Bitcoin mining financial model

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Further and as covered previously, a new block is produced roughly every ten minutes and the current block reward is 6. For example, a miner with a 4. Note that in practice, miners may underperform this theoretical production calculation, either because rigs were offline or added late in the measurement period.

Nevertheless, in more detail and including transaction fees, annual bitcoin mining revenue can be described as:. In addition to self-mining, many vertically integrated miners will offer hosting services, where they host and operate rigs owned by another party in exchange for a fee.

However, hosting is less profitable than self-mining in good times, and as such, many miners who provide hosting services constantly evaluate this tradeoff, more heavily weighting whichever business provides the highest expected return on capital at the time.

In addition to self-mining and hosting revenues, many miners may generate ancillary revenues, both operating and nonoperating, from various other sources.

We show the revenue breakout for five top publicly traded miners below. With self-mining ie. Such industry hashrate estimates tend to be fairly accurate over the near-term, as analysts can simply perform a bottoms-up analysis by looking at public company disclosed rig orders and estimate non-publicized orders and potential time delays, or perform a top-down analysis by estimating global chip production and the percentage going to crypto mining.

Over a longer period of time where the price of bitcoin has more room to move higher or lower, however, such estimates may prove less accurate as the resulting profitability will have a large impact on the network hashrate. More specifically, strong profitability will attract greater investment in hashrate causing it to rise, while lower profitability will not only cause investment in hashrate to fall but also miners to turn off their unprofitable rigs.

Conversely, a rising bitcoin price will undoubtedly attract additional hashrate and dampen the positive price impact for a specific miner if their hashrate market share fails to keep pace. Marathon Digital, for example, is guiding for its 3. This should increase its network hashrate market share from 2. Core Scientific and Riot Blockchain are also guiding to large increases in their self-mining hashrate, amounting to roughly two percentage point increases in each of their hashrate market shares, or an extra 18 bitcoin produced per day at year-end compared to March.

Nevertheless, the five public miners highlighted below are guiding for their current cumulative Current hashrate numbers are as of March Future hashrate targets are management guidance for year-end , except for Marathon and Riot, which are guidance for Q1 and Jan , respectively. To generate revenue, miners combine power, rigs, and hosting sites, all of which come with their own costs.

In more detail, major expenses for bitcoin mining companies include:. In practice, miner costs may be opaque, with disclosures, categorization, and accounting treatment sometimes varying between them and inhibiting comparisons between the miners. Nevertheless, most miners report a cost of revenue line item, which generally includes all the costs directly related to the production of bitcoin such as energy costs, hosting fees, electrical components, and operational staff salaries.

Cost of revenues will also include costs directly related to producing non-mining revenues as well. Lastly, some miners also include depreciation and amortization in their cost of revenues while others do not, but all typically specify the amount of depreciation and amortization in their regulatory filings even when included in the cost of revenues.

Hut 8 and HIVE tend to have more laddered and thus more costly fleets, though this also comes with a long history of operating experience that will help them through any future environment. Several miners reference their cost of mining a single bitcoin in filings or company presentations. This can be thought of as both the breakeven cost of mining as well as an indication of profitability. Some miners like Marathon show a marginal cost of production that assumes hardware is already in place, so the incremental cost to mine bitcoin is only the cost per kWh of power and hosting.

Other miners like Hut 8 reference a cost to mine bitcoin based on the total cost of revenue excluding depreciation, so they are further incorporating expenses like personnel, network monitoring, equipment repair, and maintenance costs to form a more comprehensive cost of mining.

Below we show an estimated cost per bitcoin for the miners from The Block, which attempts to standardize the calculation between firms. The two tend to move together, as a rising price of bitcoin attracts greater investment in hashrate and can make unprofitable, offline rigs profitable again, while a falling price of bitcoin can reduce investment and cause miners to power rigs down.

However, the network hashrate and price do not always move together, as was the case in the second half of after China banned mining. As such, the price of bitcoin recovered and reached new heights but the network hashrate only did so more slowly, allowing miners outside of China to benefit from high bitcoin prices as well as a low network hashrate. To illustrate why the network hashrate and the price of bitcoin should be considered together, we provide the following example.

This would allow the miner to now produce 20 bitcoin each day rather than the original Source: Blockchain. We then chart the daily profitability against the network hashrate and the price of bitcoin to show that the highest profits occur when the price of bitcoin is high and the network hashrate is low. Conversely, profitability falls materially when the price of bitcoin is low and the network hashrate is high.

