The cryptocurrency mining industry experienced a dramatic drop in profitability across 2018. The late 2017 crypto market run-up saw miner revenues reach an all-time high of nearly $1 billion in a single month, generating massive profits. Extended bearish market action resulted in a progressive decline in mining profitably that saw gross margins shift from 94 percent in January 2018 to just 32 percent in December.
A recent analysis published by blockchain industry intelligence platform diar, however, indicates that Bitcoin mining profitability is rising rapidly. Diar’s report demonstrates the hash rate squeeze placed on smaller miners by large miners with access to wholesale energy and optimal equipment, who have deployed massive amounts of hashing power in order to remain solvent.
The exclusion of smaller scale miners from the mining industry dramatically increased competition across 2018, which resulted in a 60% loss in profitability by the end of the year. The deployment of more efficient mining hardware and the return of miner confidence, however, has seen the Bitcoin hash rate increase by 20% since January 2019, which has led to a 7 percent increase in mining profitability.
Profitability Increase Indicates Mining Growth
Mining industry revenues in January 2019 fell to just $195 million, a 10 percent drop from December 2018 revenues — a far cry from the near $1 billion dollar peak revenue of December 2017. The Bitcoin mining industry lost over 600,000 miners in November 2018 subsequent to a dramatic drop in Bitcoin value, which saw BTC fall to $4,000 for the first time since September 2017.
The September 2017 price drop saw Bitcoin values enter an extended “crypto winter,” and resulted in the cumulative hashpower directed at the Bitcoin network fall from 47 TH/s to 42 TH/s. Mao Shixing, founder of major mining pool F2Pool, stated at the time that the mining enterprise was shutting down and selling thousands of hardware units at a significant loss, with redundant units suitable only for recycling.
A changing 2019 mining ecosystem, however, has resulted in a return to gross margin growth. Gross profitability is calculated by a number of factors — difficulty, the market value of Bitcoin, and the cost of electricity.
Most major mining pools operate massive data centers in regions that offer extremely low electricity prices. Iceland, for example, is a major hub of mining industry activity due to the cheap geothermal power generated in the region, combined with lower cooling costs. Widespread availability of cheap hydropower in China, combined with state-subsidized electricity, makes China a world leader in Bitcoin hash power.
Hashrate Arms Race Heats Up
The availability of cheaper energy prices and the ability to leverage massive amounts of capital has allowed the largest mining pools to leverage highly efficient next-generation mining hardware such as the Bitmain Antminer S15, which offers an 84 percent increase in gross margins over the S9, which is contributing to the overall growth of profitability in the mining industry.
Regardless of drifting profit margins, the Bitcoin mining industry still delivers significant profitability potential — despite an increase in profitability, major pools are obligated to upgrade hardware or lose market share.
The Bitcoin market may not be approaching the bottom, with bullish movements and increasing hash rate indicating a turnaround on the near future, but miners aren’t out of the woods yet. The upcoming 2020 Bitcoin halvening will further reduce mining profitability — the smart play for major mining pools in 2019 will be the investment of Q1 profits in long-term hardware efficiency.
