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Publicly
listed Bitcoin (BTC) miners from Wall Street are grappling with escalating
production costs, with the average expense to mine one token reaching $49,500
in the second quarter, highlighting the growing challenges in the
cryptocurrency mining sector.
Bitcoin Miners Face
Profitability Squeeze as Production Costs Soar
The
increasing costs, driven by rising electricity prices and record-high mining
difficulty levels, have forced many mining operations to pivot their business
strategies. When accounting for depreciation and stock-based compensation, the
total cost surges to $96,100 per bitcoin, putting significant pressure on
miners’ profit margins.
“The
Bitcoin mining industry has faced significant challenges this year, with
revenues and hash prices declining,” CoinShares
commented in the newest report. Overall market activity “has pushed mining
difficulty levels to new highs, intensifying the issue of high production costs.”
Mining
companies are implementing various approaches to combat these rising expenses.
For example, TeraWulf has positioned itself as an industry leader in cost
reduction, achieving production costs of $18,700 per Bitcoin through strategic
power contracts, including a fixed-rate agreement with a nuclear facility at
$0.02 per kilowatt-hour. Their success stems from a fixed-cost power agreement
with a nuclear facility at $0.02/kWh, valid until August 2027.
BitFufu
has taken a different approach, opting
to acquire a majority stake in an 80-megawatt (MW) cryptocurrency mining
facility in Ethiopia. The US company aims to leverage East Africa’s
lower-cost energy to counter diminishing profit margins in the BTC mining
industry. According to the company’s latest report, its production costs surged
by 170%.
AI Integration and
Infrastructure Evolution
In response
to these challenges, mining companies are increasingly diversifying their
revenue streams, with several incorporating artificial intelligence (AI) operations
into their business models. Core Scientific has emerged as a pioneer in this
transition, securing a significant 12-year, $8.7 billion deal with Coreweave
for AI infrastructure.
In 2023, Finance
Magnates reported that following
a challenging 2022, cryptocurrency miners began turning to high-performance
computing (HPC) and AI: both highly energy-intensive sectors.
A
report from VanEck in August this year confirmed this shift, with Matthew
Sigel, VanEck’s head of digital assets research, noting that a pivot from BTC
mining to HPC and AI could potentially generate $38 billion in value for mining
companies by 2027.
“AI
companies need energy, and Bitcoin miners have it,” Sigel commented. “As the
market values the growing AI/HPC data center market, access to power—especially
in the near term—is commanding a premium.”
This
transition has been apparent since last year. For example, HIVE Blockchain
rebranded to HIVE
Digital to reflect its evolving business model, which now includes both BTC
mining and support for HPC and AI industries. The company anticipates that this
diversification will double
its revenue and has announced plans for a new hydroelectric data center to
support these operations.
Bitcoin HODL-ing Looks
More Profitable
A
comparative analysis of mining versus direct Bitcoin investment reveals
interesting dynamics (check the infographic above). A standard 1 MW mining project utilizing advanced equipment like the Canaan Avalon A1566 requires approximately $740,000 in initial investment. With Bitcoin projected to reach
$130,000 by late 2026, operators could achieve full capital recovery within 27
months, assuming stable electricity costs at $0.045 per kilowatt-hour.
However,
for mining operations to match the returns of direct Bitcoin investment, mining
fee revenue would need to increase dramatically to approximately 70% of total
daily issuance over the next four years. Given the historical average of 5%, this represents a significant challenge.
Industry Outlook
The mining
network’s growth trajectory suggests significant expansion ahead. Current
modeling indicates the network hashrate will approach 765 EH/s by year-end
2024, representing a substantial increase from the present 684 EH/s.
Looking
further ahead, the industry faces an interesting inflection point regarding
energy utilization. The potential conversion of globally flared gas, estimated
at 150 billion cubic meters annually, could support sustained growth while
potentially reducing carbon emissions by 63% by 2050.
This article was written by Damian Chmiel at www.financemagnates.com.
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