Source: Bitinfocharts. At the company level, there are various profitability metrics such as the overall company gross margin, the self-mining business gross margin, and the adjusted EBITDA margin. Below we show the overall gross margin and the mining gross margin. Note that we use company-given margins where disclosed so the metrics may not be perfectly comparable. Nevertheless, in addition to efficiency, business mix plays a large part in determining the overall gross margin.

Marathon, for example, reported a particularly strong gross margin in due in part to only having a self-mining business, which exhibited particularly strong returns last year. Turning to the gross margin of the mining business, which removes the impact of business mix, we can see that HIVE had the strongest gross mining margin last year likely due at least in part to its large Ethereum mining operation, which was particularly profitable last year.

Mining is a highly competitive business, with miners around the globe continuously hashing away day and night, days a year. Miners compete on many fronts, including securing cheap power, acquiring ASICs, and raising capital. In addition, miners must decide whether to acquire assets directly or to leverage third-party service providers, where to locate, which rigs to utilize, and whether to sell or HODL mined bitcoin, among many other decisions.

And, miners must make these decisions in light of many future unknowns, making the optimal decision difficult to discern ex-ante. In more detail major strategic decisions include:. Core Scientific additionally has two facilities in Georgia and North Carolina, but only one is shown in each of these states on the map. Hut 8 facilities are a mix of mining facilities and traditional data center operations.

The two facilities in Alberta, as well as the facility in North Bay, Ontario are their three crypto mining facilities, while the four remaining facilities are traditional data centers. Marathon leverages 3rd party hosting providers and they do not disclose the number of facilities they use or which cities they are in outside of the Hardin facility. Founded in , Core Scientific currently operates six data centers across North Carolina, Georgia, North Dakota, and Kentucky, with two additional data centers being developed in Texas and Oklahoma.

Historically, the company predominantly generated revenue through third-party hosting services, but the company expanded its self-mining capabilities in July by acquiring Blockcap, one of its largest hosting customers.

The company also generates a meaningful portion of revenue by securing ASICs and selling them to its hosting client base. Core Scientific is net carbon neutral, purchasing renewable energy credits to offset any carbon-emitting energy utilized. Founded in , the company historically operated a diverse set of businesses prior to entering the digital asset mining space in November Marathon employs a more nimble, capital-light strategy, predominantly leveraging third-party hosting infrastructure and deploying the freed-up capital into extra mining rigs.

Marathon has miners deployed across South Dakota, Nebraska, Montana, and Texas, and primarily leverages Compute North facilities that tap off-grid renewable energy sources.

Additionally, Marathon owns and operates Marapool, its own mining pool. Riot began mining in , and its fleet is deployed across its own facilities and third-party hosted facilities. The facility featured MW of developed capacity and Riot quickly embarked on an incremental MW expansion plan. In addition, Riot recently announced plans for a massive 1 GW 1, MW development in Navarro County, Texas with the first phase expected to commence mining and hosting operations in July Riot is the first miner to deploy an industrial scale liquid immersion mining operation, where chips are cooled via liquid immersion rather than traditional air cooling to generate extra hashrate.

The company began mining in , and it operates three mining facilities across Alberta and Ontario. Further, Hut 8 is an authorized MicroBT repair shop, reducing rig downtime via on-site repairs, adding additional revenues, and strengthening its with the manufacturer.

Hut 8 also utilizes its GPU fleet to mine Ethereum at very attractive economics. Hut 8 is aiming to be net carbon neutral by Based in Vancouver, B. The company began mining Ethereum in as it acquired GPUs from a data center operator in Iceland. HIVE mines a diversified mix of bitcoin and Ethereum today, maintaining both exposures on its balance sheet. Below we provide an overview of mining company operations.

Hashrate is perhaps the most important controllable metric to monitor, and as such, many public miners will provide monthly updates as well as future hashrate guidance. These include:. CORZ represents total company power, including for hosting.

Future hashrate targets for Marathon and Riot are estimates for Q1 and Jan , respectively, as opposed to December for the others. There are over 25 public bitcoin mining companies, with several more on the way and up significantly from a few years ago.

This flurry of new listings has occurred as investor appetite for bitcoin exposure has increased and as mining companies seek access to capital via the public markets. As the price of bitcoin impacts miner earnings as well as the value of any digital assets on balance sheet, miner stocks have a high correlation with bitcoin, ranging from 0. Additionally, bitcoin mining stocks tend to be much more volatile than the stock market or even bitcoin itself.

