2023 Bitcoin Mining Industry In-Depth Report Halving Approaching, Miners’ Survival and Preparation
2023 Bitcoin Mining Industry Report Halving Impact and Miners' ReadinessAuthor | Colin Harper
Hashrate Index Chinese Content Partner Releases
Abstract
It has been more than two years since the Bitcoin mining ban and the migration of mining power from China. Since the Chinese government drove most of the business in this industry overseas, the Bitcoin mining industry has undergone irreversible changes.
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After this historic event, the profitability of mining skyrocketed, and miners calculated their mining “luck” during this brief “super cycle of mining power prices,” followed by a period of darkness in mining power prices during the bear market in 2022. In November, the price of the coin reached $15,000, and a few mining commentators speculated that the price could reach $30,000 by mid-2023. However, Bitcoin likes to disrupt people’s expectations.
Now that two years have passed since the mining ban, the Bitcoin mining industry has matured significantly. There is no doubt that mining operations in 2023 are low-key, tenacious, and instantaneous, but the “shadow play” of Bitcoin mining has come to an end, and the internal operations of the Bitcoin mining industry have become more transparent compared to the past.
Today, listed mining companies and private mining companies dominate the mining landscape. Especially in North America, with the collapse of mining operations in China, the Bitcoin mining industry has grown vigorously since its glorious debut. Moreover, mining power continues to overflow into new mining centers outside the United States, including Russia, the Middle East, Latin America, and Southeast Asia. The distribution of mining power on a global scale is more balanced than ever before.
As the industry has evolved from its stumbling early stages to its current maturity, miners are learning from the market chaos in 2022. They are actively engaged in fund management and financing practices, and previously bankrupt mining companies are reorganizing and re-emerging with more sound operational strategies.
For the Bitcoin mining market, 2022 can be said to be a shocking year, laying the foundation for active participants to stand firm this year. As we approach and pass the Bitcoin halving period in 2024, more volatility is expected. Affordable energy is the key to this game, and miners are particularly concerned about mining machine procurement and fund management.
Any measures to reduce costs in the above areas and elsewhere will be crucial for surviving the halving period. For some fortunate mining companies, this can be achieved through negotiation for lower electricity rates, especially for those large enough to participate in demand response programs; other companies can only reduce electricity costs by lowering the operating speed of machines through firmware downclocking; some miners are looking for more affordable hardware facilities and logistics costs; and some miners are reducing costs by recovering waste heat. For large mining companies, reducing administrative costs is also essential.
If this is the case, Bitcoin mining is no longer a “plug-in and earn” game. In terms of reducing capital and operating costs, operators who can obtain the cheapest electricity and/or have effective expansion and operation strategies will be able to survive better after the halving. Since the ban in China, the center of the mining industry has shifted from the East to the West, making it easier for North American investors to enter the industry than ever before. New attention and capital are pouring into this field at an unprecedented speed. In the next year, some more ordinary investors, especially those retail investors with low MOQ hosting transactions, may face difficulties.
As the Bitcoin industry continues to grow and becomes closely linked to institutional finance, we expect the integration trend that started in 2021 and accelerated in 2023 to continue. At the same time, Bitcoin’s hash rate has never had such a widespread global footprint, and it is expected to continue to expand globally.
Miners in North America need to remember that they are not only competing with their neighbors, but also facing the booming mining industry in the Middle East, as well as China, Russia, Latin America, and other regions.
Each region and background has its advantages and disadvantages, and some forward-looking miners have started to diversify their hash power to different jurisdictions through connections and resources.
In the second quarter of 2023, we saw many miners taking advantage of low-priced mining machines for future expansion. The rebound of Bitcoin and the breathing space after the tightening of hash rate prices in 2022 (with sufficient help) gave miners the opportunity to catch their breath at the bottom of the hash rate price in 2022. For medium-high cost miners who did not make a profit in most of the fourth quarter of 2022, the rebound in coin price and the stability of hash rate price are crucial.
Now that the second quarter has ended, Bitcoin prices have fallen and hash rates have risen, miners are preparing for the harsh era of the fourth halving. Building on the trend of last year, in 2023, mergers and acquisitions, integration, and asset consolidation sales are accelerating, as poorly positioned miners are looking for exit opportunities, while advantaged miners are preparing for expansion. We expect the halving to accelerate these trends.
With the end of the breathing period for the hash rate price in the second quarter and less than eight months left until the halving, miners have a simple slogan: survive and prepare.
Hash Rate, Mining Difficulty, and Hash Rate Price
2023 is an important year for the growth of Bitcoin’s hash rate (although it has not met miners’ expectations). The hash rate in 2022 has grown more than in 2021 (the year of the Chinese mining ban), and it is estimated that the hash rate growth in 2023 will exceed that of 2022.
However, in the second quarter, the growth of computing power slowed down, which also indicates that the secondary impact of the “great migration” of computing power is emerging.
It can be seen that the high concentration of computing power in North America (45-50%) has formed a new seasonal impact on Bitcoin’s computing power: the summer heatwave overloaded the power grid across the United States, forcing miners to reduce their mining scale, thereby suppressing the growth of computing power. Specifically, the seven-day average computing power of Bitcoin increased by 7.5% in the second quarter of 2023, far less than the 35% increase in the first quarter. This slow growth is mainly due to the summer temperatures interfering with the operations in mining hotspots such as the United States. However, it is worth noting that compared to last year’s summer heatwave, the growth of computing power this summer has not been greatly affected.
Currently, Bitcoin’s computing power has grown significantly in 2023. As of July 22, 2023, compared to the beginning of the year, Bitcoin’s computing power has increased by 50%, from 255 EH/s to 380 EH/s.
Figure 1: Changes in Bitcoin’s computing power 7-day and 30-day moving averages
With the growth of Bitcoin’s computing power, the mining difficulty of Bitcoin increased by 8.1% in the second quarter of 2023 and increased by 52.5% since the beginning of the year (as of July 22, 2023).
Figure 2: Overview of Bitcoin’s mining difficulty changes
After reaching a historical high of 53.91 T, the mining difficulty has decreased by 2.94%. Last summer, due to the heatwave ravaging the United States and causing a decrease in computing power, Bitcoin miners adjusted the difficulty three times in a row. Since the beginning of 2023, miners have largely avoided the scorching summer, and the heatwave has not caused too much interference to the computing power. However, as we enter August (the second hottest month in U.S. history), if the weather becomes extreme enough, we may see more negative difficulty adjustments. Nevertheless, any disruptions in computing power can be easily offset by the expansion of mining in other parts of the world.
Stagnation after a surge in computing power
Recalling what we mentioned in the year-end report of 2022 (which is unnecessary to remind if you are a miner), the price of computing power hit a bottom in the fourth quarter of last year. It reversed in the first quarter, providing some relief for miners, and in the second quarter, the price of computing power quickly rebounded and stabilized under the combination of the decline in the NFT frenzy (which will be further discussed in the ordinal/inscription section), the recovery of Bitcoin prices, and slow growth in computing power.
The average price of computing power in Q2 (denominated in USD) was $77/PH/day, a 5% increase from the average of $72/PH/day in Q1, and a 30% increase from the average of $59/PH/day in Q4. The average price of computing power in Q2 (denominated in BTC) was 0.00275 BTC/PH/day, a 15% decrease from the average in Q1.
Figure 3: Overview of the daily average value and 7-day average value of hash rate prices under the US dollar standard
Overall, Q2 was a feast for profit-starved miners. Considering that the breakeven point for S19j Pro miners is $51.25 per PH/day under an electricity cost of $0.07 per kWh, it can be imagined how many miners were worried at the end of 2022 (especially in North America). Q1 provided a slight relief to this profit shrinkage, and Q2 further eased this situation.
However, with the stagnation of Bitcoin’s upward trend and the difficulty reaching its all-time high in July, the pressure has returned to hash rate prices. Currently, the hash rate price under the US dollar standard is $72 per PH/day, and the price under the coin standard is 0.00244 BTC per PH/day.
Figure 4: Comparison between Bitcoin hash rate prices and mining difficultyOrdinal and Inscriptions: Miners Stop “Fighting” and Fall in Love with “jpeg” format images
In 2023, Bitcoin miners are reminded that transaction fees will have a huge impact on their bottom line, and they should partially thank the influence of “bored apes” and “Pepe jpegs”.
In 2022, transaction fees accounted for 1.63% of all block rewards. In comparison, the percentage of transaction fees so far is 4.9%, 2.3% in Q1 of 2023, and 8.11% in Q3. This increase is not from traditional economic transactions, but from the new way of minting and trading NFTs on Bitcoin.
