Bitcoin Mining: a Back-of-the-Envelope Calculation
of the Current Situation

Research | L1 | 5 March 2023

The business of Bitcoin (“BTC”) mining concerns generating new BTC, the value of which should exceed the cost of the overhead needed to generate them. The main components of such costs being i) the purchase of expensive top-tier mining hardware necessary to solve the algorithms posed by the BTC network in order to win the block reward, and ii) the tremendous amount of electricity required to operate such hardware.

At current price levels of BTC and electricity cost, it seems that it will be a challenging environment for BTC miners, particularly in the US, to operate at a break even level, let alone pay back the price paid for new mining machines. BTC will need to be at least US$25k levels for the operation to be at a break even level.

TL

DR

The BTC chain relies on the constant validation process by miners who are rewarded with new BTC for solving complex algorithms that validate a new block of transactions (a block). This “proof of work” process of solving each algorithm requires making random guesses using advanced machines that that can generate millions of guesses to arrive at the correct answer. This validation process is mining. Miners are incentivized to keep validating each new block and secure the network as they are then able to earn the newly minted BTC

A Layman Introduction of BTC Mining

Source: BTC.com

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The The current block reward is 6.25 BTC for every validation of transaction, typically every 10 minutes. In addition, only 144 blocks can be mined per day, meaning that the blocks per year is fixed at 52,560 blocks per year.

However, there is a finite supply of BTC to be mined as the total supply of BTC is capped at 21 million. The number of BTC rewarded for validating each block decreases over time in what is known as the halvening process.  The block reward is halved after every 210,000 blocks is mined, which usually takes about 4 years. The last time block reward was halved was in May 2020. The next halvening is expected to take place in May 2024 to 3.12 BTC. The long term implication of this constant halvening is usually unclear as the decrease in supply could potentially be offset by a possible increase in price or decrease in miners and competition.

Block Rewards

As BTC has grown in adoption and popularity over time, more and more miners have to compete with each other to solve the algorithm to score the block reward. When more miners compete for the solution, the difficulty of the algorithm increases, and it becomes more expensive for miners to mine a new block – the more miners there are, the harder network recalibrates the difficulty of the algorithm which requires the amount of energy required to solve the problem and earn new BTC.

Network difficulty

BTC Network Difficulty

The main component of any BTC mining business is the BTC mining machine i.e. application-specific integrated circuits (ASICs). ASICs are typically purchased and then deployed by miners to solve the mathematical equations generated by the network. As miners are essentially in a race against each other to validate each block and score the block reward, it is necessary to acquire the most efficient equipment possible to optimise their potential to earn the block reward.

The purchase of the ASIC is the largest cost component for the miner. ASICs’ cost range from $1,000 all the way up to $15,000, and their mining efficiency varies. Typically miners would purchase second-hand ASICs in order to realise further cost savings. However, the slowdown in the crypto sector has meant that the price differential between machines bought on the first hand market and second hand market have minimised significantly.

The top three ASICs manufacturers, Bitmain, MicroBT and Canaan, currently have a combined market share of over 85%. The best ASICs will typically strike the desired balance between the hashrate versus the power draw and the price of the machine.

Hashrate refers to the rate at which the mining hardware is capable of solving the algorithm. Thus the higher the hashrate the better.

Power Draw of the ASIC is measured in watts. The lower the number meaning the less energy it consumes and therefore more optimal.

The efficiency of ASICs is measured in joules per terahash (J/TH). The lower the number, the higher the efficiency and profit

Mining Equipment

Electricity is the other large cost component for the typical BTC mining business, as it requires significant energy to run the mining machines in order to solve the mathematical equations and earn the block rewards. Generating a new BTC consumes around 92.47 TWh of electricity annually, according to the Cambridge Bitcoin Electricity Consumption Index. As a result, miners typically locate in areas where they have access to the cheapest energy.

The United States has the highest proportion of BTC miners in operation, according to Bankless Times, with 35.4% average monthly hashrate (total computational guesses in the network) share globally in 2021, followed by Kazakhstan (18.1%) and Russia (9.6%). Given rumours that Khazakhstan is likely to lever a significant tax upon BTC miners, and the negative impacts of the war in Ukraine, we believe these will remain as significant headwinds to the mining industry in these countries.

Global energy prices have surged in the past year, resulting in an increase in electricity cost throughout major BTC mining countries. Taking the example of the state of Texas in the U.S., electricity rate is around $0.14 per kWh for commercial customers as of Jan 2023. While in Kazakhstan, electricity rate is around $0.06 per kWh and in Russia around $0.10 per kWh, according to GlobalPetrolPrices.com.

Electricity

The economics of a BTC mining business is very simple:

Economics

Given the current market cycle and price of BTC, we lay out the profitability scenarios at various BTC prices by country in a matrix, using the Antminer S19 Pro ASIC as a base case. Given that the manufacturers are selling new machines at a significant discount which are similar to prices seen on the second hand market, we have simply used the discounted prices for new machines for the analysis below. Further, we also assume that there are occasional breakdowns when running operations in Russia or Kazakhstan with an uptime of 80%.

Scenario Analysis

As can be seen in the above scenario analysis, 25K seems to be the mark at which BTC mining becomes profitable. At current levels of BTC, miners in the US are undergoing a period of difficulty to operate at a break even level. Given the volatile state of the market, any large market movement downwards would further exacerbate the current situation. Further, whilst it may be profitable still to operate in Russia or Kazakhstan, it remains to be seen whether it is viable on to continue to grow and operate a BTC mining business at scale in those countries.

Conclusion