Can the problems of Bitcoin miners trigger a “death spiral” for the BTC price?

by · July 17, 2022

A July 9 post by @PricedinBTC about the “cost of extracting Bitcoin” in the US gathered the attention of the crypto community, especially considering the recent headlines made by BTC miners. The crypto bear market and rising energy costs have caused a perfect storm for the mining sector, and this has led some companies to lay off employees and others to postpone all capital expenditures. Some went so far as to raise concerns that Bitcoin miners hit a “death spiral”.

However, Raymond Nasser, CEO of Arthur Mining, a professional mining company operating in the United States, told Cointelegraph that their margins do not fully match the data from @PricedinBTC.

Arthur Mining’s current capacity is 25 megawatts (MW) and the company focuses on environmentally friendly energy sources. To begin with, one could dismiss their figures as listed companies such as Marathon Digital Holdings have 300 MW plants, but these are dependent on traditional grid energy – even though part of the power comes from hydropower plants.

To achieve best practice for the environment, social and governance (ESG), small-scale mining uses underestimated torch and stranded gas from the oil and gas industry. Their secret is mobile Bitcoin mining, tapping greener, more efficient and more profitable energy sources compared to traditional solutions.

Regarding the production cost of $ 16,000 for miners, Nasser said:

“These charts are extremely subjective. The largest new projects in the industry are looking for off-grid solutions, and this chart represents some of the most expensive online energy costs used in urban areas. Our all-in energy costs are lower than $ 0.02 kWh in two different US states. “

Electricity costs have doubled in the last year

Data from QuickElectricity shows that from March 2022, commercial electricity costs per kilowatt / hour (kWh) ranged from $ 0.08 to $ 0.09 in the US state of Idaho, Utah, Virginia, Texas, Nevada, North Dakota, Nebraska and Oklahoma.

One of the strengths of the Bitcoin network is that it prioritizes efficiency, which means that the labor-intensive production process will always find the lowest operating costs and shift towards it. ASIC mining equipment is mobile, but more importantly there are options for other energy sources. For example, these machines can be installed in containers, sent to offshore oil and gas structures and work with oscillating power sources.

To date, Upstream Data, a Canada-based manufacturer of Bitcoin mining data centers, is building portable Bitcoin mining equipment and natural gas infrastructure without the need for pipelines or midstream facilities. Having distributed over 180 of these data centers, it is becoming clear that this activity is becoming mainstream.

Earlier this year, CNBC investigated how renewable energy is used in the Bitcoin mining process, and to date, Giga Energy Solutions, a natural gas Bitcoin mining company, has signed agreements with more than 20 oil and gas companies, four of which are listed.

Higher interest rates and Bitcoin collapse hurt BTC miners

Regardless of energy source, miners have struggled with their balances. In addition to the impact of lower Bitcoin prices, financing has been a major obstacle in the industry. A Cointelegraph report on July 7 examined how industrial-sized Bitcoin miners owe around $ 4 billion in loans, and some have been forced to liquidate their BTC holdings to cover capital and operating costs.

However, not all mining companies have access to traditional long-term bank financing. Thus, these companies created a more risky debt structure by offering their miners and infrastructure as collateral. As the price of Bitcoin fell, so did the prices of mining equipment, which in turn worsened their financing conditions when they needed it most.

Blockware Solutions analyst Rich Ferolo expressed his concerns to the Cointelegraph on June 28:

“For s17s [ASIC miner]to $ 0.07 per kilowatt, BTC must be around $ 18,000 …. you will see a lot of capitulation, insolvency and redundant machines … It’s more about survival of the fittest. “

According to Nasser:

“We have always curbed our convexity exposure by immediately reinvesting or liquidating our bitcoin balances on a weekly basis. We understand that with 70% + ebitdas and high efficiency in most cases, being too greedy by keeping Bitcoin reserves can ruin your operations and cost you jobs, as we have seen in the last month “.

The mining industry has a problem, but the impact is limited

The industry clearly has a problem, but this may simply be a reflection of its infancy. Nevertheless, the impact of miners selling more Bitcoin than they have extracted in the last few months could create further pressure on the price of BTC.

This endless cycle reinforces the “death spiral” theory, but this oversimplification fails to take into account that miners simply turn off their machines below a certain price threshold, and that many will locate in areas with cheaper electricity costs or even seek out renewable alternatives. .

Although reduced mining activity effectively poses a short-term risk as the network becomes less secure, this risk is overestimated because Bitcoin’s difficulty adjustment increases the profitability of operational miners. In short, the Bitcoin mining business poses no systemic risk to the BTC price.

The views and opinions expressed here are solely those of author and does not necessarily reflect the views of the Cointelegraph. Every investment and trade involves risk. You should do your own research when making a decision.