Charting Bitcoin Mining Profitability Estimates Over Time

On August 26, 2018, the Bitcoin network hash rate reached an all time high of more than sixty thousand petahashes per second, as miners, as a whole, dedicated greater resources to securing the network. Over this same time, bitcoin prices held above $6,500 per coin during a period of exceptionally low volatility.

On November 14, 2018, this began to change when bitcoin prices declined over 10% on the day. This sell-off was part of a broader digital currency market correction, as bitcoin declined 45% since late August. Over this period of time, various miners declared bankruptcy. In order to determine just how the collapse in market bitcoin prices squeezed mining operators’ margins, we constructed breakeven mining costs overtime.

To estimate commercial mining profitability, we first needed to estimate the approximate breakeven cost to mine one bitcoin for a typical commercial miner. Our estimates accounted for the following assumptions:

  • Electricity costs of $0.065 kWh
  • Power-usage-effectiveness of 1.1
  • Straight line depreciation over 2 years
  • Antminer S9i Device Type
    • Average device price point of $750
    • Device hashing power of 0.014 PH/s

Our electricity costs are based on expected prices for commercial data center operators in the Sichuan province of China. A 2017 study, conducted by Cambridge University, estimated that nearly 60% of mining hardware is operated out of China. Additionally, the study concluded that the largest concentration of mining centers is located in the Sichuan province, where electricity costs are comparatively lower. For this region, at current USD/RMB exchange rates, the average dollar price per kWh is $0.065.

We assumed that large scale Bitcoin mining centers operate at a power-usage-effectiveness (PUE) of 1.1. PUE is the ratio of total amount of energy used by a computer data center facility (including, lighting, cooling, etc) to the energy delivered to computing equipment (mining rigs, in our case). While traditional data centers often have a higher PUE ratio, Bitcoin mining centers have been known to operate at significantly lower ratios: Giga Watt Mining claimed a PUE of around 1.05; Bitfury claimed its Norway data center operated at a PUE of below 1.05 and Bitmain’s China domiciled mining centers were said to operate at a PUE around 1.1

With our assumptions in place, we diagrammed estimated breakeven mining costs over the past several months during a period of time that saw bitcoin prices fall considerably. In the chart below, we overlay our mining breakeven estimates with bitcoin prices reported from a bitcoin index (XBX), that is provided by TradeBlock.

Figure 1: Bitcoin Prices Fall Below Breakeven Mining Costs

Data for chart sourced from the TradeBlock Professional Platform

As shown in Figure 1 above, as the bitcoin network hash rate peaked in the late summer months, the cost to mine one bitcoin accelerated until reaching nearly the same price that bitcoin was trading for in the market. Given the rising mining costs, yet stable bitcoin prices, mining profitability began to decrease as shown in Figure 2 below. This stymied mining operators’ profits until the point where they were operating at razor thin margins.

In mid November, as bitcoin prices suddenly began crashing, mining profitability turned negative for the first time (according to our estimates) as bitcoin began trading well below these estimated mining costs.

Figure 2: Mining Gross Margins Turn Negative as Bitcoin Prices Fall

Data for chart sourced from the TradeBlock Professional Platform

In response to a negative profit margin mining environment, we anticipate that miners, as a whole, began allocating resources away from securing the Bitcoin network in the fall months. This, likely, was primarily responsible for the incredible decline in hash rate that occurred in October until mid December.

In the chart below, we diagram the hash rate seven day moving average overlaid with our mining profitability estimates. Notice that as mining operators’ profit margins to turn flat to negative, hash rate begins to decline as operators turn off rigs either as they shut down (due to bankruptcy) or as they wait until bitcoin prices recover.

Figure 3: Bitcoin Network Hash Rate Declines as Mining Profitability Falls

Data for chart sourced from the TradeBlock Professional Platform

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John Todaro

John is a former wall st trader @citi. Crypto investor and entrepreneur that loves to write in-depth articles relating cryptocurrency and blockchain.

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