05 Oct 2022

Predicting Bitcoin’s hashrate by year-end 2022

Bitcoin’s hashrate is gearing up for a solid finish to 2022. Will it keep surging, or will rising power prices and increasing difficulty put an end to it? This article estimates Bitcoin’s year-end hashrate and explains the factors impacting it.
Bitcoin hashrate.svg
Recently, a rare phenomenon has unfolded: Bitcoin’s hashrate has soared simultaneously as the bitcoin price has remained relatively flat. The hashrate growth is likely caused by American miners returning to full production after a summer of periodically curtailing operations as part of their participation in demand response programs.Some factors indicate that the hashrate will keep growing towards the end of the year. The public miners are expanding like never before, planning to plug in tens of thousands of mining machines by year-end. On the other hand, mining economics are under severe pressure due to the growing difficulty and the depressed bitcoin price. At the same time, miners all over the globe are hit by rising energy prices. These factors could potentially render some mining operations unprofitable, thus holding back the hashrate from its full potential. We will now go through all these factors before I give my 2022 year-end hashrate prediction in the end.
The public miners are far from done expanding in 2022
There 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.
Public miners combined hashrate in 2022
Source: All the public miners’ production updates
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.
Public miners hashrate expansion goals in 2022
Source: All these companies’ 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.
The soaring difficulty will hold back hashrate growth
Increasing 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.
Bitcoin mining daily revenue per ths
Source: Hashrate Index
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.
Rising energy costs may put spokes in the wheels of some mining operations
As mentioned in the previous section, the cost side of miners' income statement has historically been relatively stable. This has changed this year as energy prices are on the rise all over the globe. Energy is around 80% of miners' operating costs, and most bitcoin miners are exposed to rising energy prices. The only unexposed are those with long-term power purchase agreements or those using stranded energy.Unfortunately, most miners today are, to a varying degree, exposed to rising power prices. The mining industry has already become almost eradicated in Europe due to the energy crisis, but American miners also feel the heat. Power prices in the US, where a significant portion of the industrial-scale miners are located, have increased considerably and will likely keep rising as natural gas prices go up.Some miners, like Riot, have long-term hedges in place and can keep mining without worrying too much about the growing prices, but many don't have such insurance. An example showing how bad things can go when you are not hedging is the recent bankruptcy of Compute North - one of the world's biggest hosting providers. The company didn't hedge its power prices simultaneously as it locked in long-term hosting agreements with its customers. When spot energy prices increased, these hosting contracts fell underwater, bankrupting the company. If power prices keep increasing, we may see some miners buying spot energy suffer the same destiny as Compute North. Still, this will likely not happen this year, but further out in time. But I nevertheless believe that the profitability of a small portion of the Bitcoin mining network will go underwater in the coming months due to the rising power prices, pushing these miners out of the network. I think the effect of higher power prices is a 5 EH/s reduction in hashrate.
And my hashrate prediction for the end of the year is…
Let’s put all these numbers together to find my year-end hashrate estimate. I estimated the public miners to add 11.3 EH/s, the private miners to add 19.4 EH/s, soaring difficulty to push out 9 EH/s, and the rising energy costs to shave off 5 EH/s of capacity. Adding these numbers together leaves us at 260 EH/s.The boring but essential caveat here is that it depends on the bitcoin price. Suppose the bitcoin price turns around and surpasses $25k during the next month or two. In that case, we will see many miners operating slightly underwater, turning on their machines again. On the other hand, if the bitcoin price falls toward $15k, the hashrate might drop significantly. I made my 260 EH/s estimates assuming that the bitcoin price will stay around $20k for the remainder of 2022.My estimate is only a 4% increase away from today’s 249 EH/s, making it rather conservative, in my opinion. Still, at the start of 2022, most analysts, including me, believed the hashrate would surpass 300 EH/s in 2022. This will not happen unless a miracle unfolds. A lethal combination of a bitcoin bear market, energy price rises, and supply chain constraints has held back the hashrate this year. With this backdrop, if bitcoin miners end the year hashing at 260 EH/s, I will consider that a solid finish to 2022 for the security of the Bitcoin mining network.
Share this article