Bitcoin’s price gains this year bring needed relief to cash-strapped crypto mining industry

The recovery of Bitcoin prices since the start of the year has brought some breathing space to the companies that mine the world’s largest cryptocurrency after 2022 drove many to warn of cash shortages or even in the case of Core Scientific, one of the biggest publicly traded miners, to file for Chapter 11 bankruptcy.

Miners rode the boom in 2021 as Bitcoin rose to all-time highs of more than US$68,000 in November of that year, with Core Scientific listing shares on the Nasdaq exchange just two months later. 

But the euphoria went up in smoke in 2022 as Bitcoin prices took a downturn, the US$40 billion Terra-Luna stablecoin collapsed in May and Bahamas-based crypto exchange FTX failed in November amid charges of fraud. Bitcoin plunged more than 75% from that all-time high to around US$16,000 at the end of 2022, squeezing profit margins at mining companies.

Bitcoin has since kicked off this year with price gains to top US$25,000 in February for the first time since June 2022.

“With Bitcoin closer to US$24,000 it’s obviously a lot better and a greater share of the industry is now profitable,” said Daniel Roberts, co-founder and chief executive of Nasdaq-listed Iris Energy, in an interview with Forkast. Roberts said at US$25,000 per Bitcoin, Iris can make US$100 million a year in gross profit. 

The change in fortunes is reflected in the share price of Iris, which traded at US$2.82 as of last Friday from an all-time low of US$1.02 in late December.

The Bitcoin network is secured by network participants trying to crack complex cryptographic equations required to validate transactions on the network. This process requires enormous computing power and energy use and these validators or “miners” are typically rewarded in Bitcoin. 

Iris was just one of many Bitcoin mining operators to report a cash shortage at the end of last year, as did London-listed miner Argo Blockchain and Greenidge Generation Holdings. But Iris appears to have resolved the shortage, according to the company’s recent earnings report.

Hard times

Bitcoin’s mining difficulty, a variable that measures how much computing power is required to verify blocks on the blockchain, rose to an all-time high on Feb. 25. This has offset profitability at the miners, even as Bitcoin gained.

Another Bitcoin mining operator said it was not just the crash in Bitcoin prices that hit the industry last year but a series of factors, including mining difficulty and energy prices.

The Bitcoin price crash was compounded by mining difficulty going “through the roof” and the volatility in energy prices as global inflation surged, Tim Broadfoot, chief corporate officer of Australian cryptocurrency mining firm Mawson Infrastructure Group, said in an interview. 

“So, it has been hard,” he said. Broadfoot added that the Bitcoin price surge in late 2021 led to a rush in orders for the specialized computers customized for crypto mining. Those machines are now coming online but are required to run to be profitable.

Energy prices also took a toll on the Bitcoin mining industry, after Russia’s invasion of Ukraine caused household energy prices around the world to almost double, according to a recent report from the World Economic Forum.

Sticky Bitcoin

Both Mawson and Iris have been somewhat insulated from the surge in energy costs as both rely primarily on renewable sources of energy that have been less affected by volatility in prices of electricity generated from fossil fuels such as oil and gas.

Iris uses surplus renewable energy to power its mining operations, which the company believes could provide a market incentive to build additional renewable energy facilities based on wind, solar and others.

“[Iris’s] strategy has always been to target excess renewables, which almost by definition is the lowest cost energy you can get,” said Roberts. “So, we’ve remained very competitive and increasingly competitive in the global cost curve.”

Mawson is powered by a nuclear energy power station in Pennsylvania, U.S., and also operates as an energy retailer. Broadfoot said throughout December, Mawson earned US$4 million from the energy market, but mined very few Bitcoins.

“So that’s really helped the company over the past few months and will continue to be a part of our strategic process,” he said.

Roberts said the slump in crypto prices and failures of various trading platforms ultimately help Bitcoin by distinguishing it as a monetary alternative.

“People are now starting to learn that Bitcoin is different from crypto and Bitcoin is different from these centralized exchanges,” he said. 

“I think that continued level of interest from individuals, high net-worth family offices and institutions is a little bit stickier and is staying through the cycle rather than potentially going to ground for a couple of years during previous bear markets.”