Introduction
In our previous Bitcoin article, we established our price projections for the entire year of 2024. In short, we expect a flat price movement through the Bitcoin (BTC-USD) halving before going to a new all-time high (ATH) at $90,000. Then, we started observing Bitcoin mining companies through this lens. We intended to identify the Bitcoin mining company that could outperform the sector, but what we found was the emerging risk of a sector-wide consolidation. Therefore, we want to discuss the severe and adverse implications of this observation for Bitcoin.
The Reckoning of Bitcoin Miners
The Unsustainability of Today’s Bitcoin Miners
We project the average Bitcoin price from today (as of the time of writing) through April 2025 to be around $66,000. Then we benchmarked this projection against the major Bitcoin miners to determine their sustainability and profitability. Here’s what we observed:
- Only Marathon Digital Holdings (MARA) and Iris Energy (IREN) can break even (Table 1) based on today’s Bitcoin price.
- Post-halving, only IREN and MARA (barely) are expected to break even after the halving event (Table 2).
- The general total business costs per Bitcoin rose across the board, except for MARA and CLSK (potentially a one-off spike).
Therefore, these observations imply that the risk of another wave of bankruptcies is real and tangible. For instance, the ones that “went down” (or nearly) in the previous bear market include Compass Mining, Bit Digital, Core Scientific, Greenidge Generation, Compute North, USBTC, and others. These unsustainable mining operations can potentially lead to a sector-wide consolidation.
Table 1. Total Mining Cost Per BTC ($) of IREN, BITF, CLSK, RIOT, HUT, HIVE, and MARA
Quarter (CY) | IREN | Bitfarms (BITF) | CleanSpark (CLSK) | Riot Platforms (RIOT) | Hut 8 Corp. (HUT) | HIVE Digital Technologies (HIVE) | Marathon Digital Holdings (MARA) |
2023Q3 | 44,600 | 60,452 | 65,800* | 80,500 | 53,700 | 39,900 | |
2023Q2 | 33,640 | 41,300 | 37,050 | 51,500* | 70,800 | 45,400 | 39,500 |
2023Q1 | 26,600 | 33,276 | 97,740 | 70,900 | 37,000 | 32,100 | |
2022Q4 | 34,200 | 30,500 | 53,200 | 59,900 | 48,000 | 44,400 |
Source: Author, * After deducting credits received
The Cause: “Slow and Steady”
The increase in mining cost per BTC presented can be explained by what we coined as “Slow and Steady Lose The Race.” We observed that Bitcoin mining companies that expanded slower than the Bitcoin network saw (1) their Bitcoin production decline and (2) their cost basis increase. Slower-than-network growth lowers a miner’s network share and thus its Bitcoin production, while the slow expansion will still bring about higher operating costs and depreciation costs. Combining both production decline and higher costs results in an overall higher cost basis for the mining companies.
Some might argue wouldn’t a 0 expansion reduce the cost basis?
In this study, we compared HUT’s 0 expansion to BITF’s “some” expansion. Here are the findings:
- HUT’s total mining cost declined by 44% thanks to lower depreciation and operating costs. However, the total mining cost PER Bitcoin went up 88% because the Bitcoin production decline was so severe.
- BITF’s total mining cost increased by 33% due to higher depreciation and operating costs. However, the total mining cost per Bitcoin went up only 72% because the Bitcoin production decline was much less severe.
Hence, not expanding will result in a steeper decline in Bitcoin production that increases the overall cost basis.
Based on these observations, a miner’s top priority is to outgrow competitors, in other words, to grow faster than the Bitcoin network hash rate. In summary, the eventual outcome of a Bitcoin mining company that constantly falls behind the network growth is declining production and rising cost basis to the point of business infeasibility.
The Ripple Effect and Bitcoin’s Long-Tail End-Game
Firstly, the unsustainability of Bitcoin miners can add downward pressure to the overall Bitcoin price. Simply, the higher the mining costs, the more Bitcoins had to be sold to cover expenses. This adds selling pressure. We’ve also seen how Bitcoin mining companies liquidate their Bitcoin holdings during times of distress. For instance, HUT, which previously had a perfect 100% HODL track record, liquidated its Bitcoin holdings to cover expenses and expansion. Other miners such as BITF, CLSK, HUT, and HIVE had also tapped into their Bitcoin reserves to cover expenses and expansions. The depressed Bitcoin price continues this vicious cycle.
This vicious cycle could then force weaker miners (those losing network share) out of business and a series of acquisitions, mergers, and ceases of operations is likely to occur in the Bitcoin mining sector. Any one of these events contributes to a sector-wide consolidation because they result in fewer but bigger Bitcoin mining companies. These events also highlight the ability (operational sustainability) to outlast competitors because the surviving miners gain network share when a miner ceases operations.
Another implication we can draw from this potential sector consolidation is to focus only on the strongest miners. We strongly favor CLSK while keeping tabs on MARA, BITF, and IREN. We favor CLSK because CLSK has shown consistent Bitcoin production growth, and network share growth while keeping total cost per Bitcoin in the low $30,000 level. MARA also looks promising for the same reason (Table 3), consistent Bitcoin production growth, network share growth, and cost basis. However, we have yet to look into MARA enough to recommend it. BITF has to show that it can meet its 2024Q2 guidance, while IREN is a strong contender if it begins to HODL Bitcoin. We avoid miners like RIOT and HUT as their problems are fundamental while CLSK’s is simply a valuation one.
While sector consolidation may benefit some miners in the short run, it is detrimental to the entire Bitcoin ecosystem in the long run. This kind of consolidation is fundamentally unfavorable to any trustless protocol because it makes a protocol more centralized. We can debate whether centralized finance or decentralized finance another time, but this is not the point. The point is the risk of Bitcoin’s Proof-of-Work (PoW) trustless protocol collapsing increases proportionally to the degree of centralization of the mining sector. This risk is often called the 51% Attack Risk. In simple words, any one entity that manages to gather 51% of the Bitcoin network, that entity will be granted the ability to counterfeit Bitcoin’s transactions. This is the weakness of the PoW protocol. The theoretical cost for a 51% attack can be found here. There are already many well-known PoW projects that have fallen to this 51% attack.
Table 3. MARA’s Showing Promise
QR | Built-up hash rate | Bitcoin Production | Total Mining Cost per BTC (‘000) | Bitcoin Network | Network Share |
2023Q3 | 23.1 | 3,490 | 39,000 | 400 | 5.78% |
2023Q2 | 21.8 | 2,926 | 39.5 | 398 | 5.48% |
2023Q1 | 11.5 | 2,195 | 32,100 | 347 | 3.31% |
2022Q4 | 7 | 1,562 | 44,400 | 272.5 | 2.57% |
Source: Author
Verdict
The implications and impact of “slow and steady” are vast and wide. In the short run, it causes the Bitcoin mining sector to consolidate and favor a subset of mining companies; In the long run, over-centralization could break Bitcoin.
Bitcoin is also not foolproof. While institutions and corporations are getting more involved in the Bitcoin ecosystem (especially after the spot ETF), we do not think that Bitcoin is too big to fail because Bitcoin is being perceived as a threat to one’s sovereign control over monetary policy, including the U.S. Hence, the Fed is unlikely to swoop in to save the day.
Therefore, what we’ll take from all these observations are as follows:
- We’ll continue to be conservatively bullish on Bitcoin based on its decade-old halving cycle
- We’ll continue to hold Bitcoin and wait for the ideal entry into CLSK while monitoring others.
- We’ll not diversify broadly.
- We’ll avoid miners that are losing network share.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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