Bitcoin Mining Bear Market Causes Struggles For Small Scale Miners

Surviving a Bitcoin bear market separates those prepared and those who have overextended themselves. The recent crypto winter has been particularly ruthless to miners who depend on mined revenue to pay employees, everyday expenses, loan payments, and most importantly, their substantial electric bills. Miners can afford to pay a premium on both electricity and Asics during a bull market, and overreaching can bury a miner when profitability tanks.

Following China's shut down of mining, July and August of last year experienced a sudden and rapid drop in difficulty, creating an excellent opportunity for miners. It seemed like available hosting space for miners to expand couldn't catch up even months later. This November, Ethan Vera, COO of Luxor, said, "Many mining companies still have ASICs sitting in their warehouses, waiting to get plugged into racks. These companies are prioritizing dollars spent on infrastructure and future ASIC orders, rather than spot buys."

Given the profitability of miners at the time, people were willing to pay massive premiums for the little remaining space, with many new miners paying up to 14 cents per kilowatt-hour, over two and a half cents higher than the average residential electric rate in the US according to a chart from Ycharts.com.

Asics were also trading at an unheard-of premium. For example, Compass Mining, an American hosting space provider, was charging as much as 21,000 dollars for an Antminer S19PRO as recent as December, which would have taken well over two years to pay back, even considering the high price of Bitcoin that same month according to the BTC.com mining calculator. Inexperienced miners were flocking to purchase, even at these prices, because "50% year over year return sounds really good on paper," a Reddit user told Bitpush. "These new miners had no idea what they were getting into," he continued.

When asked about Asic pricing, Blake from Musk Miners called current miner pricing "nuts," "doesn't make any sense" and "just stupid." He went on to say in Bitpush exclusive interview, "Chinese miners bought these machines months ago at a price. They can't go lower because they purchased them at around 55 dollars per terahash." "They should be 45 dollars per TH. Their ROI should be a year or two. Reasonable pricing should be way less." Prices are not falling because resellers "don't want to take a loss," according to our discussion with Blake.

This demand made hosts eager to bring new space online, and that they did. Since the recent difficulty low following the Chinese mining ban last year, total network difficulty has nearly tripled according to the CoinWarz difficulty chart. For the same amount of computing power, miners make one-third the amount of Bitcoin that they were just ten months ago.

The same S19 PRO machines sold by Compass for 20,000 dollars make $6.31 a day after electricity or about $190 a month. Furthermore, the BTC.com mining income calculator says these machines "Cannot Payback." This means miners will never recoup their original investment, let alone profit.

This massive drop in profitability was driven by two separate events, which caused the "perfect storm for a bear market," AverageBitcoinGuy on Reddit told Bitpush. "People were falsely promised by hosting providers that it would be years before difficulty would rebound to pre-China ban levels. Difficulty rebounded within about three months, and the price of Bitcoin tanked near after, according to CoinWarz's data. Following the difficulty rebound, Bitcoin fell over 55% as past savings in Bitcoin were wiped out, and current mining income was decimated. "There was very little hiding for anyone that overexposed themselves," the same Reddit user continued.

Gustavo from BTC.com said in an interview with Bitpush, "Small miners have been hit quite hard as they have little to rely on, and that little continues to shrink." 

In dollar terms, miners are making about a third of what they were for the same computing power just seven months ago, according to a Hashrate Index chart. Furthermore, because electric prices are constant, the real profit is affected even more and can even go negative if the ASIC is inefficient enough. 

(The Y-axis represents daily revenue per TH)

Blake from Musk Miners in a Bitpush interview said, this bear market is the first of its kind because mining has grown so much. "There are so many residential miners getting into the game." He went on to say, "profitability drops so drastically because of their electrical costs that (new small scale miners) lose out."

These overexposed miners have a few solutions. The lucky ones can learn from their mistakes, stomach the downturn, and accept that they will not be profitable until prices rebound. Hopefully, at the same time, they can search for cheaper power and enjoy Asic pricing lower than they were paying a few months ago.

The less fortunate ones can cash out the machines they have and move on to new ventures. AverageBitcoinGuy on Reddit told Bitpush, "I sold off my farm a month ago. Larger farms are always looking for people willing to sell (their Asics) at a loss, and I got about half of what I paid for them in August. Somehow including the revenue I made this fall, I actually walked out a little ahead." 

Thankfully, Asic pricing hasn't fallen as much as expected according to the hashrate index, allowing the sale to be a viable option for some farms. It is still well above the lows of 2020, and even similar to the pricing people were paying just last July, according to the same Hashrate index chart.

(The Y-Axis represents the average sale price of Asics of varrying efficiencys)

Other farms were not so fortunate. Some investors purchased their machines on loan, which means that if the sale of their machines will not cover the cost, they are stuck. A source who asked not to be named told Bitpush, "I purchased most of my farm with a HELOC, hoping to take advantage of the low-interest rates." He went on to say, "selling isn't really an option because it would only pay off about a third of my loan. I am just trying to make ends meet and hoping they (the Asics) don't go into the red."

Investors hopefully will learn from this going into the next bull and bear swing. "It all comes back to low power costs to endure the bear market," according to the interview with Blake from Musk Miners. These swings are "healthy for the market" and "need to happen," he continued. In the meantime, miners desperately hope Bitcoin prices deviate from their current path, or their problems will only exacerbate.

Author: Garrett Meifert

Related Articles