Bitcoin mining profitability threatened as hash rate hits new all-time high

Bitcoin hash rate reached a new all-time high above 245 EH/s on October 3, but at the same time, BTC mining profitability is near the lowest levels on record.

With prices in the low $20,000 range and estimated network-wide production costs at $12,140, ​​Glassnode analysis “suggests that miners are slightly on the way to acute income distress.”

Usually, difficulty, a measure of how “difficult” it is to mine a block, is part of determining the production cost of mining Bitcoin. Higher difficulty means that additional computing power is required to mine a new block.

Using a difficulty regression model, the data shows an R2 coefficient of 0.944 and the last time the model flashed signs of miners’ distress was during BTC’s flush-out at $17,840. Currently, it is hovering near $18,300, which is not far from the price range seen in recent two weeks.

The hash rate hitting a new all-time high effectively means miner margins will be further squeezed and outfits that are unprofitable can either mine at a loss, assuming BTC’s future price will eventually make up for the cost difference, or they can disconnect and wait until either the difficulty decreases or the energy costs improve.

With the recent increase in the hashrate, the difficulty is likely to increase next week as well, with estimates pointing to a 6% to 10% adjustment.

Below are estimates of profitability for miners assuming a power rate of $0.08 kw/h.

Depending on a miner’s capital costs and operating costs, the profit statistics above clearly illustrate the tightrope some miners are trying to balance on at the moment.

Despite the stress on profitability, independent market analyst Zack Voell suggested that miners with healthy balance sheets are constantly looking for ways to grow their business, and the recent increase in hash rate could be related to Bitmain’s latest S19 XPs coming online.

Miners who aren’t broke or suing each other continue to distribute what they can. Each month has a couple of headlines (at least ) about new facilities under planning or energy. And a lot of the new hashrate is from XPs coming online

— Zack Voell (@zackvoell) 3 October 2022

Is Bitcoin in the clear?

What investors really want to know is whether or not the Bitcoin price is clear, or whether there is an elevated risk of another sell-off driven by miner capitulation.

According to Colin Harper, Head of Research at Luxor Technologies:

“Miners are still selling in the current environment (for example, Riot sold 300 BTC last month and Bitfarms sold 544 BTC). In my estimation, we are more likely to be driven lower by general selling, not specifically miner selling. If BTC price goes to $10 000, in addition to more miners capitulating via BTC sales, there will also be many rigs flooding the market, we are not trying to single out Riot or Bitfarms, these are just the current updates we have, besides Hut 8, which did not sell some BTC.”

On the other hand, Joe Burnett, chief analyst at Blockware Solutions, said that most of the miner sell-off is likely to have passed, reducing the possibility of another sell-off at capitulation levels.

Burnett told Cointelegraph:

“I think the small miner capitulation Bitcoin experienced this summer knocked out some weak and surrendered players. I don’t think we’ll see another significant drop in hashrate without Bitcoin making new lows below $17,600. That doesn’t mean individual weak miners won’t drop off this year and next year, but the new gen rigs being connected will likely be enough to keep the hash rate up.”

When asked about the increase in hash rate putting pressure on higher difficulty adjustments and the effect on miner profitability, Burnett said:

“For sure. Individual weak players may drop out and get knocked out, but there won’t be a significant and sudden ‘miner capitulation’ without a drop in BTC price. Margins are definitely tight.”

According to Glassnode, their model of “the implicit income stress of the Puell Multiple, with the explicit stress observation of the difficulty band compression” recently left the zone where “miner capitulation is statistically probable”, suggesting that another miner-driven sell-off is currently unlikely.

However, the analysts were careful to emphasize that the aggregate size of Bitcoin held by miners is close to 78,400, and any sharp downward movement in the BTC price could trigger selling from distressed mining outlets.