These digital images, videos, texts, and electronic game files called inscriptions can include arbitrary data in Bitcoin transactions using specific transaction conditions by Bitcoin users. Unlike NFTs on Ethereum, Solana, and other blockchains, these NFTs are actually uploaded to the blockchain. To track them, collectors use ordinal theory, a mathematical method of digital sequencing, to mark a single satoshi as the “proof” of the inscription in each transaction. Based on the first-in-first-out basis, ordinal theory can track every satoshi since the genesis block.
Just like banknotes and coins, collectors also look for rare mintings with monetary value, and the inscription craze has opened up a market for “rare satoshis”.
The discussions caused by inscriptions and ordinal theory in the crypto community have led to an explosion in block transaction activity on the Bitcoin blockchain, to the point where transaction fees have reached the highest level since October 2020.
Figure 5: Overview of the rarity levels of Bitcoin “satoshis”Ordinal and Inscriptions Set New Historical Highs for Transaction Fees
Casey Rodarmor first introduced the concept of ordinals and inscriptions in January this year, although he and others had been experimenting with this technology since December last year.
Inscriptions caught the attention of the crypto community in February, and early adopters rushed to engrave digital art and miscellaneous collectibles. This novel NFT method attracted many NFT traders, collectors, and creators from the Ethereum ecosystem, which accelerated the frenzy and booming transaction fees. So far, there have been over 19.6 million inscriptions on the Bitcoin blockchain.
In February, the adoption of ordinal inscriptions immediately doubled the income of miners from transaction fees compared to 2022. In 2022, the average share of block rewards obtained from transaction fees was 1.63%; so far, the average share in Q1 is 2.3%, in Q2 is 8.11%, and the annual average share is 4.9%.
When the inscription craze peaked in May, miners earned more income from transaction fees than from block subsidies, and it was common to receive blocks with 12.5 or more bitcoins as rewards, which was the same as the previous halving period’s block subsidy.
Figure 6: Overview of the proportion of transaction fees to block rewards and transaction volume Changes in block capacity under the inscription craze
Inscriptions have been controversial for various reasons, one of the main reasons being that they benefit from the data discount of SegWit. Inscription data is stored in the witness part of the block (introduced through the SegWit upgrade in 2017). Compared to other data blocks in regular transactions, witness data has a lower cost per byte for transmission, so the transaction cost per byte of data for inscriptions (satoshis) is lower. We can see the final effect of the SegWit discount in the graph below, where the gap between the number of transactions and the block size from February to May effectively demonstrates the impact of the witness discount on the early dynamics of inscription fees. Blocks are filled with inscription data (such as images and text), but the number of transactions (while increasing) did not increase at an astonishing rate.
Figure 7: Average daily transaction volume per unit block and average daily block size
Figure 8: Overview of the proportion of transaction fees to block rewards and block size
In the second quarter, “BRC-20 tokens” dominated the inscription market, and the number of inscription transactions and actual transaction fees began to rise. Initially, most inscriptions were in JPG and other image formats, but BRC-20 transactions required less witness space and more transaction field space, incentivizing a completely different level of transaction activity.
As shown in the figure below, trading activity accelerated in April and reached its peak in early May.
Figure 9: Average daily transaction volume and total transaction volume
The BRC-20 token standard was initially launched in April 2023, ultimately bringing the minting frenzy similar to Ethereum to the realm of inscriptions. Prior to this, inscribers would mint an entire collection and then auction it off in a very basic over-the-counter manner on Discord servers, Twitter, and other forums; unlike popular NFT collections on other chains such as Ethereum and Solana, users could mint their own NFTs from the auctioned collections, but this option did not exist for inscriptions collectors.
The BRC-20 standard changed this. Now, using the OP_CODE field of Bitcoin, collection creators can create tokens with fixed supplies. After the template is broadcasted, anyone can mint tokens in the series according to the token’s parameters. When BRC-20 started to gain popularity in May, a first-come-first-served mechanism encouraged inscribers to bid for fees, competing for the opportunity to be the first to mint tokens in a new series. These minting transactions are also OP_CODE transactions, so they do not benefit greatly from SegWit discounts, as the cost per byte is higher.
Figure 10: BRC-20 OP_CODE example
This minting incentive and BRC-20 transactions did not benefit significantly from SegWit discounts, resulting in a significant increase in transaction fees in May, as shown in the chart below. We can also observe that after the exponential increase in minting activity in May, it began to stabilize in July.
Figure 11: Average daily transaction fees and total transaction fees (inscriptions)
The first wave of NFT frenzy on Ethereum came in the form of CryptoKitties in 2017, but it wasn’t until the historic bull market in 2021 that NFTs truly began to have a significant cultural impact. For example, Eminem and Snoop Dogg portrayed bored apes in a virtual performance at the MTV Video Music Awards (VMAs). NFTs have started to integrate into people’s daily lives, not to mention their impact on miner earnings.
We expect ordinal inscriptions to have a similar continuity and to create cyclical periods of transaction fee prosperity and downturn, especially during bull markets when interest in Bitcoin and cryptocurrencies is high.
However, this does not mean that miners should bet on inscriptions to keep the price of mining power stable. We believe that digital collectibles have captured cultural consciousness, and the trend of inscriptions is expected to increase miner earnings, especially when developers and entrepreneurs begin to experiment with new applications using spatial blocks.
Stabilizing Miner Prices
Since the end of the bull market in December 2021, the prices of Bitcoin miners have been in free fall. However, in the third quarter of 2023, there seems to be some signs of recovery, at least for now.
The overall trend is still downward, but market data shows that miner prices in July may stabilize, especially for the new generation of devices. Below, we list the quarterly price changes for some popular miner models (data from Luxor’s miner trading platform RFQ).
· S19 XP (-2.64%)· S19j Pro+ (2.07%)· M30S++ 112TH/s (-10.34%)· S19 Pro 110 TH/s (-15.63%)· S19j Pro 104TH/s (-16.88%)· M30S 88TH/s (-25%)
It is clear that newer models with lower hashing power, such as S19 and M30S, are gradually losing popularity, while the premiums for new generation models like S19 XP are rising (as miners seek more efficient machines in preparation for the halving period).
From the price chart of miner price changes in the second quarter of 2022 below, we can see that although Bitcoin miner prices declined in the second quarter of 2022, they began to rebound in June and July, especially for the aforementioned next-generation models.
Figure 12: Price trend chart for popular models
It is worth noting that compared to other S19j series models, the S19j Pro+ showed appreciation at the end of the quarter, with a premium per TH. The S19j Pro+ has just been launched, and like previous new machines, its price is lower when miners place futures orders and the machine’s performance is unknown. As miners gradually observe the operation of the S19j Pro+ and trading transitions from the futures market to the spot market, prices rebound as uncertainty dissipates and the model becomes more transparent. We also saw this pricing dynamic with the S19XP that was launched last summer.
It is worth noting that new generation devices like S19j Pro, S19 Pro, and M30S++ are currently in tight trading. For most operators, older models in these series, such as the regular S19 and M30S, are becoming less popular, as can be seen from the price decline of the M30S in the chart above (in November 2022, when the mining power price reached its lowest point, the value of the M30S fell sharply).
For miners whose operating electricity costs are equal to or higher than the average electricity price (e.g., $0.075/KWh), any model with an efficiency value lower than 34 J/TH is not worth investing in (unless Bitcoin skyrockets in the next 12 months, which we won’t bet on, and further analysis on the payback period of miners in this report). With the Bitcoin halving in 2024 and the launch of a large number of new machines in 2023 and 2024, yesterday’s next-generation machines will become tomorrow’s mid-generation machines. However, based on the price per TH, investing in mid-generation and new generation machines may be a strategy to double profits, provided that 2024/2025 is a bull market. Just like miners bought S9s for a few cents last year and sold them for $50/TH at the peak of the bull market in 2021.
S19XP Premium Increase
As miners expand their mining operations in preparation for the 2024 Bitcoin halving, the price of mining power and the price of Bitcoin are not the only factors miners consider when evaluating mining hardware. Bitmain and MicroBT have launched several new models in 2023, and like all new hardware, miners are uncertain about their performance. As Bitmain’s flagship next-generation miner, the Antminer S19 XP has been in field testing for a year now, but there are still some areas that need improvement in its design (such as covering one side of each hash board with an aluminum panel, as reported by ComLianGuaiss’ Mining Memo), but miners generally consider it to be a stable machine.
As the halving approaches, miners are prioritizing machines with advantages in efficiency and mining power. Therefore, the premiums for next-generation hardware such as the Antminer S19 XP and the Whatsminer M50S++ are increasing compared to older models.
Figure 13: Comparison of premiums between S19XP and other models
As shown in the above figure, the premium for the S19 XP reached its lowest point in the second quarter but has been rising since June. In the third quarter, the premium for the S19 XP approached the high point at the end of last year when the price of Bitcoin was between $15,000 and $16,000, and every analyst called for a price reduction. With the rapid recovery of Bitcoin in the second quarter and the surge in transaction fees during the inscription craze, the price of mining power has been continuously rising, and the relatively low premium in the previous quarter was a response to the improvement in market dynamics. When the marginal cost of mining improves, miners do not urgently need to replace efficient hardware, so the premium for the XP also decreases. Now that the price of mining power has returned to an uncertain level, especially with 9 months left until the halving, and miners are increasingly inclined to refer to post-halving mining economics, the premium is rising again.
