The price of Bitcoin continues to decline, causing concerns within the industry. However, there is a group that may be even more worried. Miners, who were already facing reduced profits after the halving, are now finding it even more difficult to survive. According to research institutions, if Bitcoin drops to $54,000, only ASIC miners with an efficiency of over 23W/T can remain profitable. Currently, only five models of miners can withstand these conditions.
But the main cause behind this decline is undoubtedly the selling-off by miners themselves. In order to cope with the cash flow issues after the halving, mining companies have been continuously selling off their Bitcoin holdings. In just one month, 30,000 Bitcoins from miners have entered the market.
As Bitcoin approaches the “shutdown price,” miner capitulation is coming to an end. However, the impact of the halving and price changes on miners is more profound than imagined.
Miners, as the direct producers of the limited 21 million Bitcoins, are of utmost importance. Before institutional investors entered the Bitcoin market, mining companies held the largest sway in the industry. The business model of mining companies was simple: apart from mining and selling mining machines, they also provided hosting services for others. The associated costs included electricity prices, labor, and storage maintenance fees. These costs, which were relatively controllable, could be used to determine the basic price for mining machine operations, also known as the shutdown price. Of course, regardless of the business model, the higher the Bitcoin premium, the higher the profit. Since 2011, mining has made many people wealthy, and the history of cryptocurrency has left behind the bitter experiences of mining companies.
In addition to the increasing energy costs, mining rewards are the most crucial indicator for miners. To limit the speed of Bitcoin mining and inflation, mining rewards are halved at fixed block heights. Every time the Bitcoin blockchain produces 210,000 blocks, the Bitcoin block reward is halved. This process occurs approximately every four years. In April of this year, Bitcoin completed its fourth halving, reducing the mining reward from 6.25 BTC to 3.125 BTC.
Every few years, miner profits decrease by half, resulting in a rapid decline in the input-output ratio. This mechanism drives the refinement, industrialization, and scaling of the mining industry. After all, increased computing power increases the probability of obtaining certain profits. This makes mining a typical capital-intensive industry. Due to the decrease in profits, the shutdown price rises after the halving, leading to miner capitulation. In simple terms, miner capitulation refers to the reduction in mining operations or the sale of mined BTC to maintain livelihood or hedge risks. This usually triggers a further decline in Bitcoin prices.
This situation has undoubtedly occurred after this year’s halving. According to data from MacroMicro, the average cost of mining a single BTC at the beginning of June soared to $83,668. As of July 2nd, it had slightly decreased to approximately $72,000. The rising costs and the sharp drop in total miner revenue from an average of $107 million per day before the halving to $30 million reflect the increasing difficulty of mining operations.
CoinShares’ Head of Digital Research, James Butterfill, has shown that during the halving event in April, the price of Bitcoin hovered around the average production cost of miners. Among the 14 known mining companies, including Bit Digital and Riot Platforms, half of them had production costs higher than the average level.
F2Pool, a Bitcoin mining pool operator, has also confirmed this conclusion. Based on an estimated energy cost of $0.07 per kilowatt-hour, only ASIC miners with a power efficiency of 26 W/T or lower can be profitable when the Bitcoin price is $54,000. Specifically, six Bitcoin mining machines, including Antminer S21 Hydro, Antminer S21, and Avalon A1466I, achieve a balance between Bitcoin profitability and loss at $39,581, $43,292, and $48,240, respectively. Other models, such as Antminer S19 XP Hydro, Antminer S19 XP, and Whatsminer M56S++, can achieve profitability at Bitcoin prices exceeding $51,456, $53,187, and $54,424, respectively.
In this context, with the ebb of mining, mining companies have naturally chosen to sell off their holdings to survive, whether it is due to cash flow reserves, industry migration, or exit. Since June of this year, crypto mining companies have sold off over $2 billion worth of Bitcoin, totaling approximately 30,000 Bitcoins. The number of Bitcoins held by miners has reached its lowest level in 14 years.
Fortunately, regardless of the pressure from the previous bear market, mining companies’ asset-to-liability ratio remains favorable, and from the market’s perspective, as the price of Bitcoin declines, small and medium-sized mining farms have begun to gradually cease operations. The mining difficulty of Bitcoin is rapidly decreasing, and miner capitulation is coming to an end. On July 9th, BTC.com data showed that the Bitcoin mining difficulty was reduced by 5% to 79.5T, and the average network hash rate over the past seven days was 586.72EH/s. In line with this data, the number of Bitcoins sent by miners to exchanges for sale has significantly decreased, and over-the-counter trading volume has also dropped. Compared to the previous accumulation of selling pressure, on June 29th, the entire trading volume of mining companies’ over-the-counter trading counters had been exhausted.
In addition to capitulation after the halving, consolidation and mergers have also become the main trends in this round of mining cycles. Equipment upgrades to increase production capacity, the development of low-cost energy regions, and the consolidation of mining pools all require a substantial cash base. Therefore, for small mining companies with unfavorable balance sheets, the best option is to seek financing or, more directly, be acquired.
