Why Are Bitcoin Miners Struggling to Make a Profit?

Bitcoin mining has become drastically less profitable this year, despite soaring revenues. What’s behind this dip in profitability? Block Explorer editor Ben Brown explores.

New research from Diar reveals that Bitcoin mining has generated record revenues of almost $5 billion so far this year. That’s already higher than 2017 with three months to go.

However, that revenue hasn’t translated into profit.

High energy costs and increased competition in the space means the average bitcoin miner is struggling to make a profit.

In fact, September marked the first month when bitcoin mining became unprofitable for anyone paying retail prices for electricity.

Worryingly, this means bitcoin mining will increasingly be dominated by the “deep pockets” of mining corporations like Bitmain.

bitcoin mining profits infographic
Credit: Genesis Mining

Mining a Bitcoin Costs More Than Buying One

According to further data by Fundstrat, it currently costs $7,300 to mine one bitcoin.

Yet, we can go to Coinbase and buy one bitcoin for less than that – $6,600 at the time of writing.

To come up with its $7,300 figure, Fundstrat takes into account a $4,000 energy fee (at $0.06 kW/h) and $3,300 for equipment, wear-and-tear and other overheads.

So what makes bitcoin mining currently so unprofitable?

More Mining Competition Than Ever

Despite the bitcoin bear market, mining activity is stronger than ever. Bitcoin’s hash power has doubled since May, which means more and more miners are competing to generate Bitcoin blocks.

Hash rate explained: In order to generate a bitcoin block, miners compete to solve mathematical puzzles. The first to solve the puzzle with computational power generates the block and receives the bitcoin reward. The total number of attempts to solve the puzzle per second is called hash rate. The more miners working to solve the puzzle, the higher the hash rate.

The hash rate hit a record high in August. In other words, there are more miners working to generate bitcoin blocks than ever before.

bitcoin hash rate chart
Chart from: Blockchain.com

More competition means each miner requires more energy and computer power to generate a bitcoin block.

Energy Rates are Choking Mining Profits

Because miners need more and more energy to compete, electricity prices are choking their profits.

Diar estimates that anyone paying a retail energy price of $0.10 kW/h can no longer make a profit on bitcoin mining.

Add that to overhead costs such as equipment, rent, and salaries, and you begin to see why profits are declining.

It’s no surprise that 81% of bitcoin’s hashing power originates in China. That’s because energy rates are relatively lower – an average of $0.08 kW/h at retail price.

Bitcoin Mining: Dominated by “Deep Pockets”

Energy prices are even lower when bought at wholesale prices, which only large mining pools can afford to do.

In other words, the dominance in bitcoin mining will shift more and more towards big companies like Bitmain. Bitmain owns two of the largest bitcoin mining pools and commands up to 75% of the world market for mining equipment.

As you can see in the chart, bitcoin mining is already dominated by a small number of pools (Bitmain owns BTC.com and Antpool. At one point in June, Bitmain edged close to 51% of bitcoin hashrate).

bitcoin mining pools chart
Chart from: Coin.dance

With bitcoin prices in a bear market, hash rates at a record high, and fierce competition, miners are increasingly incentivized to join larger mining pools.

And here’s where it interesting. The vast majority of Bitmain’s revenue comes from selling mining equipment (95%). So it’s in Bitmain’s interest to keep bitcoin mining profitable for its miners, wherever they are in the world.

Since Bitmain can purchase cheap energy wholesale in China, where it owns 11 giant mining facilities, it can offset the more expensive mining costs in, say, the US. Bitmain can therefore lure miners to a larger pool by offering more security.

Big Companies Can Afford to Take a Short-Term Hit

The profitability issue is also linked to the fact that bitcoin is at a significantly lower price today than it was in January, offering a lower return. Companies like Bitmain can afford to play the long game, betting on higher profitability when the crypto market turns around.

By that point, Bitmain will have swallowed up more miners and increased its market share.

This all means that power, dominance, and control over bitcoin mining will shift yet further to just small group of mining pools.

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Ben Brown

Editor, Block Explorer News

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