- Mining is among one of the most lucrative industries
- Early-bird miners could easily pocket at least 50% of the total revenue, while the heightened barrier to entry blocks eager participants from joining the race
- Global chip shortage and demand volatility lead to mining rig scarcity
Though mining was conceived as a highly lucrative industry, the profit model of miners remains relatively opaque, especially to those who are new to the crypto space. The lack of transparency fuels over-blown, fairytale-like speculation of miners literally sitting on mountains of digital gold, with the wheels of wealth turning round the clock. However, the reality is that these wheels cost — the profitability of miners hinges primarily on the acquisition costs of mining rigs.
The complexities of various forces at play in the mining industry can be boiled down to a simple supply and demand model. Mining rigs are scarce due to a global chip shortage. Little did chipmakers anticipate that there had been rising demand from an array of burgeoning sectors, including gaming, mobile manufacturing, and crypto mining. Even if they did, not all chipmakers embrace the steep rise in chip demand with open arms. Leading chipmaker TSMC, for one, is wary of high volatility associated with crypto mining and therefore adopts a cautious attitude towards providing more capacity to the mining sector. Samsung, who shares TSMC’s concerns, prioritizes supplies to traditional sectors where the demand is seen as more stable. It is no surprise that new rigs are hard to come by under current market conditions, with major rig manufacturers overbooked till the end of next year. The scramble is pricing out small-time miners and at the same time, accelerating an industry consolidation among deep-pocket players. New entrants who are drawn to the lucrative business have no choice but to purchase hand-me-down mining rigs at high premiums that, in turn, increase their mining costs.
Revival of the Old Machineries
If crunching numbers help to better illustrate the effect of supply squeeze on profitability, let’s suppose that electricity cost is capped at $0.06/kWh — mainstream mining rigs could easily incur a total cost above $40,000 for every coin mined. Net Direct Cash Cost (C1), the static cost incurred at each processing stage, starts at a $10,000 bottomline — ka-ching — when there is zero mining production, and the bill just keeps rolling. The huge initial costs compel miners to jump into production despite surging fixed costs. Keep in mind that our estimation of electricity costs is still rather optimistic — not all miners can negotiate such a rate. The recent Bitcoin rally has engendered a revival of outdated models such as Antminer S9, as higher Bitcoin prices allow “ancient” machinery to reap profits again.
When electricity cost goes up to $0.09/kWh, a common scenario for miners with high electronic component or operation costs, mining profitability continues to dwindle.
Sob stories aside, miners who acquired equipment at much lower prices could still benefit from the current bulls. Crypto mining giant Bitmain is dumping huge amounts of advance shipments to the market, though the chance of acquiring a physical model remains scant. An S19 rig used to cost no more than $4,500 in the second-hand market before the massive bulls took off in late 2020. Even early-bird miners, those who made their rig purchases before the 2020 boom, are shouldering a C1 cost of $9,084 and a C3 cost of $24,155, assuming a flat rate of electricity costs at $0.06/kWh. For miners who acquired S9 rigs when price was hovering around $50, their total cost is capped below $30,000.
Winter Is Here
Industry experts forecast that the long winter of chip shortage is likely to frost over to 2022. Simply put, rig shortage is here to stay. High demand will further exacerbate the underlying supply-demand imbalance, driving up prices of older models in the second-hand market, which by then will become sprinkles of gold dust. However, mining isn’t just a game of high stakes and deep pockets — hash power matters too. Some mining companies have gone the distance of acquiring more hash power with new share issuance to fulfil their hash rate commitments.
At any rate, the mining fever won’t go away anytime soon. The skyrocketing BTC prices only offer a glimmer of the future for the mining industry. While miners dwell on this prospect with every satisfaction which unlocking immense wealth inspires, it is also important to manage risks and expectations. Rig producers will face the dilemma of whether to fulfill their shipping commitments or to default slightly further down the road — the repercussion of default is simply too big considering how they’ve sold machines with future delivery at too low a price, especially before the end of last year.