The Great Bitcoin Mining Renaissance: Why 2023 Could Be The Turning Point
Bitcoin (BTC) mining has had a tumultuous journey over the past year. The bearish market conditions, rising energy costs, and increased difficulty levels have made it increasingly difficult for miners to remain profitable.
However, according to a recent Twitter thread by Mitchell, a researcher at Blockware Solutions, the tides are shifting, and the outlook for Bitcoin mining is looking positive.
Is The Future Of Bitcoin Mining Bright?
Mitchell suggests that to be bullish on mining, one must also be bullish on Bitcoin. BTC has proven to be a resilient asset, with a fixed supply and a growing list of use cases. Mitchell highlights the potential collapse of fiat banking and debt-ceiling increases as factors that make Bitcoin an attractive investment.
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The researcher highlights the impact of Application-Specific Integrated Circuits (ASIC) commoditization on miner profitability in his analysis. He notes that the decreasing marginal efficiency gains of new ASICs mean that mid-generation machines will not be made obsolete by new-generation machines, and the network hashrate will not maintain its historical growth rate.
This has important implications for miner profitability. Because in the past, when new ASICs were released, older machines would quickly become obsolete, and miners who did not upgrade would be left behind.
However, with new ASICs’ decreasing marginal efficiency gains, mid-generation machines can remain competitive for longer, allowing incumbent miners to remain highly profitable for longer periods.
Additionally, the delay between price bull runs and hashrate bull runs has increased, as acquiring new hashrate requires miners to secure a power source, build infrastructure, and acquire ASICs.
This means that incumbent miners have been able to maintain their competitive advantage for longer time periods, as it takes more time for new miners to enter the market and increase the hashrate.
The Power Of Transaction Fees
Mitchell also discusses the role of transaction fees in Bitcoin mining. While many may not like the idea of paying fees to inscribe jpgs on the chain, the scarcity of block space means that demand for transactions will be high during a bull market. This will likely lead to fees that are higher than the 3.125 BTC subsidy, further increasing miner profitability.
Higher transaction fees can significantly increase miner profitability, as they provide an additional source of revenue on top of the block subsidy. This is particularly important in times of low block subsidies, such as after each halving event when the block subsidy is reduced by half. In these situations, higher transaction fees may be necessary to sustain profitability for miners.
Another factor that Mitchell highlights is the trend toward zero future supply of Bitcoin. While Bitcoin’s supply will eventually reach its limit, the dollar-denominated value of the remaining future supply is trending up. This means that incumbent miners will be dollar-cost averaging at a significant discount when Bitcoin is trading at higher prices.
Finally, Mitchell notes the trend of declining exchange balances and increased BTC adoption. As the halving decreases the rate at which future supply becomes circulating supply, and more people adopt Bitcoin, there will be fewer BTC on exchanges. This could further increase the scarcity of Bitcoin and drive up its price, leading to even greater profitability for miners.
Overall, Mitchell’s analysis suggests that several factors are contributing to sustained profitability for Bitcoin miners. While the challenges of 2022 were significant, the commoditization of ASICs, coupled with the potential for higher transaction fees, increasing the dollar-denominated value of remaining future supply, and declining exchange balances, are all positive indicators for the future of Bitcoin mining.
Featured image from iStock, chart from TradingView.com