In my previous article on "Bitcoin Mining Economics" I discussed the dynamic variables that influence Bitcoin mining revenue, a metric known as hashprice. This week, I will shift my focus to the other side of the equation – the cost aspect of Bitcoin mining operations.

The costs associated with Bitcoin mining can be categorized into two distinct subcategories: fixed costs and variable costs.

Fixed costs encompass the initial investments required to establish the mining infrastructure. These include physical components such as racks, cooling fans, and energy sources, as well as the acquisition of land and the purchase of ASIC miners themselves.

On the other hand, variable costs are the recurring expenses that fluctuate based on the mining activity. The primary variable cost is electricity consumption, which is a critical factor in determining profitability. Additionally, occasional repairs and maintenance of ASIC miners contribute to variable costs. For large-scale mining operations, labor costs also fall under this category.

Let's discuss the latter aspect – the cost of electricity – as it plays a pivotal role in determining the profitability of Bitcoin mining operations.

Cost of Electricity

Over the past decade and a half, the Bitcoin mining industry has witnessed remarkable growth, paralleled by a significant surge in mining difficulty. As the computational power dedicated to mining increases, the difficulty of solving the cryptographic puzzles required to validate transactions and add new blocks to the blockchain intensifies. This ever-increasing difficulty has rendered Bitcoin mining unprofitable when relying solely on standard retail electricity rates.

This dynamic has given rise to the hosted Bitcoin mining industry, where specialized companies have emerged to address the electricity cost challenge. Providers have taken on the crucial task of sourcing low-cost power sources, constructing purpose-built mining infrastructure, and managing the day-to-day operations of these facilities. By partnering with hosted mining services, clients can purchase ASIC miners directly from such companies and have them hosted within their state-of-the-art facilities. This innovative approach enables individuals and organizations to participate in Bitcoin mining, even if they lack direct access to low-cost electricity sources themselves.

The hosted mining model has democratized the Bitcoin mining ecosystem, empowering a broader range of participants to contribute to the network's security and validation processes while mitigating the financial risks associated with high electricity costs. As the industry continues to evolve, the role of electricity costs will remain a critical factor in determining the profitability and sustainability of mining operations.

Efficient ASICs

Once you've secured access to low-cost power sources, the next critical factor in maximizing Bitcoin mining profitability is the efficiency of the ASIC (Application-Specific Integrated Circuit) miners employed. While an ASIC's hashrate determines its revenue potential, the true cost-effectiveness lies in its energy efficiency, measured in Watts per Terahash (W/TH) or alternatively, Joules per Terahash (J/TH).

The primary objective of leading ASIC manufacturers like Bitmain and MicroBT is to develop cutting-edge mining rigs that strike an optimal balance between maximizing hash output and minimizing energy consumption. This pursuit of efficiency is crucial in driving profitability and maintaining a competitive edge in the increasingly demanding Bitcoin mining landscape.

To illustrate the significance of ASIC efficiency, let's compare two of Bitmain's latest offerings:

While the S21 consumes more energy at 3,500 watts compared to the S19 XP's 3,031 watts, it can produce a significantly higher hashrate per unit of energy consumed. This translates to the Antminer S21 being 19% more energy-efficient than its counterpart, the S19 XP. The profound significance of this efficiency metric lies in its direct impact on profitability. ASICs with lower watts per terahash (W/TH) or joules per terahash (J/TH) provide miners with a crucial advantage – downside protection during bear markets and substantial profit margins during bull market conditions.

The most profitable ASICs are those that strike the optimal balance between computational power and energy efficiency. These energy-efficient mining rigs not only minimize operational costs but also contribute to the long-term sustainability of mining operations, aligning with the industry's growing emphasis on environmental responsibility. As the pursuit of efficiency continues to drive innovation in ASIC design and manufacturing, miners who prioritize energy-efficient hardware will be well-positioned to navigate market fluctuations and capitalize on opportunities, solidifying their position in the Bitcoin mining ecosystem.

Price of ASICs

The prices of ASIC miners are influenced by a confluence of key variables. Foremost among these is the hashprice, a metric that measures mining revenue, as discussed in Part 1 of this series. There exists a tight correlation between the revenue earned by Bitcoin miners and the prices of ASIC miners. If the hashprice increases by 100%, it is reasonable to expect ASIC prices to follow a similar upward trajectory.

Another primary factor shaping ASIC prices is the emergence of newer, more advanced mining rigs. The latest and most energy-efficient ASICs command a premium over their middle or older-generation counterparts, reflecting their cutting-edge performance capabilities.

