Bitcoin’s price has dropped around 70% from its last all-time high and the mining sector is feeling the full brunt of the ongoing bear market. Many fears, uncertainties and doubts (FUDs) often spread far and wide about miners during bear markets, but the data on how these traders are affected and perform in this environment is simple. This article outlines six key datasets that illustrate the bear market’s effects on bitcoin miners and their operations.
Monthly dollar-denominated revenue is a characteristic metric that reports the state of the mining industry. In bear market conditions, miners are expecting a decline in revenue and the bar chart below illustrates exactly what is happening. Primarily this metric is declining due to a cheaper bitcoin price quoted in dollars. In fact, June’s monthly mining revenue is expected to record the lowest level in the past 18 months. From August 2021 to April 2022, miners also enjoyed a comfortable nine-month streak of at least $ 1 billion in total industry-wide revenue. May ended that streak and revenue continues to decline in June.
Digging deeper into mining revenue, transaction fees are an important (and much debated) revenue category. Many bitcoin advocates and critics alike argue that a strong fee market is critical to Bitcoin’s long-term success. And during bullish market conditions, the fees generally account for a significant percentage in monthly mining revenue. But bear markets historically wipe out this revenue stream, and current market conditions are no exception. From August 2021 to May 2022, fees accounted for about 10% to 15% of monthly revenue, but since August that number has hovered around 1%. In fact, since August, fees have accounted for no more than 2% of monthly mining revenue, as shown in the line graph below.
Mining machines have a very strong positive correlation with the price of bitcoin, and bear markets often cause the prices of these machines to drop precipitously. There are several causes for this relationship, including repricing based on current income produced per machine and some basic psychological factors unique to the mining industry. Curiously, machine prices tend to lag behind bitcoin as the market sells, and the graph below illustrates this dynamic. Since the beginning of the year, the prices of mining machines with various levels of efficiency and profitability have dropped from 50% to 60% at the time of writing. If the price of bitcoin continues to fall, the mining hardware market will surely follow.
Not only are hardware prices falling, but older machines are being completely excluded from the market as economically rational miners are forced to shut down less efficient hardware to avoid mining bitcoin at a higher price than the market is willing to pay for it. This effect is most clearly seen in the hash rate share provided by Antminer S9s, an older generation of machines developed by Bitmain. Compared to a 35% share of the hashrate coming from these machines a year ago, the S9s now barely contribute 5% of the total hashrate, according to data from Coin Metrics shown in the chart below. “At these BTC prices, the S9 looks like scrap metal once again,” She said Coin Metrics analyst Parker Merritt.
The most accurate metric for tracking mining revenue is hash price, which measures dollar-denominated revenue per unit of hashing power fed per second per day. This metric often fluctuates regardless of the price and can go down even as the price of bitcoin goes up. The graph below shows the growth of mining difficulty and the collapse of the hash price since the beginning of 2022. Indeed, at the end of June the price of hash fell below $ 0.10 for the first time since late October 2020. Another symptom of the bear market conditions that have made life more difficult and less profitable in the mining sector.
The collapse in share prices for publicly traded mining companies is probably the strongest sign of current market conditions. For all the reasons mentioned above, most mining companies hold significantly depreciated physical mining assets, operating at rising profit margins and earning a much cheaper digital asset as the price of bitcoin falls. But mining stocks also tend to act as a high-beta game for the price of bitcoin, so when the price of bitcoin goes up or down, the stock prices of mining companies undergo even bigger moves in the same direction.
The line chart below shows the normalized one-year performance of a dozen different mining companies operating on the Nasdaq. Almost all companies are down at least 60% during that period as of this writing, with the worst performing – Stronghold Digital Mining – down 94%. Times are tough for bitcoin miners … and their shareholders.
In bearish conditions, bitcoin markets often turn to miners to gauge whether sentiment is stabilizing or worsening. Miners selling coins, disconnecting machines, or liquidating hardware are all signs that, yes, conditions are bad. But ultimately all of this data follows the bitcoin price instead of influencing the bitcoin price. So when any of the above datasets will improve is an open question: it depends on when the bitcoin market stabilizes or turns bullish. Until then, miners continue to trade according to their existing plans to survive another bear market.
This is a guest post from Zack Voell. The views expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.