Bitcoin mining has become drastically less profitable in 2018 despite soaring revenues. While bitcoin miners are earning record revenues, their profit margins have decreased from last year’s highs.
Why are bitcoin miners struggling to make a profit? Ben Brown at Block Explorer recently addressed that question.
“New research from Diar reveals that Bitcoin mining has generated record revenues of almost $5 billion so far this year. That’s already higher than 2017 with three months to go. However, that revenue hasn’t translated into profit.”
There are two main reasons why bitcoin miners have struggled to earn profits in 2018:
- High energy costs
- Increased competition
Because of these two factors, the average bitcoin miner is struggling to make a profit.
The problem has become so bad for average bitcoin miners, in fact, that anyone paying retail energy prices while mining bitcoin in September 2018 would have lost money – even if you’re using the latest high-end bitcoin mining equipment.
This is forcing smaller bitcoin miners out of the game, allowing larger bitcoin miners like Bitmain to take over. Bitmain generated over $1 billion in profit in the first quarter of 2018 alone, although a significant amount of that profit comes through hardware sales and not bitcoin mining.
It Costs More to Mine Bitcoin Than to Buy One
You may have seen a stat that it costs about $4,000 to mine one bitcoin. According to new research by Fundstrat, however, that’s not true: the cost of mining one bitcoin is around $7,300.
Despite $BTC bear market, hashpower doubled since May to 57 EH/s – Even with upgrades to existing equipment, implies almost 1GW of new power consumption vs 5.2GW in May '18. Breakeven now $7300 ($5300 cash BE) vs. $6000 in May – Mining becoming FCF -ive @fundstrat #Crypto pic.twitter.com/pTTWJWlrz0
— Sam Doctor (@fundstratQuant) September 14, 2018
Meanwhile, the current price of bitcoin is around $6,500.
That means it costs more money to mine one bitcoin than to buy one. You can purchase a single bitcoin from any exchange for less money than it costs to mine that bitcoin. Fundstrat calculated that figure based on a $4,000 energy fee (assuming you’re paying $0.06 per kW/h) and $3,300 for equipment, wear and tear, and other overhead expenses.
We frequently see the $4,000 figure cited in the bitcoin community. Fundstrat’s study, however, shows that there are significantly more costs to bitcoin mining than simply paying your electricity bill.
Bitcoin Mining is More Competitive than Ever Before
Today’s bitcoin mining ecosystem is the most competitive it has ever been. Since May, the hash power of the bitcoin network has doubled. That means there are more miners competing on the network to mine a block.
‘Hash power’ is the collective processing power of the bitcoin network, including all the miners worldwide who are dedicating their processing power to solving puzzles on bitcoin. In the last six months, that processing power has doubled. There’s twice as much processing power dedicated to bitcoin worldwide.
Bitcoin’s hash power has taken a slight step back in recent months. The hash rate hit a record high in August, for example, before retreating slightly to the point it is at today.
Retail Energy Prices Are Reducing Miner Profits
If you want to stay competitive, then you need more miners and more energy. However, standard electricity rates are choking the profits of miners.
The study linked above estimated an average retail energy price of around $0.10 kW/h. If you’re paying $0.10 kW/h for electricity, then you cannot make a profit with bitcoin mining.
This is why so many bitcoin miners are located near renewable energy sources in China, where they can pay less than $0.05 per kW/h for electricity. Many parts of the United States and Canada pay similarly low rates for electricity. Meanwhile, some European countries pay over $0.40 per kW/h, making bitcoin mining virtually impossible.
Electricity bills are just one part of your costs as a bitcoin miner, of course. Wear and tear, maintenance, equipment costs, and other expenses also reduce profits.
Bitcoin Mining is Increasingly Dominated by Those with Deep Pockets
Bitcoin mining is increasingly dominated by those with deep pockets – including corporations like Bitmain. These corporations have a huge advantage over average miners: They can buy electricity at wholesale prices.
Only the largest miners can afford to do this. That means they pay a fraction of the energy costs of an average bitcoin miner. These firms can remain highly profitable while average miners wither away.
Inevitably, this will lead to a shift in bitcoin mining towards big companies like Bitmain. At times, Bitmain has controlled nearly 50% of bitcoin’s hashrate through its two mining pools, BTC.com and Antpool. These are the two largest bitcoin mining pools in the world.
Bitcoin is capitalist by nature: the largest mining companies will eventually absorb the smaller mining companies, leading to a concentration of wealth and power in the hands of an elite few. Some see this is a good thing: it’s a natural state of competition that leads to optimal conditions for bitcoin. Others see it as a bomb waiting to explode.
Bitmain Has an Incentive to Keep Mining Profitable
One interesting fact from Ben Brown’s article at Block Explorer should not be forgotten. Bitmain generates 95% of its profits by selling bitcoin mining equipment. If bitcoin mining is no longer profitable, then people will stop buying bitcoin mining equipment.
For that reason, Bitmain has an incentive to keep mining profitable.
Ultimately, bitcoin prices are in a bear market and hash rates are at record highs. Anyone paying $0.10 kW/h or more for electricity will not make a profit through bitcoin mining, and it currently costs more to mine one bitcoin than it does to buy one.
Fortunately, bitcoin is designed to encourage competition. The only problem is that this competition is leading to a concentration of wealth and power in the hands of an elite few mining corporations – something that could be an issue in the near future as average miners continue to get forced out of the game.