The Bitcoin hash rate surged to an all-time high surpassing 245 exahashes per second on October 3. However, concurrently, Bitcoin (BTC) miner profitability is facing significant challenges and is currently at one of the lowest levels on record.
With Bitcoin prices hovering around the low $20,000 range and the estimated network-wide cost of production at $12,140, data from Glassnode analysis indicates that miners are nearing a point of financial strain.
The difficulty level, which measures the complexity of mining a block, plays a crucial role in determining the cost of Bitcoin mining production. A higher difficulty level requires more computing power to mine a new block.
Based on a difficulty regression model with an R2 coefficient of 0.944, the model suggests that miner distress was last observed when Bitcoin dropped to $17,840. Presently, the price is around $18,300, not far from the recent price range.
The record-breaking hash rate means that miner profit margins will be further squeezed. Miners that are operating at a loss can either continue mining in hopes of a future price increase compensating for the current losses or stop mining until either the difficulty decreases or energy costs become more favorable.
With the recent hash rate increase, the difficulty is anticipated to rise by 6% to 10% in the upcoming week.
Assuming an electricity rate of $0.08 per kilowatt-hour, the profitability estimates for miners highlight the challenging situation many miners are currently facing due to tight profit margins.
Despite the profitability concerns, market analyst Zack Voell pointed out that miners with sound financial positions are exploring opportunities to expand their operations. The recent surge in hash rate could be linked to the deployment of Bitmain’s latest S19 XPs.
Is Bitcoin Security Threatened?
Investors are interested in understanding whether Bitcoin’s price is stable or if there is a heightened risk of another market downturn triggered by miners’ actions.
According to Colin Harper, the head of research at Luxor Technologies, most selling pressure is due to general market trends rather than specific miner actions, although some miners, such as Riot and Bitfarms, have been selling significant amounts of BTC.
On the contrary, Joe Burnett, the head analyst at Blockware Solutions, believes that the bulk of miner selling has already occurred, reducing the likelihood of a substantial sell-off from miners.
While the surge in hash rate may lead to higher difficulty adjustments and impact miner profitability, Burnett suggested that weaker miners may drop out gradually without causing a significant miner capitulation event as long as Bitcoin prices remain above certain levels.
Recent data from Glassnode indicates that the likelihood of miner capitulation leading to a sudden sell-off has decreased for now. Nonetheless, the considerable amount of Bitcoin held by miners suggests that a sharp decline in BTC price could prompt distressed mining entities to sell off their holdings.
The opinions expressed in this article are of the author alone and do not necessarily represent the views of Cointelegraph.com. All investment decisions involve risks, so thorough research is recommended before making any decisions.
Image Credit: Momentum Ronnarong / Shutterstock
