The hashrate securing the Bitcoin network continues to soar, surging to over 40 EH/s in June 2018 despite several months of downward pressure on Bitcoin prices. Current hashrate is now well over double the 2017 peak of around 13 EH/s, or to frame it differently, hashrate has increased by over 100% across four months. Such growth is certainly impressive but must present something of a challenge to any companies operating within the mining sector, as continuous reinvestment becomes necessary in order to remain competitive and ensure a degree of profitability in the medium term.
The impressive surge in Bitcoin prices in the final months of 2017 will have pushed up mining profitability, and historically price appreciation tends to be followed by deployment of additional hashrate. However, the inelastic nature of setting up and turning on new ASIC mining equipment tends to result in a delay between rising Bitcoin prices and any resultant climb in hashrate. This is due to the time required to set up new facilities, especially as mining profitability tends to hinge upon miners obtaining rock-bottom electricity deals, which are only available in certain locations.
To put the scale of growth into perspective, the hash power that has come online since the end of 2017 is roughly equivalent to around 2 million top of the range SHA-256 ASIC units; a figure which greatly exceeds estimates for the numbers of these units in circulation. With the units listed online for in the region of $1800, even with bulk discounts liberally applied this represents over $4B worth of additional mining equipment used to secure the Bitcoin network. Of course, this crude calculation doesn’t take into account alternative sources of hashpower from different ASIC setups such as the all-in-one BlockBox shipping container units from Bitfury. These units utilise Bitfury’s proprietary ASIC technology and advertise capabilities in the order of 8 PH/s (8000 TH/s) per container. With a rumoured price tag of $1m, such a set up will likely be out of the reach of all but the most well capitalised mining operations.
Earlier this year, Bitfury CEO Valery Vavilov estimated his companies share of the mining market at 10-12%, which would represent a significant number of BlockBox containers in operation. Hut 8 Mining, for example, have 33 of the BlockBox units currently deployed in Alberta, Canada alone, giving them a cool operating hashrate in the region of 255.5PH/s, with more mining equipment scheduled to come online by September 2018.
The huge growth in hashrate is nothing new though, and as shown by Coinshares’ mining whitepaper released in May, hashrate has effectively tripled on an annual basis over the last four and a half years, in conjunction with an impressive rate of efficiency gains for mining technology and hardware. Production costs are an essential element of the mining market and this was also investigated in the paper, which calculated a market-average marginal cost of creation of $6,400 per bitcoin, as of May this year. The marginal cost of production is primarily associated with the price of electricity supplied to a mining facility. Profitability is almost entirely dependent on a would-be mining operation obtaining cheap electricity, leading many miners to base themselves near to power producers whom can offer cheap bulk electricity rates.
Bitmex research recently explored China’s dominance in Bitcoin mining, observing the large over-capacity of energy production for the Aluminium industry that is present around China and has likely contributed to the country’s clout within Bitcoin mining. Much of this excess hydro-power capacity comes from smaller plants based in the rural areas of the country, and due to a lack of high-voltage long distance transmission infrastructure to allow this power to be consumed in areas of high demand, much of the excess capacity is available cheap to miners who can set up near to the hydro-facilities.
Concerns over power-consumption in a world which still has a significant reliance on fossil fuels appear to be overstated, with CoinShares’ mining whitepaper stressed that this doesn’t appear to be the dominant source of energy for Bitcoin mining, despite coal power being an important supply for one of Bitmain’s large operations, based in Ordos. As stated in the Coinshares paper:
“The cheapest electricity in the world is in many cases stranded hydro power and Bitcoin miners have shown a strong will and ability to seek out the cheapest possible sources, wherever they may be. While much of the industry has been confined to China in the last few years, we are now observing a large number of mines constructed across a much wider geographical spread.”
There does appear to be an increasing share of hashrate distributed globally, with many alternative territories now providing cheap energy to Bitcoin mining operations, such as Canada, Norway and Washington State. Many of these are in reasonably cool northern climates, meaning less money needs to be spent on keeping the mining equipment cooled to optimal operating ranges. Setting up shop in new areas doesn’t appear to be a straightforward process though, as shown by the current situation in Quebec, where despite appearing to encourage mining operations to set up in the area, the authorities now look to be back-tracking due to concerns at the high levels of interest from would-be mining operatives. According to Reuters, there have been calls to limit the power capacity available to cryptocurrency miners to 500MW, after HydroQuebec received requests for capacity of over 17000MW.
It is important to remember that calculating hashrate accurately is almost impossible, and most estimations for hashrate are calculated by using expected blocktimes, block difficulty and the actual time taken for a new block to be mined. In fact most calculations surrounding mining require one to make certain assumptions, many of which are explored in great detail in the appendices to the aforementioned Coinshares paper.
In summary, it appears that the Bitcoin mining sector is in rude health with increasingly well-capitalised operations set up to take advantage of low-cost energy supplies, regardless of their geography. Increasing competition in the hardware market can only be positive for miners as each manufacturer’s margins are steadily pushed down in the increasingly competitive market.