It’s time to rebalance. After a historic Bitcoin bull run followed by an unwelcome return to reality, Bitcoin miners are restructuring, refocusing and rebalancing. Unprofitable companies will exit. A potential decrease in Bitcoin price volatility will smooth projections. And the delivery of new, more efficient mining machines will separate the wheat from the chaff.
General mining competition is expected to decrease as uncompetitive miners are forced to exit the market. A typical ‘Inventory Flush’ subcycle, 2022 was characterized by a double whammy of increasing Bitcoin production costs and decreasing market rates. The result has already been and is likely to continue being bankruptcies, insolvencies and subsequent consolidation of mining power among the best-capitalized and lowest-cost players, who are better equipped to handle the challenging conditions of the current mining market.
Second, Bitcoin price volatility is expected to decrease compared to 2022, as the unwind of leverage, short-term speculation and industry failures takes its toll. If the price of Bitcoin steadies, miners will be able to plan their operations more effectively and make more informed decisions about their investments. This, in turn, will help to stabilize the mining market and reduce the pain of sudden (especially downward) shifts in miner profitability.
Finally, the better-capitalized miners will have access to more efficient mining machines in 2023, and at a lower cost per hash than the 2022 average. Efficiency will allow them to reduce their capex cost per hash and increase output without incurring additional ongoing cash-costs. Adoption of newer machines will allow for more cost-effective mining operations, as facilities learn to handle more sophisticated equipment. The result is greater separation between the struggling miners and the most well-capitalized miners, who can now power through the bear market, upgrade their mining fleet and increase their share of the pie ahead of the looming supply halving in early 2024.
Overall, we find that the Bitcoin mining market in 2023 is likely to be a more steady and sustainable year for industry participants. After rapid growth in 2021 and a devastating downturn in 2022, the mining market seems poised for a less dramatic 2023. This would be positive news for both miners and investors alike, as it will create a more predictable market for all involved.
In closing, we note the particular importance of the 2024 supply halving, given that it will have a direct impact on mining revenues across the industry and is only roughly 14 months away. In anticipation, a potential strategy by mining companies may be to focus on reducing operating expenses above their cash costs (including overhead, debt, hosting, etc.). This would strengthen miner balance sheets and in turn extend their cash runway.
For those forced into negative margins after the halving event, it could also possibly allow them to continue mining long enough to see another cyclical period of increasing profitability: a ‘Gold Rush.’ And while we don’t expect all miners to adopt this strategy, focusing on cost reduction and balance sheet strengthening rather than expansion ahead of the halving should also lower the likelihood of abrupt market changes — in this case caused by difficulty adjustments — for the industry overall throughout 2023.