We also noticed that compared to the Antminer S19 XP, the price premium for the M50S series is higher. We speculate that there are two reasons for this premium: 1) Bitmain produces more machines than MicroBT, so it can obtain better prices from chip manufacturers, 2) Whatsminer is becoming a strong competitor to Antminer.
As miners prepare for the halving, next-generation models have become their preferred choice. The premium for these models has steadily increased over the past year.
New Models and Liquid Cooling, Oil Cooling Models
Speaking of new devices, here are some new mining machine models launched last quarter.
· S19j XP (151 TH/s) – 21.5 J/TH· S19k Pro (136 TH/s) – 24 J/TH· M50S++ (150 TH/s) – 22 J/TH· M56S++ (immersion 230 TH/s) – 22 J/TH· M53S++ (Hydro 320 TH/s) – 22 J/TH
We have started to notice more and more water-cooled and oil-cooled mining farms appearing, especially as the halving approaches and manufacturers expand their offerings for these types of mining machines. Under normal circumstances, these machines can provide double the computing power for miners with the same energy input, and when they are overclocked, they can even provide more computing power.
However, this increased output comes with costs: higher capital expenditure, more hardware, and higher maintenance costs.
1. Hydro Cooling: Hydro cooling, also known as liquid cooling, uses cold plate water cooling technology with deionized water as the heat transfer medium. Unlike immersion cooling, hydro cooling typically uses a closed-loop system where water circulates in a heat exchanger without coming into contact with electrical components. This method achieves efficient heat transfer due to the higher heat capacity of water compared to air and oil. Compared to air cooling solutions, hydro cooling offers advantages such as improved cooling efficiency, scalability, flexibility, and lower operating costs.
2. Immersion Cooling: Immersion cooling involves immersing electronic components (such as servers or mining machine chips) in a non-conductive liquid or coolant. This cooling method allows the components to directly contact the coolant, providing better heat dissipation. Immersion cooling has many advantages, including improved cooling efficiency, reduced thermal stress, enhanced performance, extended equipment lifespan, and smaller physical footprint. By eliminating the need for air cooling, immersion cooling enables higher-density deployments and reduces noise pollution in the computing environment.
There are many similarities between immersion and hydro cooling systems in terms of the supported infrastructure. The main components of an immersion cooling system include:
· Water tank· Coolant· Pump· Filtration system· Heat exchanger· Control system· Power distribution unit (PDU)
The main components of a hydro cooling system include:
· Rack· Coolant· Pump filtration system· Heat exchanger· Control system· Power distribution unit (PDU)
The biggest difference lies in the coolant used in the cooling system (water or dielectric oil or a similar non-conductive fluid). Hydro cooling systems use specially deionized water as the coolant. Maintaining water quality and minimizing environmental impact are key aspects of hydro mining setups. Miners employ various techniques and measures to maintain the quality of their hydro water for Bitcoin mining, such as filtration systems for sediment and impurity removal, regular water quality testing, pH adjustment, removal of contaminants through chemical treatment, and compliance with environmental factors. Implementing water circulation and reuse systems helps reduce water consumption and ensures proper discharge management in compliance with local regulations. In this regard, MicroBT recommends the use of first-grade deionized water that meets the national standard GM/T 6682-2008.
In immersion cooling systems, the liquid must be non-conductive as it directly contacts the mining rig components. The choice of coolant depends on various factors such as dielectric performance, thermal conductivity, and compatibility with electronic components. Miners typically use fluorocarbon-based liquids like 3M, Novec, or Galden in immersion cooling systems because they are non-conductive and have high boiling points. These coolants enable efficient heat transfer while ensuring the safety of the immersed components.
Oil-cooled and water-cooled mining farms are expected to continue steadily generating the total hash rate of Bitcoin in the coming years. We have already seen it become the standard in markets like the Middle East, with countries such as the United Arab Emirates emerging and continuing to witness significant investments in the industry.
New models and 3-nanometer chips coming in 2024
There is news that Bitmain’s next-generation Bitcoin mining rigs, the S21 series, may be released next year. The Antminer S21 was originally planned for release in 2025, but it may be available for pre-order as early as next year. The efficiency of these machines is expected to be around 14-15 J/TH, but the exact specifications and hash rate are yet to be determined. This is just speculation at the moment, but it is apparent that Bitmain is developing a new Antminer series that is more efficient and powerful than the current models.
Although it is only speculation, we believe that these devices will use 3-nanometer chips. It has been reported that MicroBT has already used 3-nanometer Samsung chips in its oil-cooled model, the Whatsminer M56s++.
Stability in the electricity market
In 2023, the electricity market seems to be gradually returning to normal, especially in many states in the United States, where electricity prices have been declining since their peak in 2022. Bitcoin miners around the world can finally breathe a sigh of relief as prices are gradually returning to normal, and at least in public forums and media reports, the industry is now paying relatively less attention to this topic.
Although the situation appears better than last year, miners should still exercise caution and not assume that they have seen the end of the energy crisis. There is still a significant imbalance in the global energy market, which could potentially lead to another increase in electricity prices, especially in extreme weather conditions.
This chapter will discuss energy market trends that could have positive or negative effects on miners’ access to cheap electricity. Based on historical data and future predictions, we will also analyze the electricity prices miners need to consider for hash rate calculations after the halving event.
Gradual normalization of natural gas prices
In most modern electricity markets, the price of electricity is determined by the marginal production cost of the dispatchable last resort power source, often natural gas power plants. Given the importance of natural gas prices to the electricity market, this subsection analyzes the current state of the global natural gas market and provides an overview of the latest developments in the international electricity market to better understand future trends.
As shown in the figure below, in the second half of 2022, natural gas prices in Europe and the United States soared to historical highs. As usual, electricity prices also rose, causing serious problems for the global Bitcoin mining industry that was not hedged. At the end of 2022, the two largest Bitcoin mining hosting providers in North America, Compute North and Core Scientific, declared bankruptcy, partly due to the rise in electricity costs.
Figure 14: Comparison of natural gas prices in Europe and the United States
Fortunately, nature has bestowed Europe with the mildest winter ever witnessed. This has greatly reduced the demand for natural gas, allowing European countries to replenish their reserves. As a result, the European natural gas benchmark price (Dutch TTF) plummeted and is currently at its lowest inflation-adjusted level since September 2020, with a price of $25.96 per MMBtu, a decrease of 93% from the peak of $346 per MMBtu in August 2022.
The U.S. natural gas benchmark (Henry Hub) also experienced a decline, although the decline was smaller than in Europe. Currently, its price is $2.56 per MMBtu, a 73% decrease from the peak of $9.34 per MMBtu in August 2022.
However, according to the U.S. Energy Information Administration and market consensus, natural gas prices may slightly rise in the coming months. The U.S. Energy Information Administration predicts that the Henry Hub price will average $2.80 per MMBtu in the second half of this year, a 10% increase from the current price of $2.56 per MMBtu. This forecast is in line with market consensus, as indicated by the futures curve in the chart, which suggests that natural gas prices will rise slightly in the next winter and then decline in the spring.
Natural gas prices are extremely difficult to predict
Therefore, experts believe that natural gas prices will remain relatively comfortable in the next few months. We have no reason to oppose this consensus. However, it is still important to emphasize that in this era of volatile market conditions, any energy price forecast carries uncertainty. Due to ongoing geopolitical events in Europe and structural energy market issues, predicting natural gas and electricity prices is more complex and unpredictable than ever before.
Therefore, miners should be prepared for the worst-case scenario and ideally hedge their future months and one-year electricity input costs.
U.S. electricity prices fall from historical highs
Natural gas and electricity prices are interrelated, so the trajectory of natural gas serves as a general indicator of global electricity prices. In this section, we will delve into the forecast of future industrial electricity prices in various states of the United States.
As shown in the figure below, electricity prices in most states of the United States have significantly decreased in the past year.
Figure 15: Comparison of average industrial electricity prices in various states in Q2 2023 and Q2 2022
In many states, the decline in natural gas prices has helped, and the summer of 2023 is more tolerant of record high temperatures than last year. As we will mention later, depending on electricity prices, hosting rates either decrease or remain stable in various states.
Speculations on future industrial electricity prices in various states in the United States
The opposition between political parties has led to disagreements among citizens on every topic, including from equal rights actions to new Barbie movies. Therefore, energy policies are inevitably involved in the cultural warfare. Generally speaking (Texas being a notable exception), red states prioritize fossil fuels and nuclear power as base loads, as well as hydroelectric power (using renewable energy where meaningful). Meanwhile, blue states, especially California and New York, prioritize renewable energy such as solar and wind power over the cost of nuclear power and natural gas.
