Although the mining conditions have greatly worsened, many pre-ordered rigs have been delivered this year. So, miners have been in limbo on whether to consider the rigs as a sunk cost and start to mine on them by only considering the variable costs such as electricity, to drive the rigs directly to a waste disposal site or to sell them second-hand. It appears that miners have chosen between all of these three options.
The decision to mine on new rigs has resulted in a steadily greater hash rate. Similarly, the sudden oversupply of rigs has completely demolished the market for rigs. It is estimated that there are up to 500,000 unopened rigs simply in the US because some miners cannot mine profitably, although the rigs are considered a sunk cost. The latter, alongside the lower Bitcoin price and the higher mining difficulty, have crushed the demand for new rigs, causing the prices of new rigs to decrease by around 70% in the past 12 months.
A dangerous cocktail
To sum up, the mining environment has turned into a much darker place in the last years, given a much lower Bitcoin price, a higher mining difficulty due to excess capacity, and elevated electricity costs. If you merge these factors with the fact that some major mining enterprises took on debt last year to acquire mining rigs, you have a dangerous cocktail. Not only are these miners expected to regularly repay part of the loans, but if they are to refinance them in the future, they are likely to have a much higher interest rate, further pushing the financials of these miners.
At this time, it appears that some miners can no longer keep their heads over water. In the past couple of months, various miners have filed for bankruptcy, including Compute North, whereas others have warned of potential bankruptcy, including Core Scientific. The latter has lost $1.7bn this year. Iris Energy stated recently that it has unplugged rigs, as they are producing insufficient cash flow. With no vast relief in sight e.g., a higher Bitcoin price or a lower mining difficulty, we may only have seen the tip of the iceberg.
The increased hash rate does technically enhance the security of the Bitcoin network. Yet, with various miners filing for bankruptcy, the greater hash rate may provoke the network to be more centralized. Over time, the large and highly effective miners may acquire troubled miners, potentially limiting the majority of the hash rate to these large miners. It is not positive for Bitcoin to potentially have less decentralization because it is its main selling proposition.
Too, in this environment, miners generally dump newly mined Bitcoins on the market as soon as they are mined to free up cash. This implies that there is constant selling pressure of Bitcoins, which needs to be absorbed by the buy side for the price not to decrease further. This is contrary to when miners were highly profitable. In these times, miners often kept the majority of their mined Bitcoins.