 2021, miners were earning more than $60 million a day, according to data from Blockchain.com. Now, that number hovers around $19 million a day.
Last year the value of Bitcoin rose to almost 70 thousand dollars. This year, the Federal Reserve began raising interest rates, scaring many investors away from assets like crypto. Last week, Bitcoin traded around $19,000. What’s more, many previously strong crypto lending houses have folded, leaving mining companies with fewer sources of funding.
Crypto enthusiasts in the past used to mine Bitcoin with one computer at home. Now, mining companies run batteries of noisy, power-hungry computers to accomplish this goal.
When the value of Bitcoin soared last year, Bitcoin mining machines were a hot commodity. The rush to buy mining machinery back then was akin to “buying a shovel in the middle of a gold rush,” said Andy Long, CEO of mining company White Rock Management.
Prices for the most efficient mining machines today are about a third of what they were in December, according to Luxor Technology Corp, a bitcoin mining data analytics firm.
The steep decline had particularly serious consequences for the miners who borrowed money to finance the equipment purchases last year. When the price of Bitcoin plummeted, these miners had to sell some of their mining rigs and Bitcoin holdings so they wouldn’t be in danger of running out of cash. But there are few buyers for the devices in the secondary market, and this caused a further decrease in the price of the mining devices.
Electricity prices are soaring
Some analysts fear that there could be more forced sales of Bitcoin in the future, especially as renters also struggle with rising energy prices.
Average energy prices for the largest users in Texas rose to 7.52 cents per kilowatt-hour in June, up 41% from the same month last year, according to government data. The German equivalent was about 525 euros per megawatt hour this month, roughly the same amount in dollars and an increase of almost 140% from last December. A White House report from last week warned that crypto miners could disrupt the Texas power grid.
Two facilities in Georgia used by crypto mining company Compass Mining recently had to shut down after electricity providers in the area raised prices by 50%. Northern Data, a Frankfurt-based mining company, and other bitcoin mining companies said they operate mining rigs only during hours when demand on the power grid is down.
Publicly traded mining companies had to dispose of about 240,000 coins at end-of-season prices in May and June, according to Arcane Research, although the pressure has since eased.
For miners of Ether, the largest cryptocurrency, the winter is expected to be even bleaker than the winter of their Bitcoin counterparts.
Today, the Ethereum crypto platform uses a model similar to Bitcoin, giving the coin to the fastest miners. A software update known as the “merger” will change this. After the update, which is scheduled to happen this month, the Ethereum network will no longer need miners or their mining devices. Already, there is less money to be made. Ethereum miners make an average of $20 million in revenue every day, up from $50 million in 2021, according to crypto research firm CoinMetrics.
Ethereum miners will be able to migrate to platforms that still need mining, although these may be less profitable.
If Ethereum miners decide to stop mining altogether, they could still sell their rigs to machine learning or gaming companies, said Kyle Waters, a research analyst at CoinMetrics. He said that most ether mining devices have features that make them easy to repurpose.