To illustrate this point, let's examine the Blockware Marketplace, where the lowest-priced Antminer S19 XP is priced at roughly $4,070 USD, while the more efficient and powerful Antminer S21 commands a price of approximately $6,450 USD.

Evaluating ASIC prices in terms of dollars per terahash ($/Th) allows for a more comprehensive comparison across machines, accounting for differences in hashpower. In this case, the S21 is priced at a premium of $32.25/Th compared to the S19 XP's $28.86/Th, reflecting its superior efficiency and performance.

However, different miners may interpret this pricing dynamic through different lenses, leading to diverse strategies:

Miner A, prioritizing efficiency, and resilience in the face of current market conditions, might opt for the more expensive S21. With the recent halving putting pressure on miners' revenue, acquiring the most efficient ASIC could be the safest play to endure the current drop in revenue, protect against further potential downside, and position themselves to thrive during the next bull market.
Miner B, with a more bullish outlook on Bitcoin's price trajectory, may choose the S19 XP. If Bitcoin embarks on a parabolic bull market, the marginal differences in hashpower and efficiency between the two ASICs may not significantly impact overall profitability. By opting for the lower upfront cost of the XP, Miner B can recover their capital expenditure more quickly, capitalizing on the potential bull run.
Miner C, even more bullish and risk-seeking than the others, might set their sights on the Antminer S19j Pro+. Despite the recent halving, this model remains profitable under current market dynamics, albeit with less breathing room than the S21 or the XP, as reflected in its price of roughly $12/Th. Miner C's strategy is to flip the ASIC during the next bull market, profiting from the appreciation of their capital expense, while treating the Bitcoin mined during their ownership as a bonus.

The resale value of ASICs is an oft-overlooked aspect of Bitcoin mining. Historically, the most successful miners have been those who purchase ASICs during periods of low hashprice, allowing them to minimize their capital expenditure. When bull markets arise, these miners can not only benefit from the improved mining profitability but also capitalize on the increased demand and higher ASIC prices, profiting from the appreciation of their mining rigs.

ASICs Breakeven Prices

Understanding the breakeven point is crucial for assessing the profitability of various ASIC models. This analysis becomes even more pertinent in the context of the current hashprice, which stands at $0.05 per terahash per day. By examining the electricity costs required to mine 1 Bitcoin across different ASIC models, we can gain invaluable insights into their respective profit margins.

As evident from the chart, the more energy-efficient ASICs are producing Bitcoin at a significantly lower cost of electricity compared to the current market price of approximately $61,000 per BTC. This disparity between the electricity costs and the market price of Bitcoin is a key determinant of profitability for miners.

The breakeven point is a critical threshold where the revenue generated from mining Bitcoin equals the total operational costs, including electricity consumption and other overhead expenses. Miners operating with ASICs that can produce Bitcoin at a lower cost than the market price are positioned to generate profits, while those with higher electricity costs may struggle to remain profitable.

It's important to note that the breakeven point is a dynamic metric, influenced by various factors such as the Bitcoin price, network difficulty, and electricity rates. As these variables fluctuate, the breakeven point shifts, impacting the profitability calculations for miners. The breakeven analysis should be considered in conjunction with other factors, such as the upfront capital expenditure for acquiring the ASIC miners, operational costs, and the potential resale value of the mining rigs.

Conclusion

The prices of ASIC miners serve as a pivotal factor in determining profitability. By understanding the intricate interplay between hashprice, energy efficiency, and the emergence of newer mining rigs, miners can navigate this complex terrain with strategic foresight and adaptability.

As the industry matures and market conditions fluctuate, the ability to analyze ASIC prices through the lens of dollars per terahash ($/Th) becomes increasingly crucial. This metric enables miners to make informed comparisons across different ASIC models, accounting for variations in hashpower and efficiency, and ultimately guiding their investment decisions. Moreover, the concept of breakeven points sheds light on the profitability thresholds for various ASIC models, highlighting the importance of energy efficiency and operational costs in the mining equation. By carefully evaluating these breakeven points in relation to the prevailing market conditions, miners can optimize their operations, maximize profit margins, and position themselves for long-term sustainability.

However, it is important to recognize that mining profitability is not solely contingent upon ASIC prices and efficiency. Factors such as the Bitcoin price trajectory, network difficulty, regulatory landscape, and the potential for alternative revenue streams all play a role in shaping the overall profitability dynamics. Successful miners will be those who embrace a holistic approach, considering ASIC prices as one piece of a larger puzzle. By continuously monitoring market trends, adapting to technological advancements, and exploring innovative strategies, miners can navigate the ever-changing ASIC landscape and seize opportunities as they arise.