An analysis of the situation of reduced production in Texas during the summer
Summer is the most challenging season for Bitcoin miners in North America for two reasons. Not only is there an increased cooling demand during the summer heat, but spot electricity prices also tend to rise as everyone turns on their air conditioners. Summer is usually the peak season and time for tourism activities. These rising electricity prices often force miners to periodically reduce their operations. In this chapter, we will analyze how summer heat affects mining operations in Texas.
However, in most states, the summer is relatively mild, although the Texas and California power grids have performed poorly during periods of high temperatures and storms.
Fortunately, so far, Texas has avoided the worst and record-breaking heat waves, so miners have reduced production less than expected, except during periods of special pressure.
In Texas and other electricity markets, there are several factors driving production cuts. One common factor is that miners typically reduce production during periods of soaring spot electricity prices. As shown in the figure below, the spot electricity prices in the West Texas day-ahead market in July this year have been lower than the same period last year.
Figure 16: Comparison of average hourly electricity prices in West Texas in July 2023 and July 2022
We can see that the average prices between midnight and noon are much lower than last summer. However, the average peak prices in the afternoon around 5 o’clock are slightly higher this summer than in 2022.
In the case where spot electricity prices exceed the red line of mining revenue per MWh, most Bitcoin mining in Texas will reduce load, as shown in the figure. As we can see, this usually happens during the six hours between 3 pm and 9 pm. A six-hour reduction means that most Bitcoin miners in Texas can expect to achieve about 75% of operating time in July.
Figure 17: Overview of Riot’s monthly machine uptime in 2022
Riot’s significant reduction in summer effective operating time provides us with a real case study of ERCOT’s production cuts. As shown in the figure above, Riot’s expected normal operating time from January to April is about 90%. As temperatures and electricity prices rise, the expected normal operating time of this Texas mining giant drops significantly, operating at only 54% to 71% of capacity from June to September. Like many other miners in Texas, Riot can significantly reduce its actual electricity costs by reducing load during peak hours.
1. Different Forms of “Production Cuts”
Miners and commentators often talk about “demand response” and “production cuts,” and it has been proven that Riot has been compensated for this, while some other large operators in Texas have not, so not all “production cuts” are the same.
ERCOT provides four basic types of production cut services. (Special thanks to Evan Neel from ERCOT for providing information for this section).
a. Economic production cut: This method depends on the spot price of the day-ahead or real-time market. For miners hedging with PLianGuai, their contracts almost always have the option to relinquish their contracted electricity and have their power supplier sell it on the spot market. Miners then settle financially with their power supplier and collect the difference. This means that for some miners who choose to hedge, reducing production when spot electricity prices are high is the best financial interest, even though they have already been profitable mining at a fixed price. They reduce production because arbitrage opportunities outweigh mining revenue. Non-hedging miners do the same, but without arbitrage. If spot electricity prices rise above their mining revenue per MWh, they will reduce production. By avoiding the most expensive price range (time), they significantly reduce their actual electricity costs.
b. 4 Coincident Peak (4CP) Program: This demand response program aims to allocate the transmission costs based on the total average consumption during the peak load interval of the four summer months (January to September). By avoiding consumption during these intervals, loads can save a significant amount of money in the long term. Typically, most miners operate more conservatively during the summer, avoiding power consumption during one of these intervals (usually early afternoon to evening). The majority of the summer production reduction by miners can likely be attributed to this.
c. Ancillary Services: Ancillary services are reliability products competitively procured by ERCOT in the day-ahead market. As reliability products, they serve as tools for the operator to balance the grid through dispatching. Eligible large flexible loads (LFLs) can participate in these markets if they are registered non-controllable load resources or registered controllable load resources with subfrequency relays installed. For obligated LFLs that are awarded, they will receive the market clearing price of the product and are required to maintain a specific MW consumption threshold within the time frame specified in their contract to coordinate with their load flexibility (if the grid needs power, they will utilize it; if not, miners will continue mining).
d. ERCOT Alert Issuance: In cases of energy scarcity (e.g., winter storm Elliott), some LFLs may reduce production when ERCOT issues an alert. This type of production reduction is rare and typically occurs in winter, but is almost impossible in summer.
2. 2023 Summer More “Human” Than Expected
This summer has been milder than expected. In the United States, August and September are historically the hottest months, but they have been noticeably cooler than July. With the hottest months already behind us, the threat seems to have disappeared for Texas and other regions in the United States where Bitcoin miners are located.
U.S. Hosting Prices and Electricity Market Stability
In 2021, even retail-end miners in the United States were able to negotiate a fully inclusive hosting rate of $0.07 per kilowatt-hour. However, these favorable market conditions were not sustainable as the rise in electricity prices forced co-location organizers and hosting providers to increase their prices in the third and fourth quarters of 2022.
According to the Luxor Hosting Rate Index, in January 2023, the average retail hosting rate in the United States reached a historical high of $0.081 per kilowatt-hour, very close to the breakeven electricity price of Antminer S19j Pro at that time ($0.082 per kilowatt-hour). Fortunately for miners, electricity prices cooled off in the first quarter of 2023, leading to a corresponding decrease in hosting rates. Currently, both electricity prices and hosting rates have stabilized. The current average retail hosting rate in the United States is $0.077 per kilowatt-hour, a 6% decrease from the beginning of the year.
Figure 18: Average Hosting Prices in U.S. States
As shown in the above figure, the current prices of hosting service providers in Minnesota, Oregon, Wisconsin, Michigan, Oklahoma, and South Carolina are $0.075 per kilowatt-hour or below. Idaho and Illinois are the “most expensive states” with prices of $0.095 per kilowatt-hour and $0.09 per kilowatt-hour, respectively.
Please note that our observation of these states is much smaller than larger mining states like Texas or Ohio. As shown in the table below, states with more data points tend to provide us with a greater difference between the small MOQ rate and the large MOQ rate, as the rack space market is stronger.
Generally, hosting rates will rise or fall based on changes in electricity prices in each state, and states with more data points can most clearly reflect this correlation. In addition, hosting service providers are learning from the volatility of the electricity market in 2022; contracts have become more flexible and short-term, and are subject to monthly adjustments, with long-term contracts of 2-5 years becoming increasingly rare. Host service providers are increasingly signing “power pass-through” contracts, which allow them to pass on changes in electricity costs to customers; this is particularly common in the oil mining sector, where oil mining operators have a greater understanding of the economics of mining power prices and balance contracts on a monthly or quarterly basis to weather periods of rising natural gas prices.
1. Hosting Prices in Canada
Figure 19: Average Hosting Prices in Canadian Provinces
Hosting rates in Canada have always been slightly lower than those in the United States. The country has abundant hydroelectric resources, but new miners have difficulty entering the market due to a lack of regulatory clarity (see the section on Canada at the end of this report for more details on this). Operators in Labrador offer services at an average minimum hosting rate of $0.065 per kilowatt-hour. Meanwhile, New Brunswick and Saskatchewan are the most expensive provinces, with an average rate of $0.080 per kilowatt-hour.
2. About Hosting
Since 2020, with the rise in natural gas prices, prices for well sites and stranded gas operators have also generally increased. Energy-saving measures and stranded gas operators are also increasingly inclined towards the economics of mining power prices, and after understanding the Bitcoin mining market, they are choosing a more balanced profit-sharing arrangement; whereas miners in the past would often receive profit-sharing contracts of 80/20 or 70/30, where the gas operator would receive 20-30% of mining profits (or in some cases, revenue), miners are now receiving profit-sharing contracts of 60/40 or 50/50. Hosting rates for stranded hosting sites are increasing with the increase in grid-connected gas. Hosting in hydroelectric facilities can provide the best combination of uptime and cost.
The United States and Canada offer the most liquid and transparent custody markets, so prices are higher compared to other countries. European miners also seem willing to pay a premium to host their machines in locations relatively close to the Nordic region, thus driving up the retail custody rates to around $0.09 per kilowatt-hour in that area.
Miners who are generally unwilling to pay a premium will seek custody solutions outside of North America, such as in Paraguay or Russia, where custody costs are much lower. Paraguay has not seen any significant changes in custody fees over the past few months, with an average retail price of $0.0625 per kilowatt-hour.
According to observations from Luxor’s business team, custody rates in Russia have slightly increased, with an average retail price of $0.055 per kilowatt-hour for end customers. Over the past year or so, many miners from Europe and North America have withdrawn from Russia due to economic sanctions and the war in Ukraine. This outflow has left a vacuum in rack space, quickly filled by Chinese, Kazakhstani, Iranian, Russian, and certain adventurous Western miners. You can read more about mining conditions in these countries in Chapter 5.
