Bitcoin mining

Once more, the cryptocurrency markets have fallen, with Bitcoin nearing $20k. After the incredibly successful few years that miners had during the bull market, many have since been forced to close down their operations, as the reality of sustained low prices has begun to sink in, and capital for loans against Bitcoin and mining equipment has been harder to come by – many creditors who would have provided these loans, such as Celsius, have since gone bankrupt.

The Bitcoin hash rate continues to climb

Despite the falling prices in the Bitcoin markets, the hash rate continues to break all-time highs, which has been perceived by most as an extremely positive development for Bitcoin, as it means that the network is secure and becoming even more so.

The Bitcoin hash rate is a reflection of how many miners there are supporting the network: the higher the hash rate, the greater the energy being exerted to secure Bitcoin.

There is still profit to be made for miners

The rising hash rate shows that there is still profit to be made for miners, otherwise they wouldn’t be continuing to mine and to scale up their operations. There are many reasons for why Bitcoin miners are so profitable at the moment, not least of which thanks to the fact that there are still many places in the world that have extremely cheap electricity.

Bitcoin miners are naturally drawn to the places where electricity is the cheapest.  Since it is one of their largest expenses, having cheaper electricity as an input cost means that profit margins are far higher when miners do eventually decide to take profits on their investments.

This incentivises miners to find energy that is not only cheap, but sustainably cheap over the long term, and located in jurisdictions where the political climate is favourable to Bitcoin mining.

Antminer S19s can be used for many years to come

Previous Antminers have been in operation for only a few years before they have become obsoleted and mining with them has ceased to be worthwhile.

However, it is expected that the current range of Antminers will continue to operate over the coming years, due to the fact that newer machines are no longer obsoleting the old ones as exponentially quickly as they were in the past.

Moreover, there has been a shortage of semdiconductor chips for several years now (most notoriously felt by Sony, whose new Playstation is almost impossible to acquire), and the growing tensions in Taiwan, where the overwhelming majority of semiconductor chips are produced, is unlikely to improve the situation.

Since the primary use of Antminers is to mine Bitcoin, their prices on the secondhand market (where many are traded) has been oscillating with the Bitcoin price – those who wish to enter the mining industry may consider the benefits of market timing, just as one may wish to when purchasing spot Bitcoin.

Mining to be a “good citizen of Bitcoin”

Many proponents of Bitcoin have spoken at length about the degree to which mining is important for the security of the network, and the fact in a hyperbitcoinised world, even if the mempool were empty and transaction fees generated were low, and even if the block reward had fallen to such an insignificant level as to make mining economically unjustifiable, it would still be important for people to mine in order to protect the sanctity of the network.

It is quite likely that if this were the case, Bitcoin’s hash rate would still remain strong, given the importance of the Bitcoin network and the significance of the continuity of the Bitcoin brand. Many nation states would be inclined to mine Bitcoin in order to support the property rights of their people, and if evangelists like Jason Lowery are to be believed, people will mine to ensure that they protect national security.

Moreover, as the industry continues to mature, there are many companies and countries that can mine Bitcoin at a marginal cost of close to zero.  For example, large oil and natural gas suppliers can mine Bitcoin using energy that would otherwise have been wasted.  El Salvador is mining Bitcoin with surplus energy that they don’t need to consume or export to neighbours such as Honduras and Nicaragua, and in the future, there are to be far more geothermal mines, not less.

There are, of course, risks to mining.  For the passive investor who isn’t so familiar with the industry, investing into mining hardware is probably not a good idea since there are so many more variables to consider than simply buying and hodling one’s own Bitcoin. Even professionals in the industry can struggle with the complexities and difficulties of building a mining operation, as evidenced by Celsius’ disastrous foray into the industry.

Nevertheless, mining is important, and whilst for some it may be more suited to being a hobbyist activity than a financial decision, there is still a lot of scope for people to enter the industry of mining and to turn a profit.


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