From a certain perspective, the acquisition of mining companies is also the aggregation of mining pools, which provides more practicality. Even before the halving, the top ten mining companies raised a total of $2 billion through equity financing activities. Marathon Digital, CleanSpark, and Riot Platforms were the companies that raised the most funds in the fourth quarter of 2023, accounting for 73% of the total funds raised. In April of this year, Bradford predicted that the mining industry would eventually consolidate into four core companies: CleanSpark, Marathon, Riot Platforms, and Cipher Mining. It is worth mentioning that these mining companies are also the main force behind the selling-off of Bitcoin after the halving. For example, Marathon sold over 1,790 Bitcoins in May and June.
Another aspect is the integration and acquisition of mining enterprises. This is also a form of aggregation for mining pools and has more practicality. Core Scientific, for example, has moved away from bankruptcy marketing and is now leading in terms of efficiency with 24.23 J/TH.
However, overall, the industrialization of mining is an inevitable trend. Small and medium-sized mining companies, apart from seeking regional differences or improving efficiency to obtain lower costs, are weak in terms of long-term competitiveness. The gradual increase in the shutdown price has triggered a wave of consolidation, which is also normal.
The mining industry is highly cyclical, and the uncertainty of profitability has increased. In this context, both large and small mining companies are weathering the storm through strategic diversification. The AI industry has become a landing place for mining companies to transform.
Unlike previous cycles, the stock prices of the four major mining companies have not outperformed the increase in Bitcoin prices this year. However, the stock prices of small and medium-sized mining companies have shown significant gains, mainly due to the integration of AI. In recent months, several Bitcoin mining companies have started to replace some mining equipment with devices used for running and training artificial intelligence systems.
AI, especially the training of large models, is a high computational and energy-consuming scenario. Before the emergence of GPT, data center operators and mining companies were not friendly to this business, considering that the commercial efficiency was not high enough. However, everything changed with the arrival of GPT. A striking data point is that the energy consumption of ChatGPT queries is ten times that of Google searches.
With this in mind, AI companies began to seek cheap energy and warehouses capable of accommodating a large number of high-performance computing devices. However, data center approvals are subject to strict regulations in all countries. Taking North America as an example, it can take several years from initial approval to completion of construction. Moreover, sites with over 100 megawatts of electricity and suitable high-voltage substations are extremely rare. A few years ago, 80% of data center loads were concentrated in only 6 to 7 markets. However, Bitcoin mining companies, which have low-cost electricity and suitable physical space and computing infrastructure, naturally fit this demand.
Several mining companies have begun to enter this field by providing space equipment rentals and self-operated computing power. Core Scientific, which previously announced bankruptcy proceedings, signed a 12-year cooperation agreement with AI startup CoreWeave in June, providing over 200 megawatts of GPUs. CEO Adam Sullivan stated in an interview, “There are many invitations from AI companies. AI companies are actively bidding and starting to subscribe to mining facilities at prices higher than those in the cryptocurrency field. After announcing the AI infrastructure transaction, top private equity firms have shown increased interest in financing and cooperation.”
Another typical example is Hut 8, which received a $150 million investment from Coatue this year. The purpose of the funding is to build AI infrastructure. Hut 8 has already purchased the first batch of 1,000 Nvidia GPUs and expanded its GPU-as-a-service model. Bit Digital has also made significant moves, announcing an agreement with a client to provide them with 2,048 Nvidia GPUs over the next three years.
Of course, even the transition to AI is not as easy as imagined. Not all mining farms can be converted into compliant data centers, and the cost of building or reusing data clusters to adapt to AI computing is not cheap. The capital expenditure required for AI operations is approximately 20 times that of Bitcoin mining. Therefore, mining, as a business, will continue for small and medium-sized mining companies only if it remains profitable.
However, the results of this transformation are remarkable. Taking the aforementioned companies as examples, Core Scientific expects to generate an estimated cumulative revenue of $1.225 billion within a two-year contract timeline. Hut 8 already generates 6% of its revenue from AI, and Bit Digital’s AI revenue accounts for 27%. The stock prices also reflect the positive expectations, with Core Scientific rising by 25.33% in the past month, Bit Digital rising by 31.25%, and Hut 8 soaring by 67.41%.
In conclusion, whether actively seeking change or forced transformation, the battle for survival by mining companies has only just begun, and the wave of acquisitions is still in its very early stages. In the long run, due to the cyclical nature of mining, diversifying revenue sources through transformation is a path that mining companies must take. Additionally, with signals indicating the end of capitulation, strong support from the shutdown price, and the absorption by ETFs, short-term adjustments should not be feared. The substantial decline in prices is clearly due to limitations in market liquidity.
Looking at the industry, mining, which once dominated the top, is gradually moving away from the center of power in the crypto world. The wealthiest individuals are also facing a shift in their survival. The history of cryptocurrency will continue with the intertwining of various factors.
