Will Miners' Trouble Spark a Bitcoin Price 'Death Spiral'?

On July 9th, @PricedinBTC posted an article about the “cost of Bitcoin mining” in the U.S., which caught the crypto community’s attention, especially given the recent Bitcoin miner headlines. The cryptocurrency bear market and rising energy costs have created a perfect storm for the mining industry, causing some companies to lay off staff and others to defer all capital expenditures. Some have even raised fears of a "death spiral" for bitcoin miners.

However, Raymond Nasser, CEO of Arthur Mining, a specialist mining company operating in the US, told Cointelegraph that their profit margins are not exactly in line with @PricedinBTC’s data.

With current production capacity of 25 megawatts (MW), Arthur Mining focuses on environmentally friendly energy. At first, people might overlook their numbers because public companies like Marathon Digital Holdings have 300 megawatts of power plants, but these companies rely on traditional grid energy — even if some of the power comes from hydroelectric plants.

In pursuit of best environmental, social and governance (ESG) practices, smaller-scale mining operations utilize flaring and stranded natural gas, which is undervalued in the oil and gas industry. Their secret is mobile bitcoin mining facilities that utilize energy that is greener, more efficient and more profitable than traditional solutions.

Regarding the $16,000 production cost for miners, Nasser said:

“These charts are very subjective. The largest new projects in the industry are finding off-grid solutions, and this chart represents some of the most expensive grid-connected energy costs used in urban areas. Our combined energy costs are lower than two different states in the U.S. 0.02 kWh."

Electricity bills have doubled in the past year

Data from QuickElectricity shows that starting March 2022, each of the U.S. states of Idaho, Utah, Virginia, Texas, Nevada, North Dakota, Nebraska, and Oklahoma will Kilowatt-hour (kWh) commercial electricity costs $0.08 to $0.09.

One of the strengths of the Bitcoin network is that it prioritizes efficiency, which means that labor-intensive production processes will always seek the lowest operating costs and move toward that. ASIC mining rigs are mobile, but more importantly, have alternative energy sources. For example, these machines can be installed in containers, transported to offshore oil and gas facilities, and work with oscillating power sources.

To date, Canada-based bitcoin mining data center manufacturer Upstream Data has built portable bitcoin mining rigs and infrastructure for natural gas without any pipelines or midstream facilities. After deploying more than 180 of these data centers, it's clear that this type of activity is going mainstream.

Earlier this year, CNBC explored how renewable energy could be used in bitcoin mining, and so far gas bitcoin mining company Giga Energy Solutions has signed deals with more than 20 oil and gas companies, four of which have gone public.

Higher Interest Rates and Bitcoin's Crash Are Hurting BTC Miners

Regardless of energy, miners have been struggling to fix their balance sheets. Aside from the impact of falling bitcoin prices, financing has been a major hurdle across the industry. A Cointelegraph report on July 7 examined how industrial-scale Bitcoin miners owed around $4 billion in loans, with some being forced to liquidate their BTC holdings to cover capital and operating costs.

But not every mining company has access to traditional long-term bank financing. Thus, these companies create a riskier debt structure by offering their mining rigs and infrastructure as collateral. As the price of bitcoin plummeted, so did the prices of mining equipment, which in turn worsened their financing conditions at a time when they needed it most.

Blockware Solutions analyst Rich Ferolo expressed his concerns to Cointelegraph on June 28:

“For s17s [ASIC miners] at $0.07 per kilowatt, BTC needs to be around $18,000…you’re going to see a lot of capitulation, bankruptcy, and excess machines…it’s more about survival of the fittest.”

Nasser said:

“We have been mitigating our convexity risk by immediately reinvesting or liquidating our bitcoin balances on a weekly basis. We know that with 70%+ ebitdas and high efficiencies in most cases, overly greedy holding bitcoin Stockpiling can disrupt your operations and cost you work, as we've seen over the past month."

Mining is problematic, but impact is limited

The industry clearly has problems, but that may just be a reflection of its infancy. Still, miners are selling more Bitcoin than they have mined in the past few months, which could put additional pressure on BTC's price.

This never-ending cycle reinforces the "death spiral" theory, but this oversimplification fails to take into account that miners simply shut down their machines below a certain price threshold, and many will opt for cheaper electricity regions, and even look for renewable energy.

While there is actually a short-term risk of reduced mining activity as the network becomes less secure, this risk is overstated as Bitcoin's difficulty adjustments increase the profitability of operating miners. In short, bitcoin mining operations pose no systemic risk to bitcoin prices.