Bitcoin Mining Companies Challenged By Bitcoin Price Drop

Last week Bitcoin’s price saw a severe drop, casting a shadow over mining companies which spent more than half a billion dollars to buy new equipment and be prepared for the next network’s halving.

Major Bitcoin (BTC) mining farm operators in three countries said that they have been upgrading or expanding their facilities since September in order to secure their positions in mining.

In May, the block reward given to a successful miner every 10 minutes will be cut in half, hitting these companies’ top line. As older equipment becomes unprofitable even prior to reward halving, over $500 million has been used to buy more, new efficient machines.

But Bitcoin’s recent price dip — crashing to below $4000 last Friday, representing more than 50% price drop since its high above $10,000 in late 2019 — is raising concerns about mining farms’ profitability.

Data from mining pool PoolIn suggests that even the most efficient machines, like MicroBT’s WhatsMiner M20S and Bitmain’s AntMiner S17 Pro, is generating daily profits at a gross margin below 50%. This estimate is derived from current price of Bitcoin and mining difficulty together with an average cost of electricity of $0.05 per kilowatt hour (kWh).

If Bitcoin’s price does not recover after its drop after the halving, which will cut mining rewards by half, mining companies will have to sustain a longer payback period for their investment.

Zheng Hun, CEO of Hashage, which runs several locations in China’s mining hub in Sichuan province, commented:

“We have been just heads-down and kept mining, and bought a bunch of new machines. We already have a large scale so probably won’t buy any more for the time being. We’re maintaining cash flow to see how the market plays out after halving.”

Thus, we will see how Bitcoin’s overall computing power will behave in response to Bitcoin’s price drop in the coming weeks as older mining equipment will be shut down. If the computing power and the mining difficulty on Bitcoin’s network decrease significantly, the incumbents will be able to mine more coins.

But for now, the network’s weekly average hashrate has demonstrated a downtrend since last week’s price crash, decreasing to 108 exhashes per second (EH/s) from 118 EH/s at March 9.

Chris Zhu, co-founder of the mining pool PoolIn, said on WeChat that he expected Bitcoin’s hashreate to rise slowly prior to price drop. Now he believes that the computing power will fall 20% to 30% in the coming months.

Bitcoin mining companies buy new equipment

Significant growth in Bitcoin’s hashrate in the past half-year demonstrate the appetites of global mining companies.

Since September 2019, it has increased by 30%, surging from about 90 EH/s to about 120 EH/s.

Considering the fact that the new equipment has been priced between $20 to $30 per terahash per second (TH/s), mining farm operators may have spent over $600 million in recent months to prepare for the upcoming halving. (1EH/s = 1 million TH/s.)

Artem Eremin, product manager of 3logic, a reseller of Bitcoin ASIC miners, said his clients in Russia and central Asia have started purchasing Bitmain’s AntMiner S17s since October to replace old ones (ASICs, or application-specific integrated circuits, are computer chips designed for difficult activities such as mining.)

3logic now sells around 2,500 units of the new machines each month. In October and November it used to be 5,000 units.

Igor Runets, CEO of Bitriver, a mining venue in Bratsk, Russia, said ASICs were purchased actively since last fall, but in January purchases decreased. “There was the Chinese New Year, the coronavirus outbreak, and then the buying activity just didn’t fully recover after that,” he explained.

Similarly in China, major mining farms have been upgrading their facilities with state-of-the-art equipment since the second half on 2019, when major manufacturers started to provide it in bulk.

Zheng said his company scaled up its facilities by 30% with the latest machines by Bitmain and MicroBT since the end of the summer and deployed it before the Chinese New Year.

Some companies, such as Gabriel Xia’s Spark Capital, a China-based fund, started the upgrade even earlier. “We sold all the old S9s in summer last year when its price at the second-hand market doubled and started buying new equipment,” he said.

Mining consolidation

The recent buying spree builds on the large amount of investment poured into the Bitcoin mining in 2019 alone. For perspective, Bitcoin’s hashrate reached 1EH/s for the first time sometime in February 2016. In some 30 months later the network reached 50EH/s in September 2018 — even after the 2017 bull run.

But it only took the network 15 months to double that level and hit 100 EH/s in January 2020.

This growth was made possible thanks to major manufacturers like Bitmain, MicroBT, and Canaan, which have produced and shipped more powerful equipment using more advanced computing chips.

But technological progress meant increasing equipment prices, which forced retail miners to leave the industry.

In 2017, even during Bitcoin bull run, $15 million purchase orders on mining equipment were rare, but in 2019 it changed.

Xia, whose company has been mining since 2016, said:

“With an order like 100 million yuan [$15 million] in 2017, you might be the biggest miner across the network. By 2019, $15 million would only make you just an ordinary big customer.”

Mining companies do not want to hedge against Bitcoin price drops

Traditionally, mining companies would sell their Bitcoins to fund their operations. However, latest developments on the financial market allows them to get working capital even if they want to “hodl” (Bitcoin slang for holding rather than selling).

