Cryptocurrency miners are spending heavily on the newest technology to earn more bitcoins, trying to gain market share and squeeze out rivals ahead of a halving of their rewards in around four months’ time.
Miners listed on the world’s stock exchanges have this month committed to spending around $600mn on buying new chips and servers that are the keystone of the digital ledger underlying bitcoin, according to The Miner Mag, an industry data provider. The December amount is nearly half of the $1.3bn total committed for the year.
The burst of spending comes despite miners having suffered heavy losses in the 2022 crypto market crash. They are now trying to profit from the soaring price of bitcoin, which has surged to an 18-month high of more than $44,000.
The splurge also comes before a scheduled plan in April to halve the incentive scheme that verifies all bitcoin deals. Optimists hope the so-called “halving” — a once every four year event to slow the circulation of bitcoins — will support further gains for the cryptocurrency next year but the move also threatens to undercut miners’ shaky profitability.
“Buying equipment is not just an action in the bull market,” said Juri Bulovic, head of mining at Foundry. Miners are “realising that refreshing the fleet is what would keep them in business post-halving.”
Miners play a crucial role in bitcoin’s operation, racing each other to verify new blocks of deals for its blockchain and taking on the role of deal guarantor. In return, the winner is rewarded with new tokens.
However, the process has been heavily criticised for the huge carbon footprint it creates. According to Cambridge university, bitcoin’s energy consumption is today roughly equivalent to that of Poland or Malaysia.
The halving is expected to reshape industry economics, which have been deeply strained in the last two years by the high cost of energy and the falling price of coins. Now companies are spending big on new equipment, hoping to leave rivals on older machines struggling.
Nevada-based CleanSpark, a bitcoin mining firm that has committed roughly $280mn to mining equipment this year, is one prepared to accept a smaller financial reward in exchange for a larger slice of the market.
“It won’t be dissimilar to when China banned mining [in 2021], everybody unplugged, and the percentage rewards skyrocketed for the miners that were still standing,” said Matthew Schultz, executive chair at CleanSpark. “The companies that have made these investments [in new equipment] are likely the ones that survive,” he added.
Bitcoin miners have already been pushed to their limits. Many invested during the bull run of 2020 and 2021, using debt and low interest rates to finance their expansion as the price of bitcoin soared to more than $69,000.
However they were hit hard when bitcoin lost three-quarters of its value and energy prices soared. Companies including Core Scientific and Computer North filed for bankruptcy while others were forced to temporarily shut down operations or were paid by some US states not to mine bitcoin, in an effort to conserve energy.
Another, Marathon Digital, became a focus for short sellers after paying its former chief executive Merrick Okamoto just under $220mn in stock and missing its earnings targets.
Bitcoin’s rebound this year as market speculation intensifies that US regulators will approve a spot bitcoin exchange traded fund.
Supporters say approval would potentially unlock billions of dollars worth of capital from major Wall Street players like BlackRock and Fidelity and send the price of bitcoin much higher.
Enthusiasts also note that the last halving, in May 2020, pushed bitcoin’s price up by roughly 460 per cent over the subsequent 12 months.
Bitcoin miners share prices have responded to bitcoin’s rising price: Riot Platforms is up 424 per cent this year and Marathon Digital is up 681 per cent. In Toronto, Bitfarms has risen 607 per cent this year and Hive Digital Technologies 232 per cent. In contrast, over the course of 2022 Riot and Marathon share prices fell by around 85 per cent and 90 per cent, respectively, while Bitfarms and Hive saw their share price decline by 91 per cent and 88 per cent.
“The enthusiasm over the potential of a bitcoin ETF all of a sudden has opened up the ability to raise capital to upgrade equipment, so you’ve seen this huge bulk buying spree,” said Frank Holmes, executive chair of Hive, which itself committed $9mn to new equipment this month.
But hopes for a resurgence are still contingent on bitcoin’s recent rally persisting. The SEC has given no indication it will approve an ETF, and end its decade-long policy of refusing all applications.
Moreover miners are still plagued by real-world costs, notably energy.
Latest figures pin the median cost to mine one bitcoin at around $17,000, but that could rise to as high as $34,000, according to The Miner Mag. It “doesn’t leave much room” for miners if bitcoin remains at its current price of roughly $42,000, said Wolfie Zhao, its head of research.
But some see it as a risk worth taking. Among them is Bitfarms, a Canadian-listed group, which this month set aside $95mn for new equipment.
“As our market share goes up, and we get more bitcoins on a daily basis, our revenues and our cash flow should work out as well [as] if not better than in the status quo,” said Geoffrey Morphy, Bitfarms chief executive.
“We’re not maintaining [our market share], we’re leapfrogging,” he added.