2020 has been an interesting year for bitcoin mining activity. Recently the largest digital currency by market cap neared all-time highs, trading around $16,000 per coin. Earlier in the year, exceptional volatility brought on by spreading COVID-19 cases in March, caused bitcoin to decline 40% in the matter of days. Just a few months after this crash, the bitcoin network then underwent one of the most anticipated mining events in the past few years, the bitcoin ‘halving” which occurred in May. Given the banner year 2020 has been, we charted out bitcoin mining profitability estimates over the year and highlighted some of the key takeaways.
Bitcoin mining margins during March COVID-19 crash
Bitcoin mining operator break-even points change as cost drivers change, including changes in the network difficulty. In the first few months of 2020, the network difficulty rose pushing miner break even points higher. However, during this period of time the market price of bitcoin was rising as well, with the market price staying above estimated break-even points–allowing miners to see healthy profit margins in January and February.
This changed in March when a COVID-19 inspired market crash resulted in a considerable decline in the market price of bitcoin (TradeBlock XBX Bitcoin index prices shown in figure). For a brief period of time, estimated bitcoin mining margins went into the red during the crash, as shown below.
After the market crash in March, the bitcoin network hash rate and difficulty declined considerably as miners, in aggregate, reduced resources dedicated to mining as profitability declined. As the difficulty declined, miner break-even points also declined allowing miners to once again return to higher profit margins. During this period, the network hash rate declined from 120 million TH/s to just over 95 million TH/s in one of the largest crashes in the network’s history. Our mining assumptions which were used in the profit/loss estimates for Q1 2020 are delineated below:
Bitcoin mining margins during the May ‘halving’
Leading into the bitcoin halving in May, new and more efficient mining devices came online. This had the effect of enhancing profit margins but we also saw increased resources dedicated to the network, with hash rate and difficulty rising into the halving. These mining assumption cost variables are delineated in our mining report which was published earlier this year.
After the May halving date, the mining reward declined from 12.5 bitcoins per block to 6.25 bitcoins per block, resulting in 900 new bitcoins mined per day. This had the effect of diminishing mining revenue by nearly 50%. With mining difficulty remaining elevated heading into the ‘halving’, yet revenues expecting to be cut in half, miners were looking at an effectively 2x increased breakeven point.
As such, we estimate that mining profitability fell considerably after the May halving. Correspondingly, the bitcoin network hash rate began declining after this period of time as well as miners cut resources dedicated to the network. In the figure below, the blue vertical line represents the ‘Halving’ event.
As shown in the figure above, the bitcoin network saw three large hash rate declines. The first coming during the March COVID-19 crash (as we previously discussed), the second coming around the halving, and third occurring recently with the wet season end in China and prior hash rate all-time highs which drove input costs higher than expected.
In May and June, the market price of bitcoin remained steady yet miners were now receiving half as many rewards. As such, mining margins remained compressed during this period of time, but were offset to an extent by the lower mining difficulty. As the wet season progressed in inner regions of China, where a large number of commercial mining farms are located, lower electricity costs allowed miners to see increased profit margins.
Bitcoin mining profitability in recent months
During the summer and fall months of 2020, the market price of bitcoin soared rising from around $5,000 in March to nearing $16,000 in October/November. The rise allowed miners to see increasingly healthy profit margins. Alongside the price rise, more mining operators launched and more resources, in aggregate, were dedicated to mining activity pushing the network hash rate to a new all-time high in October.
However, in recent weeks the wet season in China has come closer to an end which pushes up electricity costs. With mining hash rate and difficulty at all-time highs and electricity costs rising, miners saw their input costs rise, which compressed mining margins eventually leading to the most recent hash rate decline. Over the past few days, at lower difficulties, miners are estimated to be back at healthier margins, especially as the market price of bitcoin continues to push higher.