We sometimes forget that miners play a critical role in the Crypto-verse and that the vagaries of their business model are very similar to that for miners in the oil industry. When the market for your selected commodity goes south, you can shut down your rig or build inventory for sale at a later date, when market prices rise to an acceptable level. For Bitcoin miners, this scenario played out big time during Crypto Winter, which lasted for nearly all of 2018, until the Bitcoin market finally bottomed out in late December.
But Bitcoin prices have recovered during 2019, a godsend for the crypto mining industry, topping out at nearly $14,000, but now hovering about support at $10,000. For those miners that were able to hang on during the tough times, the profits are now finally materializing. The latest calculations for a breakeven point are roughly in the $8,000 range, give or take a few hundred in either direction. A modern rig will with access to low cost electricity will have a lower cost dynamic, but even the older rig set ups, the less efficient ones with slower computing power, can also actually make money these days.
The reporters at NewsBTC recently checked in with Alex Kern, an analyst at Fundstrat Global Advisors, to gain his perspective on current market conditions for Bitcoin miners. His tweet was very revealing:
From today’s @fundstrat Bitcoin mining update – @BITMAINtech Antminer S9’s cash and total cost of mining 1 $BTC = $7300 and $8500 (assuming $0.06 / kWh) – Older and newer generation mining rigs are profitable with BTC at current levels.
Over the past 18 months, miners have had to shut down, close their doors for good, or find lower cost environments to ply their trade. Many consortiums have set up shop in the Siberian outback to take advantage of an abundance of cheap hydroelectric power, cool weather conditions, and abandoned warehouses from shuttered manufacturing companies that perished after the Cold War ended. As we recently reported:
Mining teams from the U.S., Russia, Korea, Brazil, India, Japan, and Spain have set up their rigs here [Siberia] to benefit from low power costs and prevailing cool temperatures.
If you chose to go to Siberia, power costs could be as low as $0.04 per kilowatt-hour, a 33% improvement on the profitability model referenced in the above tweet from Alex Kern. The other major cost driver, computing power, is another story. Capital equipment expenditures or “CAPEX” are a continuing cost drain, if the miner is to remain competitive in the business. There are always newer hardware versions to install that will work twice as hard for half the cost, the reason why newer rigs have a better time of it when booking profits.
Thomas Lee, the co-founder of Fundstrat, also explains that there may be another reason why Bitcoin prices have been so range bound of late. Miners are more than likely selling their “rewards” on the market to cover old losses and the needs of CAPEX:
Latest mining report from our quant team. Using S9 and $0.06/kWh, cash breakeven for $BTC mining is $7.3K vs price of ~$10k. Miners profitable and apparently some older rigs are also profitable. Their thesis remains if miners making $$$, they are BTC sellers to fund capex.
Are miners “dumping” their newfound profitable gains on the market? Possibly so, but the health of the overall network is dependent on a profitable mining industry. Bitcoin’s “hash rate”, a measure of the computing power that supports the BTC network, just hit an all-time-high. A high hash rate equates to a stronger blockchain, but opinions are mixed as to whether this data point is a leading indicator of future price surges. More miners may be turning their rigs back on, but also selling their gains just as quickly.