So, what will happen to custody fees in the coming months? Let’s focus on the largest market – the United States. Like any other market, custody rates are determined by supply and demand. In 2022, as electricity prices soar, supply will shrink. At the same time, due to the backlog of mining investments taken on during the bull market period in 2021 and the withdrawal of many Western miners from Russia, there is strong demand for electricity. We expect custody rates to remain stable in the next quarter. However, electricity contracts (especially for industrial consumers) will become more complex. Demand response, reduction, and similar electricity management strategies will be key to maintaining low operating costs for power operators, especially before and after the halving. Some contracts, such as agreements for wind or solar-powered mining farms, may offer low normal operating hours (10-16 hours) for lower electricity fees ($0.03-4 per kilowatt-hour); conversely, hosting at nuclear or hydroelectric sites, where normal operating hours can exceed 95%, may incur higher costs ($0.06-8 per kilowatt-hour).
Since China’s mining ban, retail mining investors have become increasingly interested in Bitcoin mining in North America. Typically, these miners have smaller deployment scales (possibly 1-10 mining machines), which means they do not have the same negotiating power as custodians or power companies for better rates. Therefore, all retail miners with comprehensive custody/power costs equal to or higher than $0.075 per kilowatt-hour should evaluate their strategies post-halving.
3. The United States will add 25.6 GW of capacity in 2023
This section will cover the general trends in the power supply chain and introduce some large-scale power generation projects related to Bitcoin mining. While we will focus on the United States, we will also mention some projects in emerging mining countries such as the United Arab Emirates and Finland.
Let’s start by understanding the trends in the US power supply chain. The major trend in the US power supply over the past few years has been the replacement of coal with natural gas as the base load generation, while rapidly expanding wind and solar capacity. This trend peaked in 2023, both in terms of coal plant retirements and solar plant additions.
In 2023, solar will account for over half of the planned growth in the US power supply.
Figure 20: Estimated increase in power output for various components of the US power supply in 2023
As shown in the above figure, the EIA estimates that developers will add 25.6 GW of solar, 8.2 GW of natural gas, 5.9 GW of wind, and 2.2 GW of nuclear power in 2023. Meanwhile, we will not see any meaningful additions of new power plants in biomass, geothermal, hydro, oil, or coal.
4. Will the European power market be affected by Bitcoin mining?
In recent years, miners have flocked to the Nordic countries of Norway, Sweden, Iceland, and Finland, while avoiding the Southern European countries with significantly higher electricity costs. However, if the power market returns to normal, mining may become viable in other European countries.
As shown in the chart below, the electricity prices in most European countries have experienced a sharp decline in the past year, with France, Spain, and Germany seeing price drops of over 50%. However, the electricity prices in these countries still have a long way to go to be considered “friendly”. For example, the current spot price in France is $100 per megawatt-hour, nearly double the highest mining fee rate before the halving of Bitcoin.
Figure 21: Comparison of average electricity prices in Europe during Q3 2022 and Q3 2023
Meanwhile, the spot prices in the NO4 and NO3 electricity price areas in the northernmost part of Norway averaged $26 and $39 per kilowatt-hour in the second quarter of 2023, which is much lower than the threshold of the highest Bitcoin mining cost. Interestingly, during the European energy crisis in the second quarter of 2022, miners in this price region of Norway even obtained lower prices, with spot market costs of only $13 and $26 per kilowatt-hour. In the resource-rich northern part of Norway, where hydropower is abundant and limited by the high-voltage transmission connection to the European continent, miners were actually unaffected by the chaotic European power market in 2022.
It can be seen that miners in the northernmost price zone in Sweden also enjoy relatively cheap hydroelectric resources, priced at $46 per kilowatt-hour. Swedish companies like Hive Digital Technologies and Prosperity Digital have fortunately avoided the energy crisis due to transmission line restrictions.
Norway, Sweden, and Iceland have long been mining powerhouses in Europe, but Finland as a mining newcomer is gradually emerging in the public eye. The country recently launched the largest nuclear reactor in Europe, expected to output about 55% of electricity. This large-scale investment in nuclear energy, coupled with generally lower electricity prices, has reduced Finland’s electricity prices by 62% in the past year, to a relatively competitive $47 per megawatt-hour. With abundant surplus capacity and cheap electricity, Finnish regulations do not constrain the development of the mining industry, and over time Finland may surpass Norway to become the largest Bitcoin mining country in Europe. While electricity prices in other European countries have fallen significantly, they are still relatively high compared to Finland, which does not better prove their feasibility in the Bitcoin mining industry.
5. Europe may not be a paradise for Bitcoin mining, but we still have hope for it.
It is unlikely that European electricity prices will continue to fall, but they will continue to face power supply problems in the upcoming winter. The delivery futures contract prices for Germany in 2024 and 2025 are $153 per megawatt-hour and $161 per megawatt-hour, respectively, which is a considerable increase compared to the current spot price of $101 per kilowatt-hour.
There are serious structural problems in the European energy market, which could lead to sudden increases in electricity prices. Over the years, the European continent has severely underinvested in base load power generation, giving rise to a fragile power market with volatile prices.
Even if Europe is lucky enough to experience another exceptionally mild winter, these profound structural cracks in the European energy system will not disappear. Therefore, the high price risk makes it impractical to invest in industrial-scale mining facilities in most regions of Europe, unless investors can somehow achieve long-term hedging of electricity prices or prices miraculously drop.
Figure 22: Forecast of wind and solar energy development prospects in Europe
Nevertheless, miners and energy producers can use smaller-scale Bitcoin mining operations to address various energy issues. For example, in the context of large investments in wind and solar power in Europe, the periods of negative electricity prices are becoming longer, leading to greater price fluctuations. Bitcoin miners can absorb excess solar and wind energy from the grid. Wind energy output is typically during the night and morning, while solar energy is in the early morning.
The Bitcoin mining industry in Europe will continue to be concentrated in powerhouses such as Norway, Sweden, Finland, and Iceland.
Listed mining company stocks rebound
It is no exaggeration to say that Q2 2023 is the “resurrection season” for listed mining companies.
The stocks of listed mining companies suffered a catastrophic defeat at the end of last year, with prices falling by 90-99%. However, in the first half of 2023, the stocks of these companies rebounded, with gains of several hundred percentage points (possibly). The stock rally peaked in July but gradually declined thereafter.
This report only covers some data points of listed mining companies and provides high-level commentary. As these mining companies will release their Q2-2023 “10-Q” reports in August, the data from Q1 in this report will soon be outdated. Therefore, we will reissue a stock report in August.
Listed mining companies increase Bitcoin sales
In 2023, due to increased production capacity, listed mining companies also continuously increased their Bitcoin output, providing support for future business expansion and the deployment of next-generation mining equipment. In early 2022, miners chose to hold Bitcoin and refused to sell. However, after the impact of Terra Luna and FTX on the cryptocurrency market and the impact on hash rate prices, the Bitcoin hoardings of listed mining companies have significantly decreased. During the bull market, these companies could operate through a mix of debt and equity financing; but in 2022, their stock values were only valued at a limited bull market valuation, and as the federal government raised interest rates, financing options dried up. As liquidity from these two sources gradually dried up, mining companies were forced to sell Bitcoin to meet their operational needs, often at prices below $30,000 per coin.
The chart below shows that in June of last year, when Bitcoin first fell to $16,000, the sales volume reached its peak. Most large-scale sales occurred in heavily indebted mining companies, who had taken out large-scale equipment loans at the peak of machine prices, resulting in unsustainable debt burdens.
Figure 23: Overview of monthly Bitcoin mining and sales of listed mining companies
In May 2023, listed mining companies significantly increased their Bitcoin production. However, after June, production capacity saw a significant decline. In May, listed mining companies mined 6,079 coins, but in June, they only mined 4,859 coins. It is clear that the hot summer and higher network difficulty have affected mining efficiency as a whole.
Figure 24: Overview of Bitcoin Mining Quantity/Sales Ratio
In the first quarter of 2023, the average number of bitcoins sold by Bitcoin mining companies was higher than in the second quarter. As can be seen from the graph above, the largest sales of bitcoins occurred during periods of significant price drops. When Bitcoin reached its bear market low at the end of 2022, most listed mining companies were selling their entire inventory of bitcoins. With the arrival of spring, mining companies made adjustments to their plans, with most companies starting to sell two-thirds of their bitcoin inventory each month to fund their business operations and development.
It is expected that mining companies will continue to formulate financial management strategies to avoid making the same mistakes.
Listed Mining Company Marginal Production Cost
Figure 25: Bitcoin Marginal Production Cost
We calculated the marginal production cost of listed mining companies by dividing revenue costs (excluding depreciation expenses) by the number of bitcoins mined during that period. The data set is based on the latest quarterly financial reports of each company. According to current mining economics, most listed mining companies are expected to achieve some mining profits in the range of $15,000 to $20,000 per coin.
