Golden Observation | The price of cryptocurrency continues to decline, and the income of Bitcoin miners has dropped by more than half

Revenues for bitcoin miners have now fallen to six-month lows as the cryptocurrency's price continues to struggle of late, on-chain data shows.

Forbes data shows that Bitcoin mining revenue potential (defined as hash price) is down about 68% from its 2021 peak and 58% from its 2021 average.

(Hashprice is a bitcoin mining metric that measures the earning potential of a unit of bitcoin mining computing power (which we call hash rate).)

Two things affect Bitcoin's hash price: the actual price of Bitcoin and Bitcoin's mining difficulty, which affects the likelihood of solving a block and earning a reward of 6.25 BTC (~$187,500). For context, at Bitcoin's all-time high in November 2021, block rewards will generate roughly $430,000.

Bitcoin’s mining difficulty adjusts upwards or downwards roughly every two weeks, making it easier or harder to mine Bitcoin based on network competition. If miners produce blocks too quickly in the first two weeks, the difficulty will increase, and conversely, if miners produce blocks too slowly, the difficulty will decrease. This ensures that miners propagate blocks that are close to the 10-minute average that the Bitcoin code is targeting.

Over the past year, 18 of the 26 Bitcoin mining difficulty adjustments have increased and only 4 have decreased. When the difficulty increases, mining bitcoins becomes more energy intensive, so the hash price drops. When the price of Bitcoin falls, so does Hashprice, and right now, the price of Bitcoin is falling at a time when difficulty is at an all-time high.

During 2021, Bitcoin miners have enjoyed some super profits. There are two main reasons behind their staggering earnings during this period. The first is the high bitcoin price. During the year, the cryptocurrency reached two different all-time highs and, with the exception of a few segments, was generally on an upward trend. Because of this, any revenue earned by Bitcoin miners also appreciates and keeps them highly profitable.

Another reason is the hash rate crash due to China’s crackdown on mining. "Hashrate" is a measure of the computing power currently connected to the BTC network. With this metric, it is possible to judge how much competition miners are facing right now. The higher the Bitcoin hash rate, the more competition miners face, and the less profitable they are. China cracks down on mining, hashrate crashes in June. During the ensuing period of low hash rate, miners outside of China began to enjoy greater profits as the difficulty of mining Bitcoin dropped significantly.

However, for several months, the indicator has fully recovered from the crash, while at the same time, the price of BTC has begun to struggle, and the overall trend is down. These two factors combined mean that these miners are significantly less profitable. If the computing power continues to rise and the price of Bitcoin does not recover significantly, then mining profits will continue to decline in the near future.

Most bitcoin mining stocks are down 60% or more in the current market crash as bitcoin mining profitability declines. Prices for leading mining companies like Marathon, Riot, Bitfarms, Hut 8, Hive, Core Scientific, Argo Blockchain, Iris Energy, DMG Blockchain, and Cleanspark are shown in the chart below.

Many large public companies are still mining for profitability, and some will continue to do so even if the hash price is cut in half. Still, some companies like Bitfarms and Core Scientific have withdrawn their hash rate estimates for 2022, a cautious step given the drastic changes in the market. It is not surprising that other miners will do the same in the coming weeks and months.

Previously, Canada-based bitcoin miner Bitfarms reported net income of $5 million for the first quarter of 2022, a roughly 50% drop from the previous quarter. The company also said on Monday's earnings call that it will scale back expansion plans for the remainder of the year due to logistical and supply chain issues related to higher natural gas prices.

President and COO Jeff Murphy sees the current challenges in the market as an opportunity for the company to "increase relative market share gains" as capital supply chain and other constraints may slow the network's growth.

Compared to the previous quarter, Bitfarms’ total revenue fell 33.3%, totaling $40 million. Mining gross margin dropped to 76% compared to 84% in Q4 2021. The company's chief financial officer noted that Biftarms was "acting with caution" given the current environment.

In fact, outside of the big mining companies, the bear market could be difficult for miners who are overleveraged and buying more machines in 2021 than they could plug in during last year's market frenzy. It will also be brutal for miners with higher operating costs.

According to a report on the break-even cost of public miners, the simple average of the break-even price among the 10 miners surveyed was 13 cents, the median was 11 cents, and the hashrate-weighted The average is 10 cents. According to the report, the average miner is treading water. But many public and industrial miners have low production costs, and some of the more established players aren't worried yet. For example, miners paying $0.06/kWh for electricity are still making decent profits, though not nearly as high as they were during last year’s bull run.

With this in mind, those who make big promises in a bull market but fail to deliver in a bear market will get swallowed up. As we enter the bottom of the bear market, companies that execute well will thrive and have the opportunity to buy cheap assets (drilling rigs, farms, etc.).

Analysts noted that a drop in crypto prices would lead to a reduction in mining, but this could happen over a longer period of time. At the moment, we haven’t seen an unusual drop in the hash rate despite the price drop, and another week might see if miners have been shutting down some of their rigs, indicating that they are operating on tight profit margins. At the same time, analysts also caution that in a more violent bear market, just because a mining company is large does not guarantee that they will survive the bear market.