Bitcoin mining – back in (the) black

Bitcoin mining is an expensive undertaking. Factoring in the costs of purchasing and upgrading the necessary equipment, as well as energy costs, means that savvy miners can make enormous profits in a bull market, but they can be exposed during a bear market. Chinese mining entity Bitmain made record profits in 2017, but the 2018 bear market was a major factor in the company’s recent decline.

The price of bitcoin has rallied in the past four weeks and is currently trading at $5,200. As a result, the hash rate on the Bitcoin network is increasing. The hash rate is the cumulative amount of processing power being utilized in a blockchain at a specific point in time. In other words, as more miners join the network to compete for the bitcoin block reward, the hash rate, mining calculations and block difficulty will increase. This increase in the hash rate also increases the network’s security.

The Bitcoin network hash rate for the month of April

Historically, Bitcoin’s hash rate increases proportionally with its price value. Blockchain research company Diar published an update on the metrics of the Bitcoin network. In the paper, the researchers found that when bitcoin’s price climbed in January 2014, so did the number of miners. The paper states, “An increase in bitcoin’s price from $3200 to over $4000 last month resulted in a hash power increase as miners switched on idle equipment. The network this month saw an uptrend for the first time since August, recording a nearly 50% increase last week with the reversal of the decline that started a little over a month ago.”

Make bitcoin mining great again

Depending on how much a mining operation pays in electricity fees and how up-to-date its hardware is, bitcoin mining may be profitable again at today’s price levels – but it depends.

For example, if you are using one of Bitmain’s most popular ASIC devices, the Antminer S17, and are based in the United States where the average cost of electricity is $0.12 per kilowatt hour, you will generate a hash rate of 53Th/s with a power efficiency of 1,470 Watts. While the device is priced at just below $2,000, the costs of shipping and the additional power device, puts the hardware costs at the $3,500 mark. Additionally, mining pool fees need to be factored in, which can range from two to five percent.

Using the CoinWarz Mining profitability calculator, we can estimate that given these conditions, a bitcoin miner who is mining using one ASIC Antminer S17 would lose $0.13 daily and $1,157 annually. Hence, for a lone miner, bitcoin mining is not profitable at today’s price levels.

However, mining operations that are located in areas with cheaper electricity, and with the financial backing to benefit from economies of scale by purchasing a large number of miners at a discount, will be able to profitably mine bitcoin again even if they struggled to do so in late 2018.

A new frontier

On April 24, following approval from Liechtenstein’s financial regulator, blockchain technology company Bitfury launched a new regulated bitcoin mining fund, according to a report by Reuters. The fund was planned, designed and launched in conjunction with Final Frontier, a Swiss investment firm, and is intended to provide exposure to the bitcoin mining industry for institutional investors.

Headquartered in Switzerland’s crypto valley, Zug, Final Frontier are making their play at a time when the price of bitcoin has recovered from the lows of late 2018, but is still down 74% from its all-time-high of December, 2017. For those looking for an opportunity to invest in the space, with market sentiment improving, the right conditions are emerging.

Imraan Moola, a co-founder at Final Frontier, stated, “With the bitcoin price down significantly from its all-time high, yet institutional interest growing every day, now may be an opportune time to consider investing in bitcoin mining.”

The launch of the bitcoin mining fund appears to be in line with Bitfury’s plans to expand its services. Towards the end of 2018, Bitfury acquired a minority stake in Final Frontier. The companies intend to leverage each other’s expertise in their relevant fields to create innovative financial products for professional investors seeking exposure to the crypto asset space. The fund will invest in Bitfury scouted and approved mining sites, which are optimized for profit.

For experienced investors with an interest in bitcoin as an asset class, the bitcoin mining fund provides an effective way to gain exposure to the asset class by investing in its infrastructure without having actually having to run a mining operation. Bitcoin mining, especially on a large scale, has traditionally been the preserve of a small subset of parties who possess the necessary technological, logistical and financial knowledge required.

These barriers to entry have locked out many, especially institutional investors. The CEO of Bitfury, Valery Vavilov, explains: “The new partnership between Final Frontier and Bitfury is starting to produce significant benefits for investors around the world. With this innovative fund, Final Frontier is providing investors with a novel way of accessing bitcoin mining opportunities, creating financial opportunities and furthering institutional adoption of bitcoin.”

The end of a long crypto winter?

While the fund represents another step in the right direction for the maturing of the crypto asset industry, it also signifies a turning of the tide in regards to the profitability of the bitcoin mining sector. The price of bitcoin has been on an upward trend during April and is now trading at $5,200. Year-to-date, this marks a 38 percent price increase.

During the crypto bear market, the profitability of the mining sector fell severely. The bitcoin mining difficulty continued to increase while the digital currency’s price continued to drop. For miners, this state of affairs represented a loss-making operation. As a result, the market was flooded with ASIC mining devices being sold at low cost by miners attempting to mitigate losses. However, with the bitcoin market sentiment improving, optimism is returning to the mining industry. This is reflected by positive price movement and an increase in the bitcoin network’s hash rate. Bitcoin mining is back.