As a key point in the calculation of marginal production cost, we used the operating costs of mining companies in the first quarter to calculate their current mining capacity. For example, after Marathon Digital and Terawulf released their second quarter financial reports, their marginal production costs may reach $10,000, and the marginal costs of other mining companies may also increase or decrease. We plan to continue refining this analysis in future reports.
Listed Mining Company Hashrate Expansion
In the first half of 2023, most Bitcoin mining companies have completed their hashrate expansion. Iris Energy led the way with a 254% increase in hashrate, even though they did not fulfill their equipment loan repayment obligations last year. After Marathon Digital’s new facility in North Dakota became operational, its hashrate capacity grew by 152%. In March of this year, Terawulf’s mining capacity increased by 80% after its Lake Mariner facility started operations. Bitfarms obtained operating licenses for its data center in Argentina, and its mining capacity increased by 70% using the full power of 50 MW. Greenidge resolved its equipment loan issues from last year and successfully increased its mining capacity by 127%, becoming the “dark horse” of 2023.
It is expected that the hashrate of major listed mining companies will continue to grow significantly. CleansLianGuairk deployed a large number of mining facilities in July, increasing its hashrate capacity from 6.7 EH/s to over 8.5 EH/s. Marathon Digital’s Garden City will start operations in August, and with the expansion in North Dakota, its total capacity is expected to increase by 21-23 EH/s. Hut 8’s hashrate will double after the completion of its transaction with US Bitcoin. Lastly, Core Scientific is currently undergoing restructuring, and hashrate expansion will have to wait until it emerges from bankruptcy.
Figure 26: Major listed mining companies’ computing power increase from January to July 2023. Do not blindly follow the AI trend
This industry is no stranger to speculation and trend-following, thus the hype wave surrounding AI has emerged.
With the emergence of ChatGPT, Midjourney, and other AI tools, some miners are promoting their ability to perform high-performance computing and/or AI tasks for the purpose of speculation.
High-performance computing is a general term used for any data center functionality. However, when miners talk about high-performance computing, they specifically refer to cloud computing, graphics rendering, and similar high-computing tasks. Hut 8 generated $4.5 million in revenue from these services in the first quarter, while HIVE’s pilot project brought in $230,000 in revenue for the company.
In reality, the cost of an AI data center may be 10 to 20 times that of a Bitcoin mining farm, and it may incur higher double power costs (up to $0.15 per kWh) in operation. Computing devices such as Nvidia’s A100 and H100GPU cost tens of thousands of dollars each. In addition, these data centers require more cooling and backup power infrastructure.
Figure 27: Cost per megawatt of electricity for data centers
Riot estimated its upcoming Corsicana facility to have a power cost of $832,000 per megawatt, with a total capacity of 400 MW and an estimated total cost of $333 million. In contrast, Turner and Townsend’s 2022 Data Center Index has an average cost of $9.5 million per megawatt.
Figure 28: Comparison of Riot Corsicana’s power cost per megawatt with other data centers in North America
Except for miners who have machines capable of providing GPU graphics rendering services, no miner will use their computers for Chat-GPT. Therefore, when you see headlines or press releases about AI, don’t believe it too much, as it is not what you imagine.
Bitcoin mining landscape in various countries
In this section, we outline the Bitcoin mining landscape in countries with significant or noteworthy mining activities. As other parts of our report delve into the North American market rather than providing a high-level overview of mining activities in the United States and Canada, we summarize recent regulatory actions that have affected the industry.
United States
In general, in 2022 and 2023, Bitcoin, Bitcoin mining, and cryptocurrencies are becoming more real in the United States. We can see this especially in the Bitcoin mining industry, particularly in aspects involving traditional capital markets and industry regulations. The second quarter of 2023 has made some positive progress in both areas.
For example, the ESG pressure accumulated in the previous bull market has dissipated. The cultural war has cast a shadow on almost every social/economic/political topic in this country, but currently, no party has caused serious harm to the industry at the national level.
Nevertheless, the current government and Congress are still working hard. The industry has overcome some enforcement and legislative attempts aimed at imposing excessive taxation or additional regulatory burdens on Bitcoin mining. In particular, Biden’s Digital Asset Market Participants Tax, which would increase the tax burden on Bitcoin miners to 30%, has been put on hold after the continuously rising debt ceiling agreement reached in Congress. Instead, the CHIPS Act has triggered a frenzy among states to find suitable land to accommodate chip factories and data centers.
Since the DAME tax is currently on hold, there is no information available on the industry development of Bitcoin mining in the federal-level meetings in the last quarter, but there are many actions worth exploring at the state level.
1. State Bills
In addition to federal regulations that may affect Bitcoin miners, individual state regulations may also have a significant impact. The separation of powers in the United States ensures that certain state laws supersede federal laws (marijuana is one example, and an extreme case is the possible differences between state and federal laws).
In 2023, historically law-conservative states introduced a wave of “mining rights” laws, which stipulate that as long as miners comply with local and state laws and regulations, they shall not be discriminated against. These laws are the first batch of domestic legislation related to Bitcoin mining and provide clear guidelines for regulation.
Other states have introduced neutral to negative legislation this quarter and in the past, but most of them have not been implemented specifically or have failed.
2. Texas
One of the more disturbing legislations comes from the mining holy land of the United States-Texas.
On April 12, the Texas Senate passed Bill 1751. A bipartisan group of lawmakers from the Texas Senate Business and Commerce Committee introduced the bill in March of this year, which, among other things, restricts the degree of response that Bitcoin miners in the state can provide and prohibits them from using certain property tax exemptions applicable to industrial-scale enterprises. The main sponsor of the bill often receives campaign funding by investing in peak power plants, which are natural gas power plants that only operate during periods of high demand. Bitcoin mining farms, due to their ability to provide flexible loads to the grid, have become competitors to peak power plants, and the above measures will be a heavy blow to the Bitcoin mining industry in Texas.
This bill is awaiting a vote in the House of Representatives, and many critics and miners expect it to be rejected.
3. Arkansas
Arkansas has passed legislation to regulate the Bitcoin mining industry as part of its 2023 Arkansas Data Center Act. This bill, known as House Bill 851, not only provides tax exemptions for data centers but also sets clear guidelines for Bitcoin miners to ensure they can operate in the state in compliance with the following regulations:
a. State business and tax laws
b. Local and state regulations on operations, safety, and noise pollution
c. Any rules or rates for utility services provided by public entities and the state
d. State and federal employment laws
The reaction to this bill has been mixed, with some counties attempting to oppose it.
4. Mississippi
In February of this year, the Mississippi State Senate passed Senate Bill 2603, which was its own form of “mining rights.” Unfortunately, the bill was rejected by the Mississippi House of Representatives in April.
5. Missouri
In March 2023, both chambers of the Missouri State Legislature passed its own “mining rights” bill, known as Senate Bill 692. However, Governor LianGuairson has not yet approved it. This bill will ensure that Bitcoin mining facilities receive the same treatment as traditional data centers and prohibit any state or local legislation opposing mining in residential or industrial areas. Additionally, it exempts cryptocurrency from state and local taxes. If Governor Parson approves this bill, it will take effect on August 28th of this year.
6. Montana
Montana has passed a “mining rights” bill similar to Arkansas, which stipulates that Bitcoin miners can operate in the state without being subject to “excessive discrimination or requirements.” Governor Gianforte signed the bill on May 2, 2023.
7. Oregon
Oregon lawmakers attempted to push House Bill 2816 in the previous quarter, which aimed to impose emission targets on Bitcoin mining and data centers. The bill failed committee consideration in April after Amazon announced plans to build 5 new data centers in the state.
8. Pennsylvania
Pennsylvania House Bill 1476 was referred to the state’s House of Representatives in June. The bill proposes a suspension of Bitcoin mining’s electricity consumption and suggests conducting a study on the environmental impact of Bitcoin mining.
9. Washington
Last quarter, Washington took strict measures to regulate data centers and Bitcoin mining facilities. Governor Jay Inslee signed Washington House Bill 1416 on May 3, 2023. This law establishes emission limits for data centers and Bitcoin mining facilities in line with the state’s green energy goals set in 2021.
Canada
Similar to the United States, Canada also has a federal government, and the regulations for Bitcoin mining are mostly determined by each province. Before the mining ban in China, this country known for its deer, maple trees, and ice hockey was a leader in Bitcoin mining in North America.
In November and December of last year, some provinces in Canada implemented an 18-month suspension on new mining power contracts, seemingly as a coordinated effort to prevent miners from expanding in energy-rich areas of Canada. Miners have found it increasingly difficult to expand or enter the Canadian market, not to mention that the Canadian federal government has also raised carbon taxes. As one of the highest carbon taxes in the world, it costs about 30,000 CAD per megawatt.
