The Weekly Hash, 5/24/21: Chinese Regulation Weighs on Bitcoin; Hash Share Shifting Toward US

Bitcoin sold off 24.4% to $34,774 as of 5/23 midnight UTC, dropping as low as $30,000. Price continues to recover this morning and is at $37,529 at the time of writing. The big news driving volatility is the Chinese government’s Bitcoin crackdown: while initial mining bans focused on environmental issues, the underlying question we have focused on has been about capital controls (see our March 1 report). We are now seeing reports suggesting that both mining and mining services — pools, custody, liquidation, trading — are on the regulators’ radar.

The Chinese government appears wary of the impact cryptocurrencies could have on the RMB. The fungibility of Bitcoin — and the creation of mined Bitcoin without ever touching the RMB ecosystem — poses a challenge to the government status quo. What remains to be seen is whether local miners are able relocate or sell their equipment overseas.

Impact on Bitcoin ecosystem: Overall, this could slow down the