Bitcoin mining companies continue to struggle to survive the ongoing bear market. Long gone are dreams of outperforming bitcoin as a public mining company. Bankruptcies and lawsuits become daily headlines. Even Wall Street analysts, who were once bullish on bitcoin mining investment opportunities, are now saying they will “pull the plug” until the market improves. So how bad is the current bear market?
As the proverb says, it’s always darkest before the morning. And compared to previous bear markets, the mining industry appears closer to the end of a bear market phase than its beginning. This article examines a bunch of data sets from current and previous bear markets to contextualize the state of the industry and how the mining sector is evolving. From hardware lifecycles and miner balances to hash rate growth and hash price declines, all of this data tells a unique story about one of Bitcoin’s most important economic sectors.
Mining Revenues Evaporate
When the price of Bitcoin falls, it’s no surprise that mining revenues denominated in dollars also fall. But there are – a lot. About 900 BTC are still mined every day and will continue until the next halving in 2024. But the fiat price of that bitcoin has fallen sharply this year, meaning miners have little money for expenses like electricity, maintenance and loan servicing.
As you can see from the graph below, in November the entire bitcoin mining industry generated less than $500 million in revenue from processing transactions and issuing new coins. The bar graph below shows this monthly return compared to the past five years. November mining earnings mark a two-year low for monthly gains.
Potential Hash Rate Uptrend Reversal
Comparing the current bear market to the previous one in 2018 offers interesting insights into how the mining industry has changed and how it has stayed the same. One such comparison is hashrate growth during bearish price trends. It is not unusual to see the hash rate increase during bear markets. The annotated line graph below shows the normalized hash rate growth from the peak of bitcoin price to the historical (or current) lows of the bear market in 2018 and 2022.
So far in this bear market, the Bitcoin hash rate has only increased.
But one thing that is clearly missing in the above table is the correction in the hash rate increase during the later period of the down phase. For example, in 2018, the bullish trend clearly reversed course and caused the price of bitcoin to fall in the market. But in the current market, the hash rate has only increased. Perhaps a slight decrease in the hash rate by the end of November indicates a trend change, but the question is still open.
Dissolution of Public Mining Companies
Perhaps the most brutal bitcoin mining chart shows the retreat of publicly traded mining companies this year. It’s no secret that the past year has been brutal for bitcoin, other cryptocurrencies, and the global economy in general. But mining companies in particular are stuck. More than half of these companies have seen their share prices fall by more than 90% since January. Only two – CleanSpark and Riot Blockchain – did not fall more than 80%.
In general, mining companies are often considered a high-beta investment in bitcoin, meaning that when bitcoin rises, mining stock prices rise more. But these market dynamics cut both ways, and when bitcoin falls, the downside for mining stocks is even more brutal. The bar chart below shows the carnage these stocks have suffered.
Bitcoin mining stocks were massively destroyed.
The Rise and Fall of the ‘AK-47’ of Bitcoin Mining
An underappreciated sign of the current bitcoin bear market is the sharp drop in hash rate generated by Bitmain’s Antminer S9 machines. This model of mining machine is sometimes called the “AK-47” of mining due to its durability and reliable performance. And at one point in the 2018 bear market, the S9 was king. About 80% of Bitcoin’s total hash rate came from this Bitmain pattern at the depths of the previous bear market.
But the current bear market tells a completely different story. Thanks to new, more efficient hardware and a vice-grip squeeze on mining profit margins, the percentage of hashrate from S9s dropped below 2% in early November. The annotated line graph below shows the rise and fall of this machine.
Antminer S9 has seen a significant drop.
Miner buys balance sale
The past few months have been disastrous for the crypto industry, as exchange wars, insolvent custodians and other forms of financial contagion plagued the market. Many bitcoin investors like to think that their segment of the industry is largely insulated from the chaos of the rest of crypto, but this is usually false. In the case of miners who are very bad at timing the market, some panic was evident as address balances and miner outputs decreased and increased accordingly.
But this activity was short-lived. The line chart below shows that miner address balances have almost completely reversed their decline from late September to October. In short, miners seem to have returned to HODL mode against exogenous market events. It is not known whether the bear market is over. But miners seem to be hoarding more than selling.
Miners seem to be back in HODL mode.
Hash Price Drop Today Vs. 2018
Hash price is one of the most popular economic metrics for miners to track, although few people outside of the mining sector understand it. In short, this metric represents the expected dollar return per marginal unit of hash rate. Like everything else in a bear market, the price of hash has dropped significantly. But its decline is not unusual, especially compared to the decline of the hash price in 2018.
The chart below shows the normalized declines in hash prices from 2018 and 2022. Readers will notice a fairly similar slope and size of the declines. 2018 turned out to be a bit sharper. 2022 has been shallower but longer so far. But both were and are brutal for fledgling mining operations.
This 2022 hash price drop was shallower but longer than the 2018 equivalent.
The next stage of mining
Boom and bust cycles are a natural series of events for any properly functioning market. The Bitcoin mining sector is no exception. Over the past year, mining has seen weaker, unprepared operators being pushed out of the bull market as it is considered overextended. Now, in the depths of the bear cycle, true builders can continue to expand their operations and build a solid foundation for the next phase of the euphoric upswing.
This is a guest post by Zack Voell. The views expressed are entirely their own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.