BY Fintan Ng - October 10, 2018
Smaller bitcoin miners losing out due to costs
Smaller miners of bitcoins have become unprofitable on a combination of higher electricity costs, lower bitcoin price and higher hash rate needed to mine the cryptocurrency.
Crypto research outfit Diar says in a recent report that miners who typically pay retail rates, usually the smaller miners, are being squeezed out by the bigger miners who can afford to absorb the increased costs.
“The investment proposition for smaller miners held true throughout most of this year, but has since become questionable on the back of an increase of computing power competing for the coinbase reward,” it points out.
The coinbase reward refers to the reward miners get when they generate a block through mining. There are 54,000 bitcoins per month used for the coinbase reward.
Diar says despite the bearish market trend, bitcoin’s price is still over 40% higher than a year ago with US$4.7bil in miner reward and fees for the first nine months of the year.
While there is still lots of room to grow and profits to make, Diar says “bitcoin mining has, at least for now, and most likely in the future, moved into the court of bigger players with deep pockets”.
It estimates that firms running big mining operations are making anything from 50% to 60% in gross profit due to low electricity costs.
One such company that has the mining capability and with control over the largest mining pools is the Beijing-based maker of bitcoin mining rigs, Bitmain.
The company has 11 mining facilities in China with 200,000 rigs with three more to be operational in the US in the first quarter of next year.
It says that China is one of the few countries where it still makes economic sense to mine for bitcoins on retail electricity rates.
But smaller miners still need to watch cashflow as equipment, wages, rent and other overheads can very well push the inexperienced ones into the red.
Diar says that wholesale electricity costs four US cents per kWh in the country compared to the retail rate, which is double that.
Using Bitmain as an example, and based on the latest information that the company has to reveal for the upcoming initial public offering, the research outfit says Bitmain’s business model could bring new economic realities to mining.
With 95% of Bitmain’s revenue coming from selling mining rigs in the first-half of this year, it is also in the company’s interest to ensure that all miners are profitable.
According to Diar, the company, which has operations and warehouses spread across the globe, may act as a swing producer in an effort to keep all the miners profitable, since mining operations in the Western world is likely to be more expensive than in China.