Exploring causes and consequences of the price of mining hardware
Lumerin Protocol · Follow
Published in · 6 min read · Jan 6, 2023
Fewer people would be happier that 2022 is over than Bitcoin miners.
The year was one of the toughest ever for the industry, with several big players going out of business due to low profitability and crippling debt. Fortunately, it’s now over, and here’s to a much more fruitful 2023.
Yet, the market still carried some of the residues from last year to the new one, and one of them is ASIC prices, which have just hit multi-year lows.
Let’s dive further into why this happened and how miners could take advantage of it.
ASIC miners are complex hardware. As such, their market value can change according to many different factors.
Firstly, ASICs prices are typically determined by their mining power and efficiency. The more powerful and efficient the machine, the more expensive it will be.
However, ASIC miners — like any other asset traded on the market — also respond to the basic market laws of supply and demand.
In case you’re wondering, the law of supply and demand states that the price of a product will increase when there is high demand for it and a low supply of it and will decrease when there is insufficient demand and a high supply. This is because when there is a high demand for a product, people are willing to pay more for it, and when there is a low supply of a product, it becomes more scarce and, therefore, more valuable.
For example, during the second half of 2021, with the supply chain crisis, the pandemic, and a global semiconductor shortage, ASIC manufacturers couldn’t keep producing new machines.
Due to the reduced supply, prices skyrocketed as ASICs were harder to get.
Finally, there’s also the profitability aspect. ASIC miners serve the specific purpose of mining Bitcoin, so their price often mimics its performance.
As the price of Bitcoin increases, mining can become more profitable, leading to increased demand for ASIC miners. This can cause the price of ASIC miners to increase.
Conversely, suppose the price of Bitcoin falls or the mining difficulty increases. In that case, mining may become less profitable, decreasing demand for ASIC miners.
Let’s dive deeper into this last item, which is particularly relevant right now.
It is important to note that the relationship between Bitcoin’s market value, ASIC miners’ prices, and mining profitability is complex and sometimes behaves differently. However, it tends to respond to the following logic.
ASIC miners are productive assets because they generate revenue and cash flow. Therefore, their value relies on how much revenue they can effectively generate.
Nevertheless, that revenue depends heavily on the market, particularly Bitcoin’s price. As miners get paid in BTC, the market value of it will determine how much they earn in fiat currency, which they will have to convert their coins to pay their recurring costs, like utility bills, and debt.
Other factors, such as the cost of electricity and the availability of other miners, can also impact the profitability of mining.
So, imagine that a miner has enough ASICs to produce 1 BTC monthly, which equals around $16.5K at the time of writing this article. Let’s also assume they spend $15K per month on maintenance, electricity bills, and other costs. That means they would secure $1.5K in profits every thirty days. Not too bad, huh?
But now, imagine that Bitcoin’s price skyrockets to $30K. Now, the miner would spend the same amount of fiat money covering their costs of mining 1 BTC, but instead of $16.5K, that single coin they mine a month would now be worth $30K. That’s $15K in profits, a 10x increase!
This crazy profitability would incentivize people to start mining and get their piece of the cake. Therefore, they would likely run to the market and acquire ASIC miners. Soon after, ASIC prices would shoot up. That’s why we say ASIC prices often follow profitability.
However, the same thing happens in the opposite situation. When Bitcoin’s price drops to levels where mining is no longer profitable, many miners look to get rid of their machines and get at least some value back. So, they sell it on the secondary market, driving ASIC prices down.
And that’s precisely what we’re seeing now.
During the last bull market, mining profitability went through the roof. Many miners, individual and corporate alike, were desperate to acquire more hashrate and take advantage of the opportunity. Some even contracted debt to do this, betting on the bullish run to continue in the long term.
So, after Bitcoin crashed last year, these miners started running into trouble. Mining profitability wasn’t enough to support their operations, let alone their debt obligations, so they liquidated their assets to cover them. First, it was their BTC treasury. Then, their very own ASIC machines.
That’s why the market is flooded with these distressed assets, whose price has fallen to such low levels. And that itself can be an excellent opportunity for aspiring miners.
But how can you be sure? First of all, and as we’ve said above, much of it will depend on Bitcoin’s price. If you take advantage of the low prices and buy an ASIC, and Bitcoin surges a few months from now, you might be in an excellent position. But, if Bitcoin fails to rise, you’ll be stuck with an expensive machine you can’t even turn on.
Another critical aspect to consider is your electricity prices. Remember, a cheap ASIC doesn’t mean a profitable one. If electricity prices in your region are high, it may not make sense to invest in an ASIC, regardless of its price. You would mine at a loss. Again, this could change if Bitcoin makes a big move.
As you may have noticed, the topic of ASIC prices is very complex. There are many layers in determining the market value of Bitcoin mining hardware, all constantly changing.
Therefore, it’s essential to look at the big picture and analyze the different factors involved before making a decision.
We hope this article will help you think long-term and have a clear mind to do just that.
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