We believe mining stocks are more volatile than bitcoin for several reasons. First, revenues are directly impacted by the price of bitcoin, while expenses are much less and only indirectly so, causing an amplified impact on near-term earnings from changes in the price of bitcoin.

In addition, the majority of value ascribed to a miner can be attributed to future bitcoin production, so any change in the current price of bitcoin will impact the present value of this. Lastly, we believe the level of volatility is also due to the nascency of the industry and high level of uncertainty. Investors in bitcoin mining stocks hold an inherent belief in the asset and are expressing a view that it is more profitable to invest in an entity that can extract and HODL bitcoin at a small fraction of its market price rather than hold bitcoin outright.

Below we present the more frequent components to both the bull and bear theses for bitcoin mining stocks. Because power is so central to this operating model, miners need to look very closely at the redundancy of their supply.

While Texas has emerged as a center for the industry, there are significant questions about the vulnerability of its power grid that potential investors should consider. The regulatory environment also poses a potential risk, as miners in China and other countries have been learning.

Even countries that were previously welcoming to miners, such as Kazakhstan and Iceland, have begun to curtail new and existing mining operations in order to manage demand on their energy grids.

Because crypto regulations in both the US and around the world are still very fluid, miners need to remain vigilant and watch for changes that could undermine their bottom lines.

The crypto industry has been subject to withering criticism for its carbon footprint. The fact is that even the most efficient Bitcoin mining operation takes roughly , kWh to mine one Bitcoin. By way of comparison, the average US household consumes about kWh per month. Climate is not a niche issue any more. According to a recent Deloitte report , reducing carbon emissions is now essentially a universal priority, and brands are responding.

In May , Tesla, which had been a major investor in Bitcoin, announced it would suspend purchases using Bitcoin due to environmental concerns. The crypto industry has begun to respond as well. Many of the larger producers are committing to transitioning to renewable energy, either through direct purchases or by acquiring carbon credits. While Bitcoin mining economics at scale are very attractive, producers must recognize their regulatory and environmental context.

For new entrants like power companies, incorporating Bitcoin mining into existing operations to better manage their own energy output offers a unique opportunity to leverage public opinion in addition to excess resources. Companies with environmentally conscious energy solutions can play an important role in doing so while also reaping significant rewards. Bitcoin mining is a competition to add blocks, or secure financial records, to the blockchain ledger.

Miners do this by racing to guess a digit hexadecimal code in exchange for a hefty Bitcoin reward. Bitcoin mining can be very profitable, but it can take a long time for a solo miner to reap significant rewards.

Bitcoin can be very valuable. While its price has varied significantly, one Bitcoin can trade for tens of thousands of dollars.

Bitcoin investors make money by buying or mining Bitcoin and then selling it for a profit. Subscription implies consent to our privacy policy. An ASIC miner is a specialized piece of hardware designed for mining a specific cryptocurrency, such as Bitcoin. Follow us on. Finance Processes 11 minute read.

Expertise Blockchain. Bitcoin Is Booming Bitcoin has inspired thousands of cryptocurrencies since it launched in , but in terms of value, it still stands alone. How to Mine Bitcoin: The Basics At the root of every cryptocurrency is a blockchain, which is essentially an electronic ledger sustaining a continuously growing list of records. Bitcoin Mining Setup The resources required for mining Bitcoin include: At least one specialized computer called an Application-specific Integrated Circuit or ASIC miner , which is specifically designed to compete for and support a particular cryptocurrency.

A reliable and inexpensive energy supply. A dependable internet connection. A computer, software, and the technical skill to establish and monitor operations. A home mining operation might consist of just a computer and a handful of ASIC miners. An industrial Bitcoin mining operation in Moscow iStock. Understanding the basics What is Bitcoin mining in simple terms? Tags Fintech Blockchain Cryptocurrency. Find your next job. Dhruv Tandan Verified Expert in Finance.

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Description This model allows to model a BTC mining farm. It is performed using very sophisticated computers that solve extremely complex computational math problems. Cryptocurrency mining is painstaking, costly, and only sporadically rewarding.

Nonetheless, mining has a magnetic appeal for many investors interested in cryptocurrency because of the fact that miners are rewarded for their work with crypto tokens. This may be because entrepreneurial types see mining as pennies from heaven, like California gold prospectors in Miners are getting paid for their work as auditors. They are doing the work of verifying the legitimacy of Bitcoin transactions.

