Analysts: Bitcoin Miners' Worst Days Are Behind Them

Analysts say that Bitcoin miners' worst days are probably behind them, but the network's soaring hash rate and increase in difficulty are causing profitability margins to decreases.

The Bitcoin hash rate hit a new all-time high above 245 EH/s on Oct. 3. This is a positive development for the cryptocurrency, as it indicates that more miners are joining the network and supporting the Bitcoin network. However, at the same time, BTC miner profitability is near the lowest levels on record.

It seems that miners may soon be facing some serious financial difficulties, according to glassnode's analysis of current prices and production costs. With prices hovering around $20,000 and production costs estimated at $12,140, miners are very close to not being able to cover their expenses. This could lead to serious problems for the Bitcoin network as a whole, so it will be interesting to see how this situation develops in the coming weeks and months.

Bitcoin network hash rate. Source: Hashrate Index
The Bitcoin network hash rate is currently at an all-time high, according to the Hashrate Index.

It is generally accepted that the difficulty of mining a Bitcoin block is a key factor in determining the production cost of the currency. Difficulty measures how "difficult" it is to mine a given block, and as difficulty rises, so too does the cost of production. This is because higher difficulty requires more computing power to successfully mine a new block. As a result, Difficulty is an important metric to keep an eye on when considering the long-term viability of Bitcoin mining.

This model predicts that the current Bitcoin price is not far from the price range seen in the past two weeks, which is good news for miners. However, the model also predicts that there is a high chance of distress in the future, which means that miners need to be prepared for a potential price drop.

Bitcoin: Difficulty regression model. Source: glassnode
The bitcoin difficulty regression model is a powerful tool that can help investors predict the future price of bitcoin.

With the hash rate hitting a new all-time high, miner margins are expected to be further squeezed. Unprofitable mining outfits can either choose to mine at a loss, in the hopes that BTC's future price will eventually make up for the cost difference, or they can unplug and wait until either difficulty drops or energy costs improve.

It is estimated that the difficulty of mining Bitcoin will rise by 6% to 10% in the next week, as the hash rate continues to increase. This may make it more difficult for individual miners to find blocks, but will overall make the Bitcoin network more secure.

Bitcoin network hash rate (left) and projected difficulty adjustment (right). Source:
The Bitcoin network hash rate is projected to increase in the coming months, which will likely lead to a difficulty adjustment. This will make it more difficult for miners to earn rewards, but will also make the network more secure.

Assuming an electricity rate of $0.08 kw/h, miner profitability is estimated as follows: Bitcoin: $3.60 per day Ethereum: $0.60 per day Litecoin: $0.30 per day Dash:

Bitcoin ASIC profitability. Source: DxPool
As more and more people become interested in Bitcoin and other cryptocurrencies, the need for specialized mining hardware increases.

The current state of the cryptocurrency mining industry is one of tight margins and competition. Miners are constantly striving to balance their operational and capital costs in order to maximize profits. The above stats illustrate this reality clearly. Some miners are barely scraping by, while others are barely profitable. It is a tough industry to be in, but those who are able to find the right balance will be rewarded in the long run.

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. The recent surge in hash rate could be related to Bitmain's newest S19 XPs coming online. This suggests that miners are confident in the long-term prospects of the cryptocurrency market and are willing to invest in new equipment to increase their hash power. This is positive news for the future of cryptocurrency mining.

Bitcoin's Price Rises as Fears of a Market Crash Subside

What investors want to know is whether Bitcoin price is in the clear or whether there is an elevated risk of another sell-off driven by miner capitulation. While the market has been relatively stable in recent months, there is still a risk that prices could drop sharply if miners decide to sell their holdings en masse.

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"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.”

It's good news for Bitcoin that the bulk of miner selling has likely passed, according to Joe Burnett of Blockware Solutions. This reduces the possibility of another capitulation level sell-off, which is good news for the cryptocurrency.

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“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: "The higher hash rate is definitely putting pressure on the network, but I don't think it's anything that we can't handle.

“For sure. 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.”

This is good news for Bitcoin investors, as it suggests that the recent sell-off by miners is unlikely to be repeated in the near future. This is due to the fact that the "implied income stress of the Puell Multiple" has recently exited the zone where "miner capitulation is statistically likely." This is a positive development, as it suggests that miners are not currently under as much stress as they have been in the past, and are therefore less likely to sell their Bitcoin holdings in the near future.

Bitcoin miner capitulation risk. Source: glassnode
As the price of Bitcoin continues to fluctuate, miners are at risk of capitulation.

The analysts cautioned that a sharp decline in Bitcoin's price could prompt miners to sell their Bitcoin holdings, which are currently estimated at around 78,400 BTC. They stressed that this could have a significant impact on the market.