The public miners are far from done expanding in 2022There are around 25 public bitcoin mining companies out there, making up around 22% of Bitcoin’s hashrate. We can use these companies’ expansion plans as a proxy for the entire industry’s growth. These companies currently have 54 EH/s plugged in but are planning to grow their combined capacity to 80.7 EH/s by the end of the year. That 27 EH/s of growth potential is equivalent to a 50% increase from today’s level.
The five largest public miners by hashrate all have sizeable expansion plans. Marathon has the most aggressive plans, aiming to add 6.9 EH/s of capacity by the end of the year. The second-most aggressive expander is Core Scientific with 3.8 EH/s of remaining hashrate growth, followed by Riot with 3.4 EH/s. Some of the smaller miners are also aiming big, with Northern Data planning to plug in an additional 6.5 EH/s by the end of the year.
Source: All the public miners’ production updates
I deem it highly unlikely that all the public miners will reach these hashrate expansion targets. Most of these companies have tended to chronically overestimate their ability to get hashrate online. Therefore, we should take these numbers with a pinch of salt, and by year-end, these companies’ combined hashrate will likely be somewhere between their current hashrate and their self-projected end-of-the-year hashrate. I, therefore, estimate that we will see 65 EH/s of public bitcoin mining capacity by the end of the year, corresponding to a growth of 11.3 EH/s from today’s level.We can use the plans of the public miners as proxies for the private miners’ expansion targets. Private miners make up 78% of the Bitcoin mining network. During the past two years, these miners have collectively expanded more slowly than the public miners. Therefore, while I estimate the public miners to grow their hashrate by 21% during the final part of 2022, I believe the private miners will expand at a little less than half of that pace: 10%. This is equivalent to 19.4 EH/s of growth, bringing the total hashrate add-on of public and private miners to 30.7 EH/s.
Source: All these companies’ production updates
The soaring difficulty will hold back hashrate growthIncreasing difficulty means miners earn less bitcoin for each unit of energy they expend. Miners’ costs are typically stable, as they primarily consist of energy that has historically been exposed to relatively low. Their revenues, on the other hand, are incredibly volatile. As shown in the chart below, the hashprice has trended down for the past year, declining from $0.42 per TH/s at the peak last October to only $0.08 now.
The hashprice is determined by the bitcoin price and the difficulty. We all know that the bitcoin price is not performing well these days, so let's focus on the difficulty. Due to all the enormous amounts of hashrate coming online, we will likely see a monster difficulty increase on Monday. Braiins estimates the difficulty to surge by 12.5%, the biggest increase in one year. This will, all else equal, lead to a 12.5% reduction in the hashprice, pushing it down to all-time lows.This pressure on mining revenues will undoubtedly lead many miners operating at the margin to unplug their machines next week. It's hard to quantify this effect, but we can give it a try by looking at what happened the last time bitcoin's difficulty significantly increased. On August 31st, Bitcoin increased its difficulty by 9.3%, leading the 7-day average hashrate to drop by 9 EH/s over the following days.It's important to note that most industrial-scale miners have very low production costs and are not in immediate danger of needing to unplug machines due to the rising difficulty. This upwards adjustment will primarily affect smaller miners paying relatively high electricity prices or using older machines. While old-generation models like the Antminer S9 generated more than 20% of Bitcoin's hashrate in December 2021, the last months' bear market has gradually pushed these inefficient models out of the network. Most miners now operate energy-efficient models like the Antminer S19 series with a higher break-even power price and less sensitivity to increasing difficulty.Still, the soaring difficulty will undoubtedly lead to hashrate falling off the network. I estimate that the rising difficulty will shave off 15 EH/s of marginal miners, effectively replacing them with more efficient mining operations.
Source: Hashrate Index