It is worth noting that electricity imports are not affected by carbon taxes, and Canadian power companies export a large amount of electricity to the more populous United States (Canada has a population of 38.25 million, while the United States has a population of 331.9 million, but the installed capacity per 1000 citizens is 4 MW, which is 19% higher than the United States’ 3.4 MW per 1000 citizens). In most cases, Canadian power companies earn more revenue from selling electricity to US cities than from local electricity consumers such as Bitcoin miners.
Finally, Canadian officials proposed implementing a “shadow tax” to prohibit Bitcoin miners (and other data center operators) from obtaining input tax credits like other export industries.
If this proposal is passed, companies engaged in digital asset development will no longer be eligible for input tax credits for value-added tax. This unprecedented proposal will impose an implicit tax, increasing the cost of Bitcoin mining by 5% to 15% and significantly reducing Canada’s competitive advantage.
In response, Canadian miners have formed the Responsible Digital Asset Development Fair Taxation Alliance. So far, they have successfully suspended the proposed changes and have been urging officials to consult the industry, understand the situation of digital asset development, and promote a healthy Canadian mining industry through fair taxation and regulation.
In addition to the above alliance, the Canadian Blockchain Alliance is a recently formed organization composed of cryptocurrency, Bitcoin, and mining professionals. They have been educating policymakers and countering excessive policies.
1. Alberta Province
Alberta Province is a cowboy province that often plays a counter-trend role, trying to incorporate Bitcoin miners into the electricity market.
This oil-rich province is taking action to attract Bitcoin miners while other provinces are avoiding this trend. In addition to its abundant oil resources, Alberta has relatively less regulation in its energy market compared to socialist provinces like Hydro-Quebec, making it a free market.
Although there is currently no specific legislation, the Alberta government has expressed its desire to promote policies to make Alberta a “modern energy powerhouse”.
2. British Columbia
B.C. Hydro, the power management agency in British Columbia, implemented its own 18-month suspension of bitcoin mining power contracts in December last year. At that time, it stated that it had received requests from 21 mining companies for 1.4 GW of power contracts, while it currently only serves 7 mining companies with a total load of 273 MW.
3. Quebec
In December 2022, Hydro-Quebec, the power company in Quebec, canceled the power contracts of approximately 270 MW previously awarded to bitcoin mining companies. The power agency has a practice of implementing a stop-and-go mechanism for new bitcoin mining contracts, making it difficult for new bitcoin mining companies to establish themselves in the region. Even old miners like Bitfarms, who had similar previous power contracts, would leave the province when Hydro-Quebec refused to grant new power purchase agreements for expansion plans.
Due to its abundant hydroelectric power resources, Quebec became an early mining hub. In 2022, it exported 16.5% of its output. According to the power management agency’s report in 2022, Hydro-Quebec sold 216.2 billion kWh of power, with 35.6 billion kWh exported, mainly to major cities in the northeastern United States such as New York, at an average price of $0.082 per kWh.
Figure 29: Hydro-Quebec power sources and sales4. Manitoba
Manitoba implemented an 18-month pause on new Bitcoin mining projects in December 2022.
5. New Brunswick
New Brunswick implemented a pause on new mining contracts in March 2022.
6. Newfoundland and Labrador
Newfoundland and Labrador have not taken any action on Bitcoin mining in the past few years, making it one of the most promising mining regions in Canada.
Latin America and Paraguay
As Bitcoin miners in the Western Hemisphere seek cheaper electricity, Paraguay is emerging as the computing power leader in Latin America.
In addition to Paraguay, Argentina, Uruguay, and Brazil are also becoming promising mining countries. Colombia and Venezuela also have a small number of mining sites, but these countries lack economic and political stability, making it difficult for most miners to bear the risks even with the lowest electricity prices. Tariff imports may not be easy to handle.
This section focuses mainly on Paraguay, the largest Bitcoin mining center in Latin America.
Since the turmoil in Venezuela, Colombia, and Argentina has prevented miners from setting up operations in these former hotspots, Paraguay has risen in Latin America. It fills the void with the help of the Itaipu Dam.
Second only to China’s Three Gorges Dam, the Itaipu Dam can generate 14 gigawatts of electricity. Since its operation began on May 5, 1984, the dam has provided power to Paraguay, Brazil, and Argentina, jointly owned by Brazil and Paraguay.
Paraguay gets over 99% of its electricity from the Itaipu Dam and its “cousins”, the Yacyretá and Acaray Dams. However, Paraguay’s population of 6.7 million cannot consume all the energy generated by its dams, leading to 90% of its energy being exported to neighboring countries such as Brazil, Bolivia, and Argentina.
Figure 30: Top 10 Dams in the World (Ranked by Capacity)
Paraguay’s state-owned power company ANDE has the liquid gold in the eyes of miners, and they know it. Last year, the Paraguayan Congress passed a bill that was favorable to Bitcoin, which would officially regulate miners and lower electricity payment rates. President Benitez vetoed the bill, and when the bill returned to Congress from the president, Congress did not reach the required number of votes and the vote was postponed for a year. However, miners were not deterred and continued to flock to Paraguay. It is rumored that Paraguay’s power sector is developing at least six 100-megawatt contracts for industrial-scale miners, some of which are listed mining companies like Bitfarms.
Bitfarms has signed a long-term power contract for 150 MW, with 50 MW allocated to its existing Vilarrica mining facility and the remaining 100 MW for a new site near the Itaipu hydroelectric plant.
Undoubtedly, Paraguay is attractive for mining, but miners need the right connections to navigate Paraguay’s somewhat complicated permits and registrations. Bitcoin miners must establish a limited liability company to import Bitcoin mining hardware in bulk, and they must pay a certain amount of electricity deposit for their power contracts. Additionally, they need to obtain licenses to import the necessary cables and other electrical equipment to sustain mining operations. The cost of importing mining machines can be 17-20% of the machine’s market price (compared to 50-80% tariffs paid by miners importing machines to Brazil and Argentina or the additional bribe required in places like Venezuela and Colombia, it’s quite cost-effective). Furthermore, miners need to obtain a permit from the Ministry of Commerce to build Bitcoin mining facilities, but this permit can be obtained within a few days. Lastly, Bitcoin miners must pay an environmental tax to remain compliant.
Unless the government takes any drastic action or there is overall social and political instability, Paraguay’s position in the Latin American mining industry will continue to strengthen in the coming years.
Bitcoin mining gradually accepted in Russia
Bitcoin mining in Russia, like in most countries, has grown and operated in an unregulated manner. However, recent discussions between Russian mining communities and different departments suggest that the Russian government is seeking to regulate this industry.
The Ministry of Energy, the Ministry of Finance, and the mining industry itself are all pushing for industry regulation. The regulations will provide three main advantages for the mining industry and related regulatory agencies.
First, it will establish a tax system that clearly defines the amount of taxes miners should pay and to whom the taxes should be paid. Second, it will simplify the corporate structure of Russian mining companies, as current accounting laws do not accept Bitcoin income, preventing Russian miners from conducting individual mining through Russian entities. Third, and most importantly, the industry under regulation will be more attractive to investors, as listed mining companies will be allowed to list on the Moscow Stock Exchange and engage in market lending and financing. Many Russian investors and financial institutions are interested in investing in the mining industry, but they naturally sensibly put their investments on hold because the industry is not yet regulated.
Another interesting aspect of the upcoming mining regulation is that it may prohibit or strictly limit home mining. Home mining has already caused issues with the power distribution networks in certain Russian cities. Due to its negative public relations impact, BitRiver CEO Igor Runets is leading the effort to restrict home mining.
However, such comprehensive regulations will not be implemented overnight, especially considering the different views of government departments such as the Ministry of Energy, the Ministry of Finance, and the Central Bank of Russia on how to proceed. For example, while the Ministry of Finance wants miners to pay additional taxes on their profits, the Ministry of Energy proposes that miners should not pay corporate income tax or value-added tax, but instead be heavily taxed based on their electricity consumption. One thing seems certain: after mining is regulated, Russian miners are likely to see an increase in their taxes, whether it be additional corporate income tax or electricity tax. The Russian government plans to establish regulations for Bitcoin mining around 2024. Even though Bitcoin mining has been a relatively insignificant industry compared to oil and gas or traditional mining in the past two years, the Russian government still seems to be very concerned about this emerging industry, possibly due to its future strategic importance.
One highlight at the St. Petersburg International Economic Forum was the explanation by the Russian Ministry of Finance of how the Russian government plans to use mining as part of its domestic and international payment solutions. The specific idea is that miners must sell the Bitcoin they mine to Russian banks in exchange for digital rubles (Russia’s CBDC). Therefore, miners will help drive the circulation of digital rubles while providing liquidity for the Russian central bank in Bitcoin.
In close cooperation with the Russian government, the Russian banks will use these Bitcoins for international transactions, likely to avoid sanctions. This strategy is similar to what the Iranian government has done in the past.
