What if BTC falls to 20K, will miners still make $?
Bitcoin was not immune to these shifts. Prices for the cryptocurrency suffered along with the rest of the market when pandemic fear hit, falling as low as $4,748 in March.
Bitcoin Prices Soar and Miners Need a Plan
And yet, the technology itself (both the token and the blockchain) gave struggling enterprises hope later in the year. In the face of all the uncertainties, losses and the infamous “new normal,” large-scale institutions and even hedge funds started investing more in Bitcoin. Other entities—from banks and pension schemes to governments and universities—also began to flesh out new applications of blockchain validation.
The rise in Bitcoin prices through the rest of Q4 2020 were colossal and reached nearly $30,000 by the end of the year. Since then, Bitcoin has risen to highs in Q1 2021 of over $60,000.
Of course, with such a sharp rise, many wonder whether prices could fall just as quickly. And if Bitcoin prices fall, who will it hit hardest?
A drop in Bitcoin prices would hit tech stocks badly...
...not to mention all the institutions newly invested in the cryptocurrency.
The corner of the market that few are talking about, however, is that of the Bitcoin miners.
What would a steep fall in Bitcoin prices mean for miners? Were they ready for the rise in prices? Could they be ready for the fall?
The Tech Market and Bitcoin Miners
Every commodity market has its own investment longshot. Crude oil has wildcat exploration, while precious metals have the mining companies who actually do the digging.
Not unlike precious metals, the Bitcoin market has the miners who make the cryptocurrency possible.
New miners have hit the market in droves since the rise in prices, and not just because of the possible gains. Demand, too, has risen with the unprecedented institutional investments Bitcoin saw in 2020.
Of course, the ultimate number of Bitcoin to mine won’t change, but until all those coins are in circulation more miners will continue joining the fray. This “digital gold rush” has attracted new miners while also giving existing mining companies more to do.
Even the most established mining companies are young considering the newness of Bitcoin. This has led to a mad dash to the required hardware that’s run in parallel with the digital gold rush surging through the market. The tech market is intimately tied to Bitcoin. When assessing how Bitcoin prices will affect mining companies, it’s also in the tech market that we find our answer.
Bitcoin Mining Hardware
For the long-term viability of their businesses, the biggest factor Bitcoin miners have to consider is the hardware that makes mining possible.
Bitcoin mining requires the computer processing of digital transactions (encrypted with scrambled equations) to add validated “blocks” to the blockchain. When Bitcoin was created, it was designed to allow for a block to be mined every 10 minutes, meaning the difficulty of the mathematical problems had to be high enough that a computer would take 10 minutes to solve it.
Bitcoin was also designed to increase the difficulty of those problems the more miners there are. With this newest gold rush, the difficulty has quickly risen, meaning the computational power required to mine has, too.
The resulting climb in power expenses for mining companies is no small thing. Mining profitability floats between $0.03 to $0.08 per kWh, and the U.S. mining industry today requires 120 TWh (Terawatt hours per year). In 2020 that generated a big pay-out for energy companies with the climbing demand from new miners, but with more demand means rising prices, and mining companies can’t sustain it.
This makes hardware even more important. The ultra-power computers (usually ASICs, or application-specific integrated circuit) that run all day and all night consuming energy have to be regularly updated to continue processing more blocks with less energy.
With more miners to the market, the demand for mining hardware has climbed even more—and the cost of equipment with it. ASICs have risen from around $1,500 per unit to almost $4,000, and demand still surpasses stock. For those who decide to put digital mining rigs together themselves, the investment starts with GPU cards, which are remain in short supply as prices soar.
The choice of each hardware component in mining can make or break an operation. Uninterrupted internet and electricity are also a must for Bitcoin miners.
What Miners Can Do
If 2020 showed us anything, it’s that adaptability is essential to remain viable as a company. Most mining companies today are operating without contingency plans, but a formal business continuity plan is required to brace against whatever the market will do next.
As Bitcoin prices continue to bounce around these higher-than-ever levels, operating costs for mining companies have gone up in tandem with the stock. If prices were to fall drastically at this point, mining companies could face greatly depleted income right after substantial tech investments were made at a time when prices were inflated.
A business continuity plan for Bitcoin miners can include every possibility from a screeching halt to Bitcoin pricing to natural emergencies and pandemics. A plan will also help miners evolve as businesses and diversify their income streams, because part of contingency is knowing what to do with business capacity if regular work can’t be done.
EZ Blockchain predicts that prices will fall
... and then plateau after this spike, but will still remain far higher than they were at the start of 2020. It’s also not a fall that will necessarily happen soon.
The nature of Bitcoin means there will always be fluctuations, but we don’t believe it will fall as drastically as it did after the last surge. The biggest difference between the 2017 surge and this one is the excitement of the investments behind it. Institutional investors were not part of the 2017 climb in prices, yet they were what drove the 2020 one.
Until Bitcoin prices do fall and taper off to their new plateau, miners have the opportunity to develop the business contingency plans to protect their investments. Hardware has been purchased at unprecedented prices, and if demand for mining does fall, it’s this plan that can protect mining enterprises. The most adaptable miners will be those who then pull even further ahead.