Mass Sell-Off at Bitcoin Mining Companies as Value of Bitcoin Falls and Energy Costs Rise

Bitcoin mining companies will become unprofitable as the value of bitcoin falls, combined with rising electricity costs to power the energy-intensive computers used by miners.

During the fourth quarter of the fiscal year, the average energy cost for Bitcoin mining was more than $0.05 per kWh. These energy expenses make up a significant portion of the total cost of producing a single Bitcoin, which was estimated at around $13,500 for the fourth quarter, compared to an average of $11,000 for the entire fiscal year 2022. In addition to energy costs, other expenses such as general and administrative costs also contribute to the overall cost of mining each Bitcoin, with estimates ranging from $6,000 to $7,000 per coin. This means that it can cost around $20,000 to mine one Bitcoin.

Canaan Inc, followed by Hut 8 Mining Corp, Riot Blockchain, and Marathon Digital Holdings they have all been impacted by energy prices and are looking to sell their shares in order to sustain their mining production in 2023.

Mining firms were enticed to take on debt between the 2020 and 2021 time frame in order to “pump” their shares. The concept was straightforward: as long as Bitcoin's price is high, a company may produce more Bitcoin by operating additional mining rigs, which increases its capacity to do so, as well as its revenue and stock value. After growing its Bitcoin mining power by 4.5 times to 13.5 EH/s (a metric of “hash rate” or deployed computing power) at the end of 2021, publicly traded Core Scientific, for instance, saw its mining profits climb by 3,440% to $210.8 million in this time frame. In the first three months of this year, Hut8, another Bitcoin miner, added 9,592 computers, nearly tripling its capacity.

When energy prices increased during the summer and Bitcoin fell, the fun for riskier miners abruptly came to an end. Nobody anticipated both. Due to a grid that was overloaded and an energy agreement that priced electricity at market rates.Electricity expenses that were almost three times higher than the monthly average. Margins decreased from 70% to 20%, which is insufficient to pay debts and cover energy bills. For miners, generating a profit became nearly difficult, and the industry has received a huge blow similar to the dot-com bubble implosion.

Debt-ridden miners are currently in a challenging situation. Selling Bitcoin that was mined during the bull run would now only be worth 25% of its all-time high, while the cost of mining rigs, which is directly related to the price of Bitcoin, has fallen. Second-hand sales of unused individual miners are currently less expensive than the wholesale manufacturers' listed prices, and they even include the same warranty. As rising operational costs reduce their margins, the stock prices of all mining companies have all fallen.

None of the current lenders in the industry would issue longer-term debt with repayment terms of at least three years, which could prevent another liquidity crisis.Also it will take years for institutional lenders to regain trust in the cryptocurrency industry after the collapse of FTX.

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