Bitcoin’s hash rate plummeted to a two-month low of 575 EH/s on May 10 as miners shut down unprofitable rigs in the aftermath of the halving event.
Mining Difficulty Drops
On May 9th, Bitcoin mining difficulty dropped by an unprecedented 6% to 83.15 T, the largest decline since 2022 when Terra and FTX’s bankruptcies wreaked havoc on the market.
Hash Price Hits New Low
Bitcoin’s hash price reached a new all-time low of $44.5/PH/s on May 2, marking a staggering 75% decrease from its post-halving peak of $180/PH/s.
Mining Companies Struggle to Break-Even
According to TheMiningMag, nine mining companies, including Marathon Digital Holdings, Riot Platforms, and TeraWulf Inc., had an estimated total hash cost exceeding $55/PH/s in Q1 2024. This figure is higher than the current hash price of $54/PH/s, indicating that these companies operate below break-even.
Forecast
The current hash price is now perilously close to the fleet hash cost for many mining companies. Based on compressed mining margins and declining investment in the sector, hash rate may only grow slowly or decline in the coming months. Miners in Texas might also have to reduce operations due to impending summer heatwaves.
Sentiment
While some companies, such as Riot and Marathon, thrive through efficient operations and strategic expansions, others struggle with profitability. This divergence underscores the pressure to optimize their operations by upgrading equipment, reducing energy costs, and seeking favorable regulatory environments.
Analysis
Despite a drop in the hash rate, miners’ margins remain compressed after the recent halving event. Most companies saw margins decrease by over 50% between pre-halving levels and April 25. Narrow margins have recently worsened as Bitcoin transaction fees came down from the fee spikes induced by Runes.
Transaction Fees and Hash Price
Runes contributed fees worth $117 million between April 19th and April 30th, accounting for 43% of all transaction fees in this period. After this source of revenue fell away, the hash price hit an all-time low of $44.43/PH/day on May 1, causing a dent in the hash rate whose 7-day moving average fell by 11% from 580 EH/s.
Negative Difficulty Adjustment
As a consequence, there was a negative difficulty adjustment of 6% on May 9, the largest since Dec. 5, 2022.
Mining Companies Struggle to Cover Operating Costs
With current hash prices, mining companies are now struggling to cover operating costs. According to TheMinerMag, 9 out of 13 public mining companies had a total implied hash cost exceeding $55/PH/day in Q1 2024. These costs are above the current hash price of $54/PH/day, indicating that they operate below break-even.
Pressures on Profitability
The pressures on profitability are compounded by miners having to compete with AI data centers for power resources. Analysts at investment firm AllianceBernstein stated that this is already the case in places such as Texas.
Need for Upgrades and Expansion
Pressures on profitability make the need to upgrade equipment more pressing. However, many mining companies face financial difficulties in expanding their fleets and upgrading to more efficient hardware due to declining investment in the sector.
Declining Investment in Mining Sector
Public Bitcoin mining companies in North America raised nearly $2 billion in equity financing in Q1 2024. However, less than $500 million has been invested so far in Q2. Mining companies mainly rely on equity financing to expand their operations, but their stock performance has not been strong, affecting the funding amounts they can raise in the future.
Bitcoin ETFs and Mining Stocks
The launch of Bitcoin ETFs prompted some investors to rotate out of mining stocks and no longer consider them a proxy for exposure to Bitcoin. As of May 30, Marathon Digital (MARA) and Riot Platforms (RIOT), two of the largest U.S.-listed miners, have seen their stock prices drop by about 24% and 40%, respectively, even after Bitcoin climbed 60% year-to-date.
Rising Debt Levels
Rising debt levels on the balance sheet of some companies also hinder further expansion. For example, Hut 8 Corp. recorded a debt-to-equity ratio of 29.52% in Q1 2024, approximately a 2x increase from 15% in Q1 2023. Similarly, TeraWulf Inc. has a high debt-to-equity ratio of 36.9%.
The current state of the mining industry is marked by significant challenges, including compressed margins, declining investment, and rising debt levels. To stay afloat, mining companies must adapt to these pressures by optimizing their operations, upgrading equipment, and seeking favorable regulatory environments.
