Adjustment for Downward Difficulty
The mining industry is still suffering as a result of rising energy inflation, debt burdens, and low bitcoin prices. We saw a 13.1% drop in hash rate from all-time highs at the end of November. However, when compared to the handful of down periods of more than 15% during that time, the major hash rate declines since 2016 are still relatively small.
The most recent 7.32% decrease in difficulty is a direct result of all of that hash rate going offline. As of today, the hash rate is around 250 EH/s, down 7.84% from its all-time high of around 273 EH/s. This is the largest downward difficulty adjustment we’ve seen since July 2021, when a series of downward difficulty adjustments occurred in response to the Chinese mining ban. This should provide some temporary relief to current miners, but it’s too early to tell whether the trend of declining hash rate has ended.
Despite the recent drop in hash rate, no major public miners have made any announcements. The hash rate of the majority of public miners has been either flat or increasing over the last month.
Bitcoin holdings are largely increasing among those who have provided monthly production updates thus far, with the top three treasuries across Riot, Marathon, and Hut 8 accounting for 27,579 bitcoin. Bitfarms sold a significant amount from their treasury, most likely to pay down their current debt facilities.
When comparing year-to-date returns to bitcoin performance, miners’ stock performance continues to fall this year. The hash price bear market is still active, which has been a key thesis for us when weighing the current prospects of investing in public miners versus bitcoin. Any short-term miner outperformance in bitcoin has proven to be a market opportunity to reprice the equity lower.
The market capitalizations of a proxy basket of six public bitcoin miners show how much value has been wiped out since 2021. After rising 452% to a peak of $19.1 billion in November 2021, the market lost 90% of its value in less than a year.
While the worst of the decline in public miner market capitalizations and hash price (miner revenue per tera hash) has already occurred, we anticipate that the difficult conditions will continue for some time, squeezing many market participants along the way. The recent difficulty adjustment provided some relief, but it is insufficient for many miners who bought the majority of their machines in 2021, expecting $30,000 as their “worst-case scenario.”
Add to that the fact that global energy prices and interest rates have skyrocketed, and many operations are in extremely difficult circumstances — particularly hosting facilities where companies act as intermediaries for customers interested in reaping the benefits of bitcoin mining. The elephant in the room for the mining industry’s state is the fact that some of the industry’s largest hosting facilities are either bankrupt, on the verge of bankruptcy, or completely out of deployable hash rate for idle ASICs
We will be closely monitoring hash rate and the state of the mining industry in the coming months. Although the industry has been hammered over the course of 2022, we suspect it is not yet out of the woods.
The beauty of bitcoin and capitalism is that only the strongest will endure. In any case, blocks will continue to be mined every 10 minutes.
