On August 26, 2018, the Bitcoin network hash speed reached an all-time high of over sixty million petahashes per minute, as miners, as a complete, committed greater funds to securing the community. Over this exact same period, bitcoin prices held above $6,500 per coin in a period of low volatility.
On November 14, 2018, this started to change if bitcoin prices dropped over 10% daily. This sell-off was a part of a wider digital money market correction which has lasted in the days because, as bitcoin has declined nearly 45 percent since late August. Given the fall in bitcoin costs, we monitored Bitcoin mining operators’ estimated profitability and analyzed how this number has changed over the past several months.
To estimate commercial mining profitability, we first needed to estimate the approximate breakeven cost to mine one Bitcoin for a typical commercial miner. Our estimates accounted for the following assumptions*:
- Electricity costs of $0.065 kWh
- Power-usage-effectiveness of 1.1
- Antminer S9i Device Type
- Average device price point of $750
- Device hashing power of 0.014 PH/s
Additionally, the study concluded that the largest concentration of mining centers is located in the Sichuan province, where electricity costs are comparatively lower. For this region, at current USD/RMB exchange rates, the average dollar price per kWh is $0.065.
We assumed that large scale Bitcoin mining centers operate at a power-usage-effectiveness (PUE) of 1.1. PUE is the ratio of total amount of energy used by a computer data center facility (including, lighting, cooling, etc) to the energy delivered to computing equipment (mining rigs). While traditional data centers often have a higher PUE ratio, Bitcoin mining centers have been known to operate at significantly lower ratios: Giga Watt Mining claimed a PUE of around 1.05; Bitfury claimed its Norway data center operated at a PUE of below 1.05 and Bitmain’s China domiciled mining centers were said to operate at a PUE around 1.1
With our assumptions in place, we diagrammed estimated breakeven mining costs over the past several months. In the chart below, we overlay our mining breakeven estimates with TradeBlock’s XBX Bitcoin Index.
Figure 1: Bitcoin Prices Fall Below Breakeven Mining Costs
Shown in Figure 1 above, we estimate that as hash rate peaked between August and September, the cost to mine one Bitcoin accelerated until reaching nearly the same price that bitcoin was trading at in the market. Given the rising mining costs, yet stable bitcoin prices, mining profitability began to decrease as shown in Figure 2 below.
In mid November, as bitcoin prices suddenly began crashing, mining profitability turned negative for the first time (according to our estimates) as bitcoin traded well below mining costs.
Figure 2: Mining Gross Margins Turn Negative as Bitcoin Prices Fall
In response to a low-negative profit margin mining environment, we anticipate that miners, as a whole, began allocating resources away from securing the Bitcoin network which resulted in a hash rate decline. In the chart below, we diagram the hash rate seven day moving average overlaid with our mining profitability estimates. Our expectations are supported by reports that certain Bitcoin mining operators have recently filed for bankruptcy, thus ceasing resource allocation to the network.
This, however, is not the complete picture as the network hash rate also likely declined in part by the”hash warfare” which pulled mining resources away from the Bitcoin network. The”hash warfare” started when Bitcoin Cash undergone a tricky fork on November 15, 2018, which led to two rival chains.