Bitcoin Price Below $20,000 Puts BTC Miner Profits Under Pressure As Hash Rate Rises

October witnessed an increase in Bitcoin’s hash rate, pushing the metric to a new high of 245 exahashes per second. These changes led to a sharp drop in the hash price, resulting in a drop in profit margins for Bitcoin (BTC) miners, reaching a low of $66.8 per petahash on October 24.

According to Luxor Technologies, “hashprice” is the income BTC miners earn per unit hash rate, which is the total computational power used by miners processing transactions on a proof-of-work network.

Not only has the volume been inconsistent, but the Bitcoin hash rate increased last week to an average of 269 EH/s. This means that the network’s difficulty has increased since July 2022.

The expansion of mining, which creates the competitiveness of miners; the increased use of ASIC miners, which are more efficient than their alternatives; and the Ethereum merger has prompted some Ethereum mining firms to fill empty rack space from non-operational Ether (ETH) GPU miners with BTC-specific ASIC miners.

Consequently, the increase in hash rate resulted in an adjustment in Bitcoin difficulty at a time when BTC’s price was falling. As expected, after the hash rate and difficult increase, the hash price dropped to $0.0657 per terahash per day, thus reducing the profit level.

Increase in mining costs means compressed profits

A contributing factor to the reduced profit level is the general increase in BTC mining costs. For example, there has been a sharp increase in the price of electricity in the USA. From July 2021 to July 2022 alone, the price of electricity increased by 25%, from $75.20 to $94.30 per megawatt hour. Energy prices also tend to increase in winter, as people need to heat their homes. The Bitcoin mining industry is already seeing an increase in mining in Kazakhstan due to affordable energy.

Bitcoin miners face other rising costs, such as hosting fees, acquiring miners, and installing or upgrading cooling systems. During the 2020-2021 crypto bull market, Bitcoin mining companies took out loans when BTC and equipment prices were much higher, meaning that the interest on existing debt itself could hurt newer and legacy mining companies.

It is clear that the increase in hash rate and Bitcoin difficulty, as well as the decrease in hash price, is leading to compressed profit margins. The following graph shows a decline in profits in a landscape where hash rate, difficulty, and power costs continue to rise.

If the hash rate continues to increase in the midst of a falling hash price, the profit margin will continue to decrease, possibly causing some mining firms to close shop permanently.

One possible outcome is that lean (cooler balance sheets) mining companies like Marathon may be able to buy liquidated equipment and rack space from bloated mining companies that fail.

Mining companies that stay lean while trying to scale could turn out to be winners. Mining companies such as Core Scientific, Marathon, Riot, Bitfarm and CleanSpark are preparing for expansion even as many miners find profitability difficult.

Related: Public Bitcoin Miners’ Hash Rate Booms — But Is It Actually Bearish For BTC Price?

Is sustainability the answer?

In light of the difficulties discussed, BTC mining companies should adopt sustainable BTC mining models for both profitability potential and to ease regulators. This should include the use of renewable energy sources, increased production capacity and the installation of advanced cooling systems.

Mining companies can improve their operations by using renewable energy from wind, solar and hydropower, which simultaneously reduces costs and their carbon footprint. This approach can lead to more consistency and sustainability in energy costs for Bitcoin mining. Norway has managed to capture 1% of all Bitcoin mining through a 100% renewable energy approach.

The depressed Bitcoin price, high hash rate and Bitcoin difficulty, as well as low hash price, contribute to small profit margins, which could lead to sustainable, decentralized mining across the industry.