Hash Recon

This article was originally published in The Primary Issue of Bitcoin Magazine.

We’re less than 30,000 blocks out from the halvening and the table stakes couldn’t be higher. For many Bitcoin mining operators, this will make or break the bets they’ve made during this bitcoin epoch. Did I grow too fast? Can I handle a catastrophic drop in hashprice? Is my current energy contract going to rekt my operation? Yet Bitcoin itself remains indifferent, for the halvening is inevitable, encoded by Satoshi at Bitcoin’s genesis and enforced by nodes across the world. The blocks will continue to flow and there will be blood. The big question many are asking is how to weather this looming battle, but perhaps the better question is where to be positioned on the board when the battle happens. It’s one thing to know how to build and operate a mining operation, but the critical success factor is energy cost. To satisfy that factor it comes down to your position on the map, you must perform hash recon.

This halvening event will challenge even the most battle hardened veterans. They will need to optimize their operations at all costs. For inexperienced operators, energy cost might seem like a variable that you can overlook as they solely focus on stacking as much hashrate as possible and forget about efficiency all together, that is energy consumption per hash produced. But in the long run, energy cost is the most important variable. Sure, your dollars per terahash are important and bitcoin price is important, and network hashrate is important. It’s all important, but energy cost is the king maker. Afterall, the 7 year old legendary Antminer S9 is still profitable today with cheap enough energy.

At the heart of miners’ considerations are two foundational elements: mining revenue and energy expenses. These two variables are used to quickly run the numbers on mining profitability. It’s important to note that this does not take into account the additional operating costs like time and personnel and all the other things that go into running a mine, it’s a simple formula to run the numbers on keeping the lights on.

Mining operators come in many different sizes, and the easiest way to distinguish them is based on how much power they are using. Here in the US, the Energy Information Administration (EIA) is responsible for monitoring energy trends and categorizes consumption and power costs into Residential, Commercial, and Industrial customer power rates. We will focus how mining operators would profit on the applicable rates across each of these three categories:

  • Residential: 0-30 kW – Encompassing home miners with 1 to 10 bitcoin mining machines. Typical homes cannot handle much more energy than this and would require additional electrical infrastructure being installed. Residential scale has the highest energy rates. 
  • Commercial: 30 kW – 1 MW – Covering small to medium-sized business (SMB) bitcoin mining operators with 10 to 300 Bitcoin mining machines. The Commercial  Scale range is characterized by larger than Residential Scale energy consumption but not quite Industrial Scale. This range is typically up to 1 MW in size. While commercial scale miners have better rates than residential customers, they are not big enough to negotiate with power companies.
  • Industrial: 1 MW+ – Operations with more than 300 Bitcoin mining machines. Industrial scale operators are large enough consumers of power that they can negotiate energy costs via power purchase agreements and acquire energy at the lowest cost.

Despite these variations in scale, all 3 categories of mining operators are united by a common need for cost-efficient power. While some miners may be limited by geographical constraints, enterprising miners are actively exploring regions with affordable energy rates, we’ll call that jurisdictional arbitrage, and others are trying to scale into situations where they are large enough to have a seat at the table to negotiate lower rates. 

War Games

Now that we have a better understanding of what different scale operations look like, let’s take this a step further and run the numbers. Since we don’t have the benefit of a crystal ball, we will simulate a war game using the following data points:

  • BTC Price @ $30,000
  • Network Hashrate @ 400eh/s
  • Bitmain Antminer S19j Pro 100th/s @ 3kW per unit
  • Residential Scale – 10 Bitcoin Miners
  • Commercial Scale – 100 Bitcoin Miners
  • Industrial Scale – 1000 Bitcoin Miners
  • Energy rates are 2023 YTD average sourced from EIA

Let’s apply our simple mining profitability formula (mining revenue – power cost) to see how mining operators would handle this scenario across the US. 

Running the numbers is quite sobering, as you immediately see just how unprofitable mining is under our outlined scenario. Only six states are profitable at residential rates, 18 states with commercial rates, and 40 states with industrial rates. If you run this same scenario under a halving scenario and your daily mining revenue is cut in half, it’s suddenly a doomsday scenario where no mining operation would be profitable. Of course, that is a very weird vacuum scenario because it doesn’t account for changes in the network hashrate and BTC price.

The War Game looks bleak for operators at residential scale. With outlined conditions, profitability at residential energy rates appears elusive. Mining operations are likely running at a loss nationwide. While some may pursue this path to accumulate KYC-free SATs, for many, this does not justify operating at a deficit.

Commercial rates offer a more promising outlook for operators, as lower energy costs extend profitability into many more states. Still, only a few states provide a profitable environment for small and medium-sized business miners, especially in the potentially challenging year of 2024.

The landscape shifts further at the industrial scale, where miners wield more influence and earn a proper seat at the table. Energy producers take notice when operators’ demand approaches or exceeds 1MW, reflecting a transition from being a rounding error to a meaningful consumer. With profitability being possible in 40 states for industrial-scale miners, several states remain challenging.

The pivotal question is whether mining operators will be able to survive the battle to fight another day. Enduring an onslaught of increased competition, the halvening, and very unpredictable BTC price will not be easy so operators will need to find efficiencies where they can. This fundamental principle holds true: profitability can be achieved with sufficiently low hardware and energy costs. The big headline in this whole piece is that geographic location of your operation is probably the most critical success factor in running a mining operation and for a majority of the Country, this means you should not plug in bitcoin miners. However, there are still opportunities out there if you are ambitious enough to get in the trenches and do hash recon.