This convention is meant to keep Bitcoin users honest and was conceived by Bitcoin's founder, Satoshi Nakamoto. By verifying transactions, miners are helping to prevent the "double-spending problem. This Best Practice includes 1 Excel File. His work focuses on cryptocurrency, energy, tech, food, and life science projects around the globe.

The state of Texas, in particular, has begun to emerge as an epicenter since China banned the industry in , sparking an exodus of miners from the country. In the wake of the Chinese ban, companies based in North America, which include Riot Blockchain and Marathon Digital Holdings, are raising record amounts of capital as they ramp up production and expand their industrial-scale operations. The cost of power is one of the most significant factors in cryptocurrency mining.

That means companies with access to reliable, low-cost electricity�particularly from renewable sources�have an opportunity to play a central role as the industry evolves in North America. In this article, I offer insights into the fundamentals of Bitcoin mining, and show how to calculate the costs and the rewards, which can be immense. I also address the challenges of the industry, including questions around energy usage and risks, like the ever-evolving crypto regulatory environment.

Bitcoin has inspired thousands of cryptocurrencies since it launched in , but in terms of value, it still stands alone. Despite the volatility of its price, its monetary policy builds in a measure of stability by limiting mining to 21 million Bitcoins across a predefined schedule. Although there are almost 19 million now in circulation, the reward for mining is periodically cut in half so that it will take until to exhaust production of Bitcoin.

It soon appeared on the balance sheets of companies like Tesla and Overstock. By way of contrast, the second-most-popular cryptocurrency, Ethereum, reached only about half that value. Bitcoin also stands out because of the industrial-scale crypto mining operations, or farms, it has spawned.

The largest crypto facilities with the most advanced technology are focused primarily or exclusively on Bitcoin, like the Genesis Mining farm, which consumes more electricity than any other company in Iceland. At the root of every cryptocurrency is a blockchain, which is essentially an electronic ledger sustaining a continuously growing list of records. The blocks in the chain are basically files where data such as Bitcoin transactions are recorded, including which miner successfully created that particular block.

Each block also includes a hash, a unique digit hexadecimal value identifying it and its contents, as well as the hash of the previous block in the chain. In order to win a block in most cryptocurrencies, Bitcoin included, a miner has to be the first to guess a hash value equal to or lower than the one that Bitcoin generates for the transaction.

Instead, the difficulty of solving for the right hash and the financial reward for success create a secure consensus mechanism by making it too cost-ineffective for malicious users to hack. The consensus mechanism used by Bitcoin is known as proof of work, or PoW. Still, it has drawbacks. As more computer power is used for crypto mining, the amount of electricity required to both earn cryptocurrency and maintain the network rises.

Some other cryptocurrencies, like Ethereum, have switched or are planning to switch to a different algorithm called proof of stake, or PoS. Bitcoin, however, has not announced any plans to transition to PoS.

The current bullishness around mining, even in the face of that planned drop, says a lot about the profitability of the industry and the expectation that the original cryptocurrency will keep appreciating. It also reflects the fact that the so-called hashrate, which measures the total number of hash guesses being computed at a given time in the network, plummeted when Chinese operators were forced to shutter in This created a huge opportunity for new miners.

The next priority is power, which is needed both to run and to cool the ASICs. Given the relatively low overhead and variance in equipment costs, the price of electricity becomes the most significant factor in calculating your bottom line.

In terms of revenue, Bitcoin miners can expect to earn the block reward and a transaction fee the fee with which the network reimburses successful miners and incentivizes them to continue confirming transactions if and when they win a block. Transaction fees can vary based on network conditions and how much the transactor is willing to pay for expedited processing, but by the end of , the fees averaged about 0.

These tables represent typical Bitcoin mining costs and revenue based on values from December What this model also demonstrates is the importance of scale in order to earn back the initial investment quickly. Breaking even promptly requires multiple machines, and anyone considering investing should evaluate partnerships with existing players who already account for some of the hashrate in the network. No new venture is risk-free, of course. Since miners are paid in Bitcoin, the price volatility is a major revenue risk.

The operating risks include factors like potential problems with internet connectivity, overheating ASICs, and system hacks�though given the size and security of the Bitcoin network, hacking risk remains low.

Top of mind should be the availability and reliability of electricity. Because power is so central to this operating model, miners need to look very closely at the redundancy of their supply. While Texas has emerged as a center for the industry, there are significant questions about the vulnerability of its power grid that potential investors should consider.

The regulatory environment also poses a potential risk, as miners in China and other countries have been learning.