Kazakhstan
In the past year and a half, Kafkaesque bureaucratic processes have weakened the once great Bitcoin mining industry in Kazakhstan, and it is now not as strong as before. Since the partial power cuts at the end of 2021, Kazakhstani miners have been hoping that the Bitcoin mining regulations scheduled to be issued on April 1st will provide better regulatory clarity and operating conditions in all aspects. However, things don’t seem to have improved.
Nordic Countries
Norway, Sweden, and Iceland have been among the most favored destinations for Bitcoin miners in Europe for many years, as they have cheap, renewable energy and relatively simple business environments. Recently, Finland has also joined the ranks of attractive Bitcoin mining countries due to the decline in electricity prices. In this section, we will summarize the most important trends and recent events in the Nordic Bitcoin mining industry.
1. Summer is the low electricity price period for Nordic miners.
The main selling point of the Bitcoin mining industry in the Nordic region is the stable and low-cost electricity provided by abundant hydroelectric power in northern Norway and Sweden. So how has the electricity price in these regions changed in 2023?
These countries (excluding Iceland) have relatively liberal electricity markets, making it very simple to compare historical spot prices. As can be seen from the graph below, compared to countries in southern Europe, the electricity prices in these countries are very low in 2023. As usual, the monthly average spot price in northern Norway this year ranges from $0.020 to $0.047 per kilowatt-hour.
Figure 31: Average spot electricity prices in the Nordic countries
Although not as low as in northern Norway, Bitcoin miners in northern Sweden can also obtain highly competitive electricity prices. In 2023, the monthly average spot electricity price in the northernmost region of Sweden fluctuates between $0.027 and $0.068 per kilowatt-hour.
Meanwhile, Finland, which has been severely affected by the energy crisis, has seen a significant impact on electricity prices in 2023, with a continuous decline. The average price in July dropped to $0.022 per kilowatt-hour.
Due to the use of a utility structure in the electricity market in Iceland, Bitcoin miners must negotiate power purchase agreements directly with local utilities, so we cannot obtain their electricity price data. However, due to the abundance of hydro and geothermal resources on this volcanic island, we expect that its electricity prices will not undergo significant changes.
As can also be seen from the chart, the electricity prices in all Nordic countries have been steadily declining since January. This phenomenon is completely normal in the region, and there are two reasons for it. First, the gradually rising temperatures have led to a significant decrease in heating demand. Second, the melting of snow in the mountains of Norway and Sweden has greatly increased hydroelectric power generation and sharply increased electricity supply.
It is expected that the electricity prices in the Nordic region will remain very low at least until November.
If you want to learn more about mining in Finland, please read this article. If you want to learn more about mining in Sweden, please read this article. If you want to learn more about Bitcoin mining in Iceland, please read this article. If you want to learn more about mining in Norway, please read this article.
Middle East
The Middle East has quickly emerged as one of the fastest-growing regions for Bitcoin mining. This article mainly discusses the Gulf countries on the Arabian Peninsula, including the United Arab Emirates, Saudi Arabia, Kuwait, Oman, Qatar, and Bahrain.
These countries have great potential in Bitcoin mining due to their abundant energy resources, high level of business friendliness, and strong desire to promote economic modernization.
1. Why has the Middle East become a hotspot for Bitcoin mining?
The power system in Middle Eastern countries is perfectly compatible with Bitcoin mining. In these hot and dry countries, up to 70% of energy consumption is used for cooling and freshwater production. However, there is a significant variation in temperature between the hottest and coldest months, resulting in huge seasonal fluctuations in power consumption for all air conditioners. Due to this consumption pattern, the basic demand in winter is about half of the peak demand in summer.
These seasonal fluctuations naturally put pressure on the power system. Power plants cannot reduce their production in winter to adapt to lower demand, making the situation more challenging. This is because these countries use combined power and desalination units to desalinate seawater. Due to the crucial need to deliver fresh water, these units must operate with relatively continuous capacity throughout the year, even with significant fluctuations in power demand between the hottest and coldest months. This leads to a large amount of wasted power. Bitcoin miners can provide essential base load for these power systems and monetize the surplus electricity generated, stabilizing the grid and increasing practical income.
In the past, almost all power consumption in these countries came from natural gas. However, in recent years, they have been steadfastly trying to diversify their power supply through other sources such as nuclear, wind, and solar energy. The United Arab Emirates recently inaugurated the largest nuclear power plant in the Arab world, with a capacity of 5.4 GW, and plans to build the world’s largest solar power plant with a capacity of 5 GW by 2030. Other countries in the region also have similar plans to expand their power generation capacity, with Saudi Arabia having the most ambitious plans.
Figure 32: Mohammed bin Rashid Al Maktoum Solar Park in Asia
Until 2021, China has been the center of the Bitcoin mining industry, accounting for 50-70% of the global total hash rate.
Now, the mining industry has not completely left China, and the country still remains a dominant player in Asia. However, after the mining ban, a significant amount of mining power has flowed into neighboring countries.
In this section, we will discuss some of these countries and provide a brief update on the current situation in the Chinese mining community.
1. China
In the summer of 2021, China implemented a ban on Bitcoin mining in various provinces, but this did not completely extinguish the industry. It is estimated that up to 20% of the hash rate may still be in China.
In fact, miners with political connections (or those who can continue their mining operations without special privileges) are still conducting mining businesses in the region, and dams in Sichuan and other places remain the focus of most mining activities.
In the rainy season (May to September), the electricity price is 0.03-0.035 dollars per kilowatt-hour. Since household mining is still officially banned in the country, most mining activities are small-scale (1-2 MW).
When China dominated Bitcoin mining, it was difficult for Western observers to get a glimpse of the situation, and that is still the case today. What we know is that the scale of mining farms is much smaller now than before the ban, and those miners who are still operating are usually closely connected to the Chinese government, belonging to a privileged class that is allowed to operate under certain restrictions.
A significant portion of mining power will continue to stay in China, and for the foreseeable future, a considerable part of Bitcoin’s mining power will still come from China.
2. Bhutan
In this quarter, Bhutan’s investment institution (DHI) finally confirmed that they have been using their dormant hydro resources for Bitcoin mining for years. It is said that this long-standing mining country started mining Bitcoin when its price was only $5,000. Now, after publicly disclosing its operations, this mountainous country hopes to take its mining industry to new heights.
Bhutan recently announced that they have reached an agreement with Bitdeer to expand their Bitcoin mining capacity to 600 megawatts within three years, with the initial phase project capacity of 100 megawatts planned to start in September. Bitdeer is currently raising $500 million from international investors to support this project. Several factors make Bitcoin mining a wise choice for Bhutan. Firstly, due to its vast hydro resources, Bhutan has an excess of electricity beyond what it knows to deal with. Historically, most of the country’s surplus hydroelectric power has been exported to India. However, relying too heavily on one industry and one trading partner is very risky, and Bhutan has little bargaining chips when negotiating with India. Therefore, instead of just exporting it to India, Bhutan can mine Bitcoin by using its hydro resources for domestic power generation, converting it into higher value and achieving economic diversification.
Bhutan currently has a hydro power generation capacity of 2.4 gigawatts and plans to open two new power stations with a total capacity of 1.4 gigawatts by the end of 2024. This capacity growth further increases the country’s power surplus. With Bhutan and El Salvador leading the way in national Bitcoin mining, we expect other countries to follow suit in the coming years.
Conclusion
As Bitcoin miners enter the fourth halving, the game is changing at a rapid pace. Computing power is spreading to new geographical regions, electricity management strategies are becoming more mature, and miners are also striving to explore new capital pools and financing avenues.
It is hard to imagine what the Bitcoin mining industry will look like when the next halving period ends. But as the block reward decreases to 3.125 BTC, high-cost miners will see a significant decrease in profitability and may even shut down their machines and exit the network. Therefore, we expect to see some serious hash rate restructuring. On the other hand, in the upcoming time, further growth in production will occur in emerging mining regions such as Latin America, the Middle East, and Russia. This is not to say that North America will not maintain a significant share of the network’s hash rate. It’s just that if the cost of hash rate is low enough, miners of all scales will start looking for opportunities elsewhere.
Some Bitcoin holders, including miners, believe that the price fluctuations of Bitcoin are related to the inflation during the halving cycles. Miners should cautiously bet and plan ahead for the situation after 2024, and look for ways to improve machine efficiency, reduce power costs, or decrease other operational expenses. The best time to formulate a halving plan is during the current halving period that started on May 11, 2020. However, for miners now, any time is a good time to prepare. If they cannot secure low-cost electricity contracts or hosting agreements, then now is the time to creatively seek opportunities. Hedging strategies for electricity and hash rate prices are crucial for coping with the future years. Bitcoin’s price can change before and after the halving, so it is wise to consider multiple possibilities when simulating the future.
Good luck to everyone!
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