04 Jul 2022

The recent months have been a case study of bitcoin mining’s cyclicality

The bitcoin mining industry is notoriously cyclical, going from super profitable to barely cash flow break-even in just a few months. What exactly causes this cyclicality?
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Source: CoinMetrics (July 3)
The bitcoin mining industry's daily revenue has plummeted to $18 million from a peak of $62 million in November 2021. 2021 was an excellent year for the bitcoin mining industry, with average daily revenue of $46 million, corresponding to a total industry revenue of $16.7 billion. In comparison, in 2020, the combined income of the mining industry was $5 billion.The super-profits of 2021 led to massive investments in new mining infrastructure as both existing and new players eagerly wanted to grab a share of the profits. The hashrate grew as the new machines came online, and the Bitcoin network increased its difficulty in response.The increasing difficulty means that not only is the mining industry’s total revenue much lower now compared to in 2021, but the competition for this revenue has also increased. These two factors have led the daily income of an Antminer S19 to plunge to $8 from $38 in November 2021. This reduced revenue has again led to a steep reduction in machine prices.High CAPEX industries that derive revenue from a commodity tend to be very cyclical, and bitcoin mining is no exception. The shipping industry is another example. The cycle goes as follows: A rising commodity price leads to a period of super-profits, which causes overinvestment in new production capacity. Too much new production capacity then comes online with a lag, leading to abnormally low profits in the industry. This ultimately leads to a withdrawal of production capacity, and the cycle starts again when the commodity price increases. Rinse and repeat.The bitcoin mining industry’s current position in its cycle means that it will only continue to get worse unless the bitcoin price rebounds, due to new mining capacity continue coming online.
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