A nulber of developments in the Bitcoin mining industry are making a difficult environment more challenging. This issue first began on October 17, when Bitcoin network difficulty levels were up around 40% since early June.
Bitcoin mining is performed by a many computers on the network where these powerful machines solve extremely difficult mathematicql problems. The answer to eachproblem is a long string of numbers, called a hash. The network adjusts the complexity of the mathematical problem so that a valid hash is generated – so that a block can be added to the blockchain – about every 10 minutes.
Generally, the miners take part in the network, the greater the difficulty level. The only way for a Bitcoin miner to countenance this increased difficulty level is to add more computing power, which means more money spend on equipment and, in turn, a higher electricity consumption.
Second, there are so many computers mining on the blockchain that the number of correct hashes createdis likely to be at an all-time high. The presence of so many participants solving problems with the highest ever-recorded difficulty level to capture rewards, which were cut in half in May has made profitability after paying electricity and staffing costs a difficult task.
For example, the latest model mining computer, the Bitmain Antminer S19 Pro, generates an gross margin of around US1,460 per annum. This new computer costs US$3,000 to purchase, so it breaks even just before the end of its two year life. Less advanced computers would generate losses
Third, in October 2020, Marathon Patent Group announced plans to build a Bitcoin mining center in Montana. Marathon chose Montana because it negotiated a low-cost power agreement with Beowulf Energy, an independent power producer. Beowulf will supply Marathon electricity at US$0.028 per Kwh from its 119-megawatt Hardin coal-fired power plant...and Beowulf will also receive an undisclosed equity stake in Marathon.
The transaction illustrates the need for a Bitcoin miner to secure a rcheap source of energy to remain competitive, but also that the cost to obtain that power can be significant. In this case, Marathon surrendered a portion of the ownership stake.
These new participants, in many cases well-funded participants with the ability to be patient and absorb subpar returns for some period, squeeze the margins of less cash rich Bitcoin miners.