Xia said Spark Capital’s mined assets have been locked as collateral for loans it took to pay utility bills and expand operations. The company hopes that it will be able to sell its Bitcoins later at a higher price while shortening the time it takes for the mining machines to pay for themselves.

“We are looking at a longer term when we scale up,” he noted.

Dmitry Ozersky, CEO of Electro.Farm, a farm operator in Kazakhstan, said 90% of his clients don’t sell their coins regularly, waiting for price ups.

“Some sold at $12,000, but are now waiting for the price to get above $10,000 again,” he said.

Cynthia Wu, vice president and head of custody at Martixport, Bitmain’s crypto financial services spinoff, said the company now has up to 200 large farms as clients and about $100 million in outstanding loans, most of which were taken by miners to pay for electricity and new construction.

But Bitcoin’s 50% price fall places miners at risk of having their collateral force-liquidated.

Reluctance to sell

As to the liquidation strategy, Wu said it may be different in different jurisdictions, explaining:

“In the U.S., people would sell, because this is how they manage their cash flow. But in China, miners are more long-term hodlers, they are more reluctant to sell. In China, it’s a very typical miner mentality: not spending much of what you mine.”

Sharif Allayarov, head of Matrixport’s business in Russia, says that those who have been in industry for a long time, also do not hurry to sell.

“Newcomers are trying to jump into fiat as soon as they can, but as they stay in the business and see crypto grow, they are becoming less likely to liquidate fast,” Allayarov stated.

Ethan Vera, CFO and co-founder at mining pool Luxor Tech, said that there are miners who want to borrow money to pay bills but “those are usually OGs in the space that are long time miners and very bullish on it.”

Newcomers want to secure themselves from price drops, he noted, adding:

“In general a lot of professionals are entering the mining space in North America. They are from investment banking, corporate finance, oil and gas backgrounds. They historically use financial instruments as a way to hedge their business risk. My conversation with these large miners want to find ways to limit their exposure to the value of hashrate and the price of bitcoin.”

Neither are they interested in trading derivatives, at least in Russia, Runets and Ozersky said. This market is not mature enough, and miners want to get profits from risks, not to spend money hedging against it, Ozersky explained.

However, Matrixport saw some interest for its option product, according to Wu. Out of around 70,000 BTC in options traded at the platform since it was introduced in October, big miners accounted for about 70%.

“They want to be more protected when the market moves,” Wu said. “Miners also want to speculate [on the price] to enhance their yield.”

What to do with S9?

In the meantime, the latest upgrade among major mining companies raises a question: what to do with older mining equipment such as AntMiner S9s and similar models, which have dominated the mining industry since 2019?

With halving being about two months away, and Bitcoin’s price drop to the $5,000 level, well below the breakeven point for these older machines around $,800, will mining companies shut them all down soon?

“Everybody is trying to get rid of S9s,” said Electro.Farm’s Ozersky. Yet he is sure that S9s are not done yet. The main point here is a miner’s strategy.

At Bitriver, which is hosting 70 megawatts to power ASICs for his clients, only about 25% of the equipment are S9s, Runets stated. “Those who wanted to sell them have already sold.”

Spark Capital’s Xia, whose company already got rid of its S9s, says that the machines are only contributing about 20% to 25% to Bitcoin’s total network.

“People have different strategies: some wanted to switch from old machines to the new ones, some opted to buy old ones cheap, hoping to pay them out quickly,” Runets said.

Those who keep 9Ss do not want to stop them even though they operate on the edge of breakeven, according to Runets. “Nobody is switching off, and until the halving, people are going to squeeze everything they can from their old ASICs.”

These mining farms say that it is possible to switch S9s to a lower energy consumption at 700 watts instead of 1,600 watts, giving out 9 TH/s instead of 13 TH/s.

Similarly, some companies such as Electro.Farm and PoolIn suggest clients to level up productivity of S9 by combining two units into one.

The options aim at increasing the overall gross margin so that S9s may still bring a daily profit.

Cheap juice

Next, there are individuals or smaller farms who manage to find cheaper electricity than larger farms.

“If you can find an electricity cost of $0.02 per kWh, sure, you can still play with S9s,” said Hashage’s Zheng.

In Siberia people could even use an S7 with some profit until the end of February, Eremin explained. Retail miners, although fewer and fewer, still can be found also in Kazakhstan and in Abkhazia.

“But here’s another thing: these old ASICs are occupying space and earning less money for the farms as they usually charge a fee off each kilowatt,” Eremin said.

So large farms have incentives to replace old ASICs with newer ones.

For now, Runets is not going to see parts of his farm go offline abruptly, so Bitriver is planning to offer temporary energy price discounts to keep its clients’ machines running.

But in the long term, Xia said, “the S17, S19 or MicroBT’s M20 and M30 will become the new S9 in the next cycle.”