Stocks of Bitcoin miners have declined around 25-30% since Bitcoin peaked at US$64,000 in mid-April. At its current price of US$34,100, the digital currency has lost about half its value in less than three months, so a corresponding decline in stocks of the miners could be merited.
However, stock investors seem not to be factoring in the implications of another major development in the Bitcoin mining industry — China’s intense crackdown on Bitcoin mining in that country. At its peak, perhaps 65-75% of all worldwide Bitcoin mining took place in China, aided by the widespread availability of low-cost hydroelectric power. Now, China’s actions have perhaps taken offline about half of the mining capacity that was operational in mid-May.
More specifically, the total computer processing power of the Bitcoin network, termed the hash rate, is a measure of how many times the network can attempt to complete a difficult math problem each second. The answer to that problem is a long string of numbers, which is called a hash or proof of work. As shown below, the hash rate of the Bitcoin network is now around 85 Terahash per second (TH/s), down from a peak of around 180 TH/s about two months ago. (One TH/s represents the ability to compute one trillion hashes per second.)
Effect on Bitfarms
To demonstrate the financial importance of the enormous decline in network hash rate, consider the effect on Bitfarms Ltd. (TSXV: BITF), one of the leading Bitcoin miners. By year-end 2021, the company expects to have 3 TH/s of computing capacity installed. These mining computers will have a power requirement of about 168 megawatts, and the company’s average electricity purchase costs are around US$0.04 per kilowatt-hour.
In the two tables below, we first estimate Bitfarms’ expected revenue and cash mining profit based on today’s lowest Bitcoin price and the current hash rate of 85 TH/s. The second table computes the same revenue and profit figures, but utilizes conditions present when the Bitcoin price was at its all-time peak and when the network hash rate was 180 TH/s.
| POTENTIAL BITFARMS PROFITABILITY AT LOWER BITCOIN PRICE AND HASH RATE | ||
| Bitcoin Network Hashrate Assumed (Current Hashrate is 156 EH/s) | 85 | TH/s |
| Max. Hashrate of Argentina Facility If All New Mining Equip. Draws 210 MW of Power | 3 | TH/s |
| % That Argentina Facility Would Represent of the Total Bitcoin Network Hashrate | 3.529% | |
| Number of Bitcoin Awarded Per Block, Awarded Every 10 Minutes | 6.25 | Bitcoin |
| Average Transaction Fees Per Block | 0.43 | Bitcoin |
| Total Bitcoin Awarded Every 10 Minutes | 6.68 | Bitcoin |
| Daily Block Reward – Systemwide | 962 | Bitcoin/day |
| Number of Bitcoin That Argentina Facility is Expected to be Awarded Per Day | 33.950 | Bitcoin/day |
| Bitcoin Spot Price, US$ | $34,100 | |
| Expected Revenue Per Day, in US$ | $1,157,699 | |
| Costs: | ||
| Power Consumption | 168 | MW |
| Average Electricity Price Per Kwh, in US$ | $0.040 | per Kwh |
| Daily Electricity Cost, in US$ | $161,280 | |
| Cash Mining Profit Per Day, in US$ | $996,419 | |
| Annualized Cash Mining Profit, in US$ milions | $364 |
| POTENTIAL BITFARMS PROFITABILITY AT HIGHER BITCOIN PRICE AND HASH RATE | ||
| Bitcoin Network Hashrate Assumed (Current Hashrate is 156 EH/s) | 180 | TH/s |
| Max. Hashrate of Argentina Facility If All New Mining Equip. Draws 210 MW of Power | 3 | TH/s |
| % That Argentina Facility Would Represent of the Total Bitcoin Network Hashrate | 1.667% | |
| Number of Bitcoin Awarded Per Block, Awarded Every 10 Minutes | 6.25 | Bitcoin |
| Average Transaction Fees Per Block | 1.00 | Bitcoin |
| Total Bitcoin Awarded Every 10 Minutes | 7.25 | Bitcoin |
| Daily Block Reward – Systemwide | 1,044 | Bitcoin/day |
| Number of Bitcoin That Argentina Facility is Expected to be Awarded Per Day | 17.400 | Bitcoin/day |
| Bitcoin Spot Price, US$ | $64,000 | |
| Expected Revenue Per Day, in US$ | $1,113,600 | |
| Costs: | ||
| Power Consumption | 168 | MW |
| Average Electricity Price Per Kwh, in US$ | $0.040 | per Kwh |
| Daily Electricity Cost, in US$ | $161,280 | |
| Cash Mining Profit Per Day, in US$ | $952,320 | |
| Annualized Cash Mining Profit, in US$ milions | $348 |
As shown in the two tables, and counter to the market’s reaction simply based on Bitcoin’s price, Bitfarms’ revenue and cash flow generating power actually seems to be higher under current circumstances than at the time of Bitcoin’s all-time high price. The significant decline in the network hash rate has a significant positive effect on non-China-based Bitcoin miners.
Perhaps counterintuitively, Bitfarms’ ability to generate earnings and cash flow seems to be higher now than it was when the price of Bitcoin was about twice as high. The recent precipitous decline in the Bitcoin network hash rate appears to fully offset the crash in the underlying digital currency’s price for many Bitcoin miners operating outside of China.
Bitfarms Ltd. last traded at $4.93 on the TSX Venture Exchange.
Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
