History rhymes, but it never repeats.
The adage holds true for the mining companies weathering the current Bitcoin bear market. For miners who have weathered previous bust cycles, many characteristics of the current mining market are familiar to them.
But the 2022 bear market is unique for several key reasons, including the number of publicly listed miners, increasing political pressure, expensive energy markets and a diversifying landscape of competitors.
Public miners
Publicly traded Bitcoin mining companies were an industry focal point last bull cycle. For many of these companies – many with no previous mining experience – Bitcoin was a sandbox of opportunity to play in. But as the market sentiment soured, the game changed. And many of these mining companies are now struggling in the headwinds of macroeconomic uncertainty and a brutal Bitcoin winter.
The scale of public hashrate makes this time different compared to last cycle. Of the mining companies currently trading on U.S. markets (e.g., Nasdaq and NYSE), roughly 20% were listed in the past two years, according to historical price datasets accessible through TradingView.
Not only have listings increased, but these companies are representing a rapidly increasing share of the network’s total hashrate. Mining analyst Jaran Mellerud shared data that shows the public mining sector’s share of hashrate reached 25% in October. In real terms, public hashrate has nearly tripled in the past year, according to Mellerud.
Political pressure
Environmental concern trolling is nothing new for the Bitcoin mining industry. Perhaps the most iconic example is a headline from 2017 predicting that all the world’s energy would be consumed by Bitcoin within three years.
Even as Bitcoin’s price has gone down, climate critics have accelerated their attacks. One of the most prominent documented criticisms of Bitcoin mining comes from the 46-page report published by the White House in September, which called into question the young industry's effects on global climate change.
Academics piled on as well. Cornell Engineering published a study on incentivizing “carbon neutral mining” in the September issue of the journal Energy & Environmental Science. A paper by three economics researchers from the University of New Mexico argued that Bitcoin mining was not becoming more sustainable. Earthjustice and the Sierra Club, two prominent environmental activist organizations, also published a 37-page report detailing the climate effects from Bitcoin’s energy use.
There is little reason to believe these attacks will wane in the coming months. And with a bigger public-facing share of the mining industry than ever, these climate critics have a big target to aim at.
Energy markets
Tumultuous energy markets caused by the recent pandemic and resulting economic upheaval have made this bear market uniquely challenging for many Bitcoin mining teams. As profit margins tighten, some miners are seeing energy costs skyrocket – a combination that could end in disaster.
For example, Argo Blockchain saw profits dwindle considerably as natural gas prices soared. Core Scientific also announced it was raising its hosting rates to $0.10/kWh, citing soaring energy costs. Undoubtedly, Argo and Core are not the only miners battling high power prices.
Eager to hate on Bitcoin, some pundits have capitalized on this particular industry dynamic to predict doom for the whole sector. But veterans have protected themselves from variable energy costs, and some miners use free or even negatively priced energy for their mining.
Diversifying competition
Bitcoin mining is a zero-sum game at its most basic level – competition for finding new blocks. As the bear market continues, the roster of players left to compete in this game will thin as some companies fail or teams pivot to other activities.
But unlike other bear markets, the battle for new blocks is powered by hashrate with an unprecedented geographic distribution and energy mix diversity. These energy mixes are often cheap, if not costless. From hobbyist miners using machines to heat greenhouses or warm pools to monetizing micro grids in Kenya and harvesting methane from landfills, the explosion of new energy niches in mining grows every month. More of these specialists from other industries are integrating Bitcoin mining into their operations, making the competition for cheaper marginal hashrate fiercer and more globally dispersed than ever before.
End of winter?
When the bear market will end is anyone’s guess, and persistent macroeconomic troubles will likely prevent a decoupled resurgence in Bitcoin markets for the foreseeable future. For now, every Bitcoin mining team’s priority is to survive. New market cycles bring new challenges, and the current market is more challenging than ever before. Whoever survives to the next bullish cycle will truly be a hero.
