Financial Unsustainability of Bitcoin Mining and Likely Industry Consolidation

Bitcoin mining companies are in a zero sum game where economic viability is a race to zero and having a single dominant industry participant is highly probable. Even if it doesnt occur during this halving due to price spikes, structurally it is unsustainable (unless btc doubles in value in perpetuity).

Post Halving, bitcoin miners can expect to see revenues decrease by 40-45% as hashprices decline. For the uninformed, hashprice is the expected revenue per unit of processing power ( which is a multivariable output of global hashrate (difficulty), bitcoin price, and transaction fees.

Analysis of Pre Halving & Post Halving Hash Price

Boxed areas represent current or probable outcomes

Looking at a rough sensitivity of hashprice, post halving we can expect a probably hashprice of $30-$50/PH if miners act rationally and maintain or reduce processing power (this isn't assured as hashprices have skyrocketed in the last 12 months even though it has been very challenging for miners)

Anticipated Miner Gross Revenue, Less Electricity Costs

Boxed areas approximate mean BTC miners

If we take a hypothetical 1TH/s mining operation and look at weighted average fleet efficiency and weighted average electricity costs, we can see that for all but the most efficient operations with the newest equipment and the lowest electricity costs, mining would be cash flow negative.

However, this picture doesnt take into account overhead. Based on public data, I've approximated a very favorable fully loaded cost structure:

Miner Cash Flow – Scenario Analysis

Boxed areas approximate mean BTC miners

It gets even worse when considering equipment costs. If our hypothetical miner went out and bought brand new S21s the day of halving and replaced their entire fleets they are looking at a payback period of a minimum of three years if they have the lowest electricity prices possible (and up to non viable payback)

Payback Period Analysis

This only compounds if they have to borrow money (because miners dont have $35M of cash per TH to replace on hand)

Levered Payback Period Analysis

Factoring this all together. During this halving event, unless BTC doubles in price, most miners are not going to be able to generate cash flow to meet their current debt obligations.

What does this mean

This environment will mean that strategic players with the most favorable cost structures will be the only buyers in the space leading to consolidation. There is too much infrastructure in existence that wont go unutilized, so hashprices will always be forced towards the edge of economic viability. Large, low cost miners will be the only buyers the have the capability and risk appetite to execute transactions.

If BTC does double or more in price, this consolidation may be delayed for a few halving events, but it is a march to the inevitable.

As a note, i work on transactions and have worked on several bitcoin related transactions. The model used here is an approximation of a much more rigorous work product, but it outputs the same outcomes.

4 thoughts on “Financial Unsustainability of Bitcoin Mining and Likely Industry Consolidation”

  1. Why does it matter?

    Miners don’t control the network. No matter how many miners there are, block reward is still relatively the same. Difficulty adjustment is an amazing thing. This doesn’t matter if it’s one company doing all the mining, or hundreds of companies. Either way, new blocks are made and issuance stays the same as always, right on schedule.

    The important thing here is that running a node is still super cheap and easy as it always has been.

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