The Bitcoin hash rate hit a new all-time high above 245 exahashes per second on Oct. 3, but at the same time, Bitcoin (BTC) miner profitability is near the lowest levels on record.
With prices in the low $20,000 range and the estimated network-wide cost of production at $12,140, Glassnode analysis suggests “that miners are somewhat on the cusp of acute income distress.”
Generally, difficulty, a measure of how “difficult” it is to mine a block, is a component of determining the production cost of mining Bitcoin. Higher difficulty means additional computing power is required to mine a new block.
Utilizing a difficulty regression model, the data shows an R2 coefficient of 0.944, and the last time the model flashed signs of the miners’ distress was during BTC’s flush out to $17,840. Currently, it hovers near $18,300, which is not far from the price range seen in the past two weeks.
The hash rate hitting a new all-time high effectively means that miner margins will be further squeezed. Outfits that are unprofitable can either mine at a loss, assuming that BTC’s future price will eventually make up for the cost difference, or they can unplug and wait until either the difficulty drops or energy costs improve.
With the recent rise in hash rate, the difficulty is also likely to rise in the next week, with estimates pointing to a 6% to 10% adjustment.
Shown below are estimations of miner profitability assuming an electricity rate of $0.08 kilowatts per hour.
Depending on a miners’ capital costs and operational costs, the profit stats above clearly illustrate the tightrope some miners are attempting to balance on at the moment.
Despite the stress on profitability, independent market analyst Zack Voell suggested that miners with healthy balance sheets are constantly looking for ways to expand their operations and the recent surge in hash rate could be related to Bitmain’s newest S19 XPs coming online.
Miners who aren't broke or suing each other continuing to deploy what they can. Every month has a couple headlines (at least ) about new facilities being planned or energized. And a lot of the new hashrate is from XPs coming online— Zack Voell (@zackvoell) October 3, 2022
Is Bitcoin in the clear?
What investors really want to know is whether or not Bitcoin price is in the clear or whether there is an elevated risk of another sell-off driven by miner capitulation.
According to Colin Harper, the head of research at Luxor Technologies:
“Miners are still selling in the current environment (for example, Riot sold 300 BTC last month and Bitfarms sold 544 BTC). By my estimation, we’re more likely to be driven lower by general selling, not miner selling particularly. If BTC price does go to $10,000, in addition to more miners capitulating via BTC sales, there would also be a lot of rigs flooding the market. We are not trying to single out Riot or Bitfarms, these are just the current updates we have, besides Hut 8, which didn’t sell any BTC.”
On the other hand, Joe Burnett, the head analyst at Blockware Solutions, said that the bulk of miner selling has likely passed, which reduces the possibility of another capitulation level sell-off.
Burnett told Cointelegraph:
“I think the small miner capitulation Bitcoin experienced this summer knocked out some weak and overleveraged players. I do not think we will see another significant drop in hash rate without Bitcoin making new lows below $17,600. It doesn’t mean individual weak miners won’t drop off this year and next, but the new-gen rigs getting plugged in will likely be enough to keep hash rate trending upward.”
When asked about the surge in hash rate placing pressure on higher difficulty adjustments and the knock-on-effect on miner profitability, Burnett said:
“Individual weak players may drop off and get knocked out, but it won’t be a significant and sudden ‘miner capitulation’ without a drop in BTC price. Margins are definitely tight.”
Glassnode’s model of the “implied income stress of the Puell Multiple, with the explicit stress observation of the Difficulty Ribbon Compression” recently exited the zone where “miner capitulation is statistically likely,” suggesting that another miner-driven sell-off is unlikely at the moment.
The analysts, however, were careful to stress that the aggregate size of Bitcoin held by miners is near 78,400 and any sharp downside move in BTC price could trigger selling from distressed mining outlets.
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