Several Bitcoin mining companies are going bankrupt in the current bear market. With expenses increasing, miners are turning off their equipment leading to the biggest downward adjustment since last year’s mining ban in China. 

No longer able to HODL their $BTC earnings, Bitcoin miners are selling Bitcoin at record volumes as well as their hardware assets. It is important for Bitcoin investors to be aware of this downturn and how it will affect the operation of Bitcoin. 

Bitcoin mining explained

The term “mining” refers to the work that a mining computer does to solve a highly complex algorithm. The term “miner” can refer to both the computer (‘node’) that performs the mining or the person/company that owns the computer(s). 

When a new transaction is initiated on the Bitcoin network, the miners go to work solving a given algorithm. The first computer to successfully solve it receives the right to post the transaction as a new data block on the Bitcoin blockchain and the owner receives a small fee in Bitcoin for adding the block called a coinbase. 

To control the stream of blocks added to the blockchain, the complexity of the algorithms used in Bitcoin mining is varied. When more transactions are coming onto the blockchain, the complexity is increased; when fewer blocks are being added, the complexity is decreased. On average, a new block is added to the blockchain every ten minutes.

Bitcoin mining business

As with any business, there are expenses to pay. Bitcoin mining companies usually operate out of a warehouse where their main expense is the electricity consumption needed to operate the mining computers. 

As miners run 24/7 to solve the algorithms, the electricity consumption of a Bitcoin mining business is very high. Equipment parts and maintenance, employee wages, space rent, insurance and other expenses round out the cost of running a mining operation. 

In light of those factors, one can see how devastating the crypto crash has been on these operations. The second quarter of 2022 saw a significant drop in the price of Bitcoin - from around $45K to $20K. 

Image courtesy: Glassnode

ASIC miners (the common node model) are now selling at 70% off as mining enterprises try to shore up losses. 

Inflation is on the rise and with it comes higher electricity prices. Mining infrastructure is not cheap in the best of economies and with the added pain point of the ongoing international shipping bottlenecks, getting replacement parts is not easy. 

All in all, the machines are expensive to acquire and maintain and the infrastructure requires active monitoring. A mining operation is also very loud and produces a lot of heat, requiring cooling systems; still, many have set up mining operations in their homes. Bitcoin mining is not the set-it-and-forget-it business model it is often portrayed to be. 

Effects of the miner retreat

Historical trends in Bitcoin show us that when algorithmic complexity (“mining difficulty”) decreases, Bitcoin’s price decreases in tandem. 

Image courtesy: Glassnode

The chart above shows that right now mining difficulty over the last year has been a wide delta between price and difficulty since July 2021. However, we are now returning to a convergence of price and difficulty, meaning that the market is becoming more invested in Bitcoin. Such was the case in January 2019 and July 2020. 

As mining machines age, they are either scaled back or shut down. When this happens, Bitcoin sell pressure gets relieved because the company does not have to continue selling BTC to cover the cost of maintenance. 

The effects of the current miner retreat from the network are showing us not only that there is another market correction in the global mining operation, but there is upward pressure on the price of BTC. 

Further, the fourth cycle of Bitcoin halving will occur in May 2024, when the price of BTC earned by miners will be cut in half again. The halving takes place after every 210,000 blocks are added to the blockchain. 

Companies that can afford to push past the worst of this quarter’s rising expenses and lower profits will make up for it in the coming months as weaker competition falls to the wayside.