Bitcoin Hash Rate Hits All-Time Highs, Squeezing Miners’ Profit Margins

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By Landon Manning

Amid a bear period for bitcoin, the hash rate and difficulty of mining new coins has reached an all-time high, presenting exciting new challenges and opportunities as mining companies, pools and miners individuals look to the future.

New data from Coin Metrics showed a sudden increase in Bitcoin’s hash rate, just weeks after a two-month period of subdued activity. This period included a trend of miner capitulation, as more and more individual and smaller companies began to take actions such as selling all their mined coins for dollars, tapping into cold storage bitcoin reserves to money and cease operations altogether. However, compared to the start of this period in early summer, bitcoin price remained relatively flat as the hash rate increased significantly. Companies felt the heat across the industry, especially those with razor-thin profit margins.

Bitcoin operates on proof of work, which is the foundation for many of its most attractive features. Its decentralized and trustless blockchain can operate without a central authority governing it, only because transactions are included via an immense amount of hash functions, executed by players around the world. Miners use computer hardware to solve puzzles, which guarantees the ledger of all previously mined bitcoins and is itself the source of new bitcoins. As more and more miners contribute to the computing power of the network and therefore increase the hash rate, the individual rewards drop significantly.

The days when a hobbyist could make a net profit from running the mining algorithm in the background of ordinary computer operation are long gone, and many small miners are driven by the combination of less bitcoin mined and mined bitcoin which is worth less. Thus, the differentiation of failures and successes in the future of the industry will largely depend on the concentration and organization of capital. As Fred Thiel, CEO of mining company Marathon Digital Holdings, said in an interview with Bitcoin Magazine, “Miners who are well positioned, well capitalized and can operate from a position of strength are going to benefit.”

Thiel’s company, he claimed, had planned for this eventuality, focusing on a “very significant” increase in capacity over the past few months, adding that “we are actually one of the companies contributing to this hash rate growth”. For companies that find sufficient power sources and are well-positioned to survive spikes like this, the continued capitulation of smaller miners could result in a much larger slice of the pie. In other words, when the price of bitcoin rises again, these durable trades will find themselves in a lucrative position.

Nevertheless, it is possible that other external factors will eventually make the situation more untenable, even for capital-intensive mining companies like Marathon. Although the use of bitcoin in China has recovered from the 2021 government ban on mining, and China continues despite the ban to be one of the main producing countries, it has gone from higher in 10th place. And the government is still very willing to continue the mining operations that exist. The shadow of this ban hangs over bitcoin mining companies, as legal moves against bitcoin are considered in the United States.

Following attempts to assess the Bitcoin industry’s net contribution to the environment, President Joe Biden’s White House has signaled that it believes future carbon emissions targets may be at odds with the very existence of Bitcoin mining in the country. Leaving aside the contentious issue of whether these allegations are true or not, it is clear that a warning shot has been fired. Yet, more specifically, worried Bitcoiners should rejoice in a simple fact: compared to China, the United States government is currently much less equipped to take any kind of authoritarian and unilateral action, especially against an asset. which benefits from the support of private companies and from within the State itself.

A White House spokesperson was interviewed by The Verge on September 16, 2022, to explain the executive’s position, and was particularly vague on the topic of specific actions. Highlighting the need to promote information and cooperation, one of the few specific measures that was dropped was the use of federal agencies to assist state and local governments in their own “local impact” initiatives. Asked directly about the possibility of executive action, the only clear answer was that “there is no set timeline.”

In other words, even if a top-down campaign against bitcoin mining were launched – and it’s not clear if anyone in government has a clear plan of what such a campaign would look like – it doesn’t seem probable that radical changes can be organized or executed in the current political environment. Bipartisan support among lawmakers would only deepen the current deadlock in Congress, and executive orders alone are not enough to attack a multi-billion dollar industry.

From a legal standpoint, a doomsday scenario for miners seems highly unlikely, but it’s important to consider potential issues like this alongside more pressing issues, such as production levels and profitability. Bitcoin and its mining industry have weathered an incredible series of storms since its release, and many miners are already taking a view on how to weather this one. When the clouds clear, the spirit of innovation and adaptability will be stronger than ever.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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