Crypto Miners Are Feeling The Pinch Of High Energy Prices

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The crypto mining profitability has been adversely impacted by the challenges facing the crypto industry in 2022. Crypto mining generally refers to the process by which cryptocurrencies generate new coins and verify new transactions onto the blockchain. The blockchain in turn, rewards the miners with new coins for maintaining and securing the blockchain. The reward of new coins incentives miners to dedicate more computing power to secure the blockchain.

Among the factors that impact the profitability of crypto mining is the capital expenditure mainly for the mining equipment, operating expenditure to cover energy and maintenance costs, and the cryptocurrency price. 2022 has by far witnessed declining crypto prices and soaring energy prices, which have adversely affected crypto miners’ profitability.

In September 2022, Compute North, a crypto miner, filed for Chapter 11 bankruptcy because of slumping bitcoin crypto prices, rising power costs and the record difficulty in mining bitcoin. Difficulty refers to a measure of how hard it is to mine a block on the network. An algorithm on the Bitcoin network automatically sets the target for the difficulty of mining a new block. A higher difficulty target results in lower profitability of the mining rig.

In a December 12, 2022 press release to the London Stock Exchange, the Bitcoin mining firm Argo Blockchain announced that it was in advanced negotiations with a third party to sell some of its assets and had engaged in an equipment financing transaction to strengthen its balance sheet and improve its liquidity. The company, however, gave no assurance that it could avoid a Chapter 11 bankruptcy filing. Soaring energy prices and the slump in bitcoin prices impacted the company’s operations.

On December 21, 2022, Core Scientific, another large Bitcoin miner, filed for bankruptcy in Texas on account of rising energy costs and low bitcoin prices. Core Scientific is also said to have suffered from the bankruptcy of some of its key clients, like the Celsius Network, which filed for bankruptcy in July 2022. The company plans to keep operations ongoing as it attempts to reach a deal with its lenders and creditors.

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Crypto miners have had to search for inexpensive energy sources to maintain the profitability of their mining operations. The high energy prices and low crypto prices seen in 2022 have driven some crypto miners out of business.

Crypto miners need to determine the threshold cryptocurrency price and processing power (hash rate) at which they can profitably mine. In a bear market, crypto miners will seek newer and more energy-efficient models or join mining pools to improve profitability.

Bitcoin continues to trade under $17,000 as of press time, down from around $46,000 at the start of 2022.

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