Bitcoin Mining Industry
The profitability crisis in the mining industry forces miners to find new ways to survive
Optimization and hedging strategies for miners
The mining industry is undergoing an acute crisis. Profit margins are thinner than ever, and distressed miners are turning to last-resort solutions to remain in business.
With the global economy in recession, relentless inflation smothering most fiat currencies, and rising interest rates, Bitcoin has traded sideways for several months. Added to the increasing network difficulty, this is making it more difficult to break even for most miners.
But it gets worse. Electricity prices worldwide are increasing, eating into mining profits even more. And with the winter approaching, it doesn’t seem to be getting better any time soon.
As a result, only Bitcoin miners with the most efficient mining hardware are managing to remain in business without any extraordinary measures.
Desperate times call for desperate measures
Due to the harsh market conditions listed above, many miners had to go into damage control mode.
Those less affected were forced to sell their BTC treasuries to cover their debts, as well as several operational and capital expenses, sometimes selling more than what they had mined.
Other less fortunate mining enterprises had to turn to liquidating their capital, like miners or facilities and, in the most extreme cases, their entire operation. This opened a window of opportunity for mergers and acquisitions for larger miners with fatter profit margins, leading to a further concentration of hashrate among the top mining companies.
There was also room for more creative measures, like signing exclusive deals with energy providers to reduce electricity costs, or recycling ASIC miner heat for other activities that provide additional sources of income. Distilling whisky, greenhouse conditioning, and drying wood are only a few of the examples in this field.
The variety of measures adopted and the amount of acquisition and partnership deals coming up throughout the landscape show how complex the situation is. And if that wasn’t enough, the entire mining industry received a wake-up call after the recent bankruptcy filing from Compute North — a perfect example of what these miners are trying to avoid.
Yet, as mentioned above, it’s likely that conditions will continue to worsen. If that happens, miners who have managed to stay afloat may have to return to the trenches and tighten their damage control strategies.
But what are their options?
The mining industry needs liquidity
As some miners enter more critical situations, their options are more limited. After all, you can only sell your assets once. In that scenario, distressed miners are forced to reduce costs, increase their revenue, or go out of business.
Reducing costs is almost exclusively an electricity price issue. Besides the already mentioned deals with energy producers, other ways miners can do this is transferring the operation to a location with cheaper power or producing the energy themselves — both extremely impractical.
In terms of increasing revenue, Bitcoin leaves little options. Miners need to acquire more hashrate, or make their existing one more efficient. The only way to do this is by running better, newer hardware.
The catch is all these scenarios require a capital investment, and the mining industry is undergoing a liquidity crisis. While there are entities offering loans to miners, the conditions are less than ideal. Of course, in their current situation, miners don’t have much room to negotiate.
There’s a third option: Hedging against difficulty changes, price volatility, and payment variance using hashrate contracts.
How hashrate contracts help
Hashrate contracts are a new type of hashrate derivative that allows miners to “lock” their Bitcoin mining capacity in a bilateral agreement for a set period of time in exchange for a fixed payment.
Imagine a miner is running 100 Antminers S19 XP of 140 TH/s each, and their electricity costs are $0.10 per kW/h. This miner would be earning around $971 and spending $722 in electricity, ending up with a net profit of $249 per day. However, difficulty increases or mining pool luck could easily impact these earnings.
So, this miner decides they don’t want to run the risks, and resign some of their profitability for the sake of security and predictability. To do that, they create a hashrate contract to sell their hashrate for $27,000 worth of LMR for a duration of 30 days, or $900 per day.
As soon as a buyer acquires the miner’s contract, they have to lock the funds in a smart contract, which will deliver them upon contract fulfillment.
That way, the miner secures a fixed payment after 30 days that’s not affected by difficulty changes or pool luck. All is done in a decentralized, peer-to-peer manner without any intermediaries involved.
Why we do what we do
Bitcoin miners are between a rock and a hard place, and will likely continue to be for months to come.
In that scenario, proper risk assessment and hedging, treasury management, and a tight business strategy will become necessary for them to weather the storm.
With the Lumerin Hashpower Marketplace, miners can rely on additional hedging instruments. This will help them develop proper, long-term business strategies that help them navigate tough market conditions while unlocking new opportunities for their hashrate.
Do you want to learn more? Sign up for the Lumerin Explorer Program to enjoy early access and be among the first people in the world to mine Bitcoin with decentralized hashrate contracts!
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