Bitcoin Miner Capitulation Incoming

This is one of the most important narratives to consider right now. Bitcoin mining is not profitable at this point in time. In light of this, there is likely to be torrential spot sells to recoup costs.

• Bitcoin miners provide a service (computer processing) and earn Bitcoin.
• The current market dynamics result in negative margins for big players.
• Spot Bitcoin is being sold en masse by them to cover costs of operation.
• The next halving is 2024: will change supply/demand dynamics.

Bitcoin Mining Costs

Converting electricity into Satoshis does not happen without a large sunk cost. Producing Bitcoin is a complicated engineering problem when attempting to scale an operation. Lets do a brief case study considering the costs of an operation:

This insight is shared from the institutional perspective which are the highest contributors to the network (and have to endure the highest costs). A small size residential operation has slightly different considerations but similar theme.

Measurements

As always, when evaluating the productivity of a network there are key metrics to understand. Assessing the performance of Bitcoin can be done from different levels. Lets take a closer look..

Mean Hash Rate can be understood as the collective computational power dedicated to the Bitcoin network. More hashrate is a good thing for network health, resilience and overall operations.

Bitcoin Network Mining Difficulty is a function of the network participants and their ability to process a block. Basically, the higher this number the lower individuals get compensated for their efforts.

Cash Flow of Popular Devices analyzes the marginal profitability of the popular ASIC devices. This is purely electrical consumption, excludes the other costs mentioned above.

These are the key metrics to understand. Bitcoin’s rate of production, network productivity, difficulty, and the cash flow margins for different devices. As technology develops, more efficient models produce higher processing power. Perhaps you are still wondering, who is mining the Bitcoin?

Notable Operations

Below are the publicly traded companies in descending market capitalization. As one can see, there is about a 50% ratio between Costs of Revenue and the Operating Cash Flow. While one could interpret as relatively healthy.

For those who are not familiar with these metric..

Costs of Revenue = The monetary requirement to generate the businesses revenue. Examples including staff, electricity, device maintenance..

Operating Cash Flow = The remaining cash which is produced which can be reallocated to business development, R&D, or device investment.

The trend of this graph is very obvious. The producers are selling almost 100% of their BTC in May, and did do 100% in June. By selling the Sats, it allows them to be more liquid for opportunities — given difficulties with being profitable at this point in time.

This is another interesting graph because it shows that the price of the infamous ASIC miners has correlated well with the price of Bitcoin. If we see more bearish price action, I think we could see Asics go even lower. One could interpret this as an opportunity for both retail and institutions to expand operations as supply increases.

However, theses business models all suffer from one common theme..

One Driver?

The bitcoin mining business relies on.. Mining Bitcoin. There is not much opportunity for alternate revenue streams in the business as all of these companies buy ASICs from Bitmain based out of China.

Other conglomerates like Intel, Apple, and others are developing silicone based chips which could compete, but for now — it is all speculation.

Side note: GPUs are used for Ethereum because they are more efficient at processing that blockchain. ASICs are used for Bitcoin because of the way SHA-256 is processed.

Alternate avenues for development among these companies are relatively easy to understand. Here is a visual to explain different areas of expansion.

Volatility

The unfortunate component of this business is that it is subjected to volatility of the Bitcoin market. When it is going well, it is usually going very well:

The inverse of this is usually true during a cryptocurrency bear market.

Another factor which has become more pertinent recently is the macro economic back drop. This is micro managed by the Federal Reserve but has import implications for these companies.