Bitcoin mining experienced an upsurge at the turn of 2024. An interest in Ordinals, expectation of spot ETFs' approval, and halving are the three main components of increased mining profitability due to the growth of the bitcoin exchange rate and its network commissions.
On January 10, 2024, the SEC approved applications from 11 major investment companies for Bitcoin spot exchange-traded funds (ETFs). This event adds significant positivity in the long term, opening the door for the flow of capital from institutional investors to Bitcoin from other industries.
Meanwhile, large mining companies like Marathon or HIVE should prepare for halving by increasing the fleet of energy-efficient mining hardware to guarantee acceptable profitability after a twofold drop in revenue.
According to Cantor, the situation is really quite difficult for many mining companies so far:
This problem is partially solved by selling a significant proportion of the accumulated bitcoins, which will restrain its exchange rate growth in the short term. On the other hand, the approval of an ETF is a long-term positive signal, which means mining companies can afford to increase capex through increasing debt.
The rapid mining fleet's expansion will contribute to the Bitcoin network difficulty growth, that is, it will restrain mining profitability, since it is proportional to the Bitcoin exchange rate and inversely proportional to difficulty.
At the same time, mining hardware manufacturers today offer models that allow mining companies to significantly reduce operating costs (mainly electricity costs).
New releases of modern miners feature previously unseen hashrate values (up to 390 TH/s) with unprecedented energy efficiency (up to 16 W/TH).
Mining profitability is also affected by network commissions. In May, November and December 2023, mining companies earned super profits due to bursts of interest in Ordinals (NFT, or more correctly “inscriptions” in the Bitcoin network) and the associated increased commissions of the Bitcoin network.
For instance, in block No. 821486 dated December 16, the miner's commissions amounted to 8.05 BTC with a reward for a block of 6.25 BTC, that is, they exceeded it by almost 30%!
In January 2024, the trend began to decline along with miner profitability. Bitcoin network halving, slated to occur in April, 2024, will reduce mining rewards by half to 3.125 BTC per block over the next 4 years.
The situation with the twofold drop in the profitability of bitcoin mining is similar to the forced widespread transition to the extraction of hard-to-recover oil reserves, which, in the absence of another supply, should entail the achievement of a new price balance. Therefore, despite the mining profitability decline in the medium term, we expect a gradual corrective increase in the Bitcoin exchange rate by at least 1.5 times from the early January levels.
Nevertheless, we all need to be prepared for several difficult months before and after halving, due to all the factors described above.
As a mining company, Minto takes into account all the risks inherent in the situation, so it continues to optimize its infrastructure and protocols in order to stay in the black regardless of the external environment.
So, for more than a year, Minto has been using the 65% mining hardware uptime algorithm, whose parameters are set for the whole year 2024:
Minto users often note the fact that daily rewards can vary significantly from day to day. Indeed, the mining income on the weekends, when, due to the low cost of electricity, the hardware mines non-stop all day (100%), can more than double the income of the next working day, when the equipment works 65% of the time, turning off around 7 a.m. and turning on after 9 p.m..
However, despite the fluctuations in profitability, this approach allows us to get consistently positive financial results:
Thus, according to Table 1, a hypothetical 100% operation of the equipment over the course of three months (September-November) would result in a cumulative financial loss of about $70,000, whereas with 65% uptime, on the contrary, a cumulative profit of about $70,000 would be obtained!
December 2023 was the only month when the result at 100% uptime was in the black, and nevertheless the net profit is still 7 times lower than the one obtained at 65% uptime!
It is important that mining profitability is influenced not only by the bitcoin exchange rate, but also by the energy efficiency of mining hardware. The lower the energy efficiency value, the lower the electricity costs, which means higher net profit.
That is why, in Vote#7 Minto proposed allocating the most energy-efficient hashrate to a separate hardware category that works directly for the payout of mining rewards at the rate of 1 TH/s = 100 BTCMT, and everything earned with the remaining hashrate (corresponding to the unredeemed BTCMTs) to be sent to the Treasury. Then it would be used to solve the operational tasks of increasing the profitability and attractiveness of the project as a whole through voting.
If we apply this scheme with new parameters to the period of September - December 2023 from Table 1, then the energy efficiency of 38.9 W/TH (Customer Energy Efficiency, CEE) will be used as initial data instead of the actual 54.4 TH/s (AEE), and a hashrate of about 28 PH/s will be used instead of 78 PH/s.
