Bitcoin excitement has returned. So, what’s the plan for Sam? Entrepreneurial merchant Samuel Brannan struck gold by selling supplies to prospectors flooding into California during the gold rush of the 1850s. It proved to be a lucrative venture: items like gold pans, which used to sell for 20 cents before 1849, were suddenly fetching $8.
Fast forward to the present-day bitcoin frenzy: the price of bitcoin has nearly tripled in the past year, reaching around $73,500, and companies that mine these digital tokens are reaping the rewards. Marathon Digital Holdings has seen a similar surge in its stock price, while Riot Blockchain has gained nearly 60 percent.
However, mining bitcoin, like mining any other commodity, requires expensive equipment (in this case, powerful computing capacity) and significant energy consumption — reportedly more than countries like Egypt or Poland, according to the Cambridge Blockchain Network Sustainability Index.
Moreover, as with any mined resource, the end price must exceed the production cost. Estimates suggest that the production cost of bitcoin is around the mid-$20,000s, leaving miners comfortably profitable at present. In fact, daily mining rewards hit a record $79 million on March 11, according to Blockchain.com data.
Nevertheless, the bitcoin rally won’t last forever, and mining is a cutthroat industry with many casualties. Among the dozen or so publicly listed mining companies, mainly in North America, only three have market capitalizations exceeding $1 billion. Mining rigs become increasingly costly as efficiency improves, and the market is dominated by three major manufacturers: Bitmain, Canaan, and MicroBT.
The industry also faces ongoing challenges, including environmental concerns over energy consumption and heightened regulatory scrutiny. The European Union’s Markets in Crypto Assets regulations will come into effect in the latter half of the year, and in the U.S., the Commodity Futures Trading Commission took actions against digital assets in half of its cases last fiscal year. Additionally, competition is intensifying, particularly from countries like the UAE and Bhutan, as well as affluent industrial families.
The recent approval of ETFs, which have attracted over $70 billion in inflows in just two months, presents a more nuanced development. Investors might use these ETFs as a proxy for miners, potentially substituting them rather than creating additional demand.
More immediately, there’s the upcoming “halving” event next month, which occurs roughly every four years to mimic supply constraints. Miners will need to work twice as hard for the same reward as the number of bitcoin rewards halves from 6.25 to 3.125, effectively doubling production costs to about $50,000.
However, the situation may not be as dire as it seems. Well-funded miners often invest in more efficient equipment during the lead-up to such events, and many miners hold bitcoin themselves, ensuring financial stability.
Moreover, some miners may exit the market or be acquired, as seen with Marathon’s $179 million in acquisitions at the end of last year. JPMorgan estimates a 20 percent decline in hashrate, a measure of computing power, post-halving. Some miners, like Bitdeer, are even venturing into rig manufacturing themselves.
Miners, attuned to both public opinion and financial considerations, are increasingly focusing on reducing energy costs, with a growing emphasis on renewable energy sources and the utilization of excess electricity from producers. Japan’s Tepco is among the providers offering such services, while countries like Ethiopia and Paraguay are selling surplus electricity to miners.
However, investors should remember that Brannan’s success was all about timing. Today, those gold pans can be purchased for just $5.95.
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