(The values of 78 PH/s and 54.4 TH/s were relevant in all four specified months, and only at the end of December were they updated to 104 PH/s and 50.3 W/TH, respectively).
Reducing the hashrate from 78 PH/s to 28 PH/s will reduce revenue and costs 2.8-fold, and improving energy efficiency from 54.4 W/TH to 38.9 W/TH will reduce costs by another 1.3 times.
We get the following results for the hashrate of 28 PH/s and energy efficiency (CEE) of 38.9 W/TH:
Thus, first of all, the yield at 100% uptime has become positive everywhere, and secondly, the yield in December differs between 65% and 100% not 7-fold, but only by 1.7 times!
Let's calculate the average conditions for switching to 100% uptime based on December results according to Table 2. To do this, the gross income of 1.7193 BTC minus $52,326 in electricity costs at 100% uptime must be equal to 1.3182 BTC minus $22,647 at 65%.
Let's write this down as an equation:
1.3182 * X - 22,647= 1.7193 * X - 52,326
X = 74,000
That is, December results would be positive with 100% mining hardware uptime, a hashrate of 28 PH/s and CEE of 38.9 W/TH only if the bitcoin exchange rate was $74,000.
What will happen after Bitcoin halving?
All of the above clearly demonstrates that mining vulnerability is generally very high, and halving is a rather traumatic event. In this sense, risk limitation comes first for mining projects.
If we go back to Table 1 and imagine that the December income in bitcoins and dollars would have been halved, that is, to $76,888 (= $153,776 / 2), then, with the December average bitcoin exchange rate of $41,660, even in 65% uptime mode, the result would be a loss of about $5,500 (= $76,888 - $82,435) against a net profit of $71,341!
However, if we now turn to the December results in Table 2, then even with a twofold reduction in income, the net profit would be $4,813 (= $54,920 / 2 - $22,647).
Thus, the implementation of the decisions made at Vote#7 has sufficiently strengthened Minto before halving.
Now let's evaluate the contribution of Ordinals, since the interest in it also significantly affects mining profitability. Once again, let's imagine that the halving has already happened.
According to Table 3, in the absence of the Ordinals factor in October, with a twofold reduction in profitability, Minto would have shown a loss of $4,483 (with an average October bitcoin exchange rate of $29,017), and in November, when the Ordinals factor was very high, the result would have been near zero (with an average rate of $35,960).
Approximating this situation for the post-halving May 2024, we can say the following:
At the current rate, Minto has already secured profitability after halving, even in the absence of the Ordinals factor.
In addition, do not forget about the Treasury, whose funds (accumulated by May) can be used to compensate for losses from halving and give users the very desired multiplier that everyone is used to in the pre-halving times of 2023.
So, the main result of 2023 was Minto’s consistently positive financial outcome due to the use of the 65% mining hardware uptime algorithm, as well as the December update of the mining reward distribution mechanics with the transition to an Active Customers energy-efficient Hashrate (ACH) and the Treasury creation.
2024 should be interesting and difficult at the same time, because expectations from the growth of the bitcoin exchange rate are higher than ever, but in the second half of April, the profitability of all mining companies, including Minto, will be halved. In addition, a loss of interest in Ordinals and an increase in Bitcoin network difficulty, provoked by the hasty increase in energy-efficient hashrate by large players to reduce halving losses, will contribute to a decrease in mining profitability.
Updating the Minto protocol will allow the project to maintain profitability before and after halving, even in the absence of the Ordinals factor and with significant exchange rate drawdowns.
Our task remains to maintain stability in difficult times and earn the most in favorable market times. In this sense, we are ready for any turn of events and have high expectations for 2024 and the year 2025 following it.
We have properly prepared the project and our users for halving, limiting the risks of a negative development of the situation, and the Treasury is a tool that will allow us to accumulate and distribute additional income.
But that's what is interesting about Bitcoin in general and mining in particular: along with significant risks, the industry can throw in surprises of any scale. It may be a multi-fold increase of the main asset, which would allow it to break away from the network difficulty, which can’t keep up with its growth, and offer miners the real super profits that we have all missed for a long time.
Let's get through the halving and earn the maximum we've been preparing for since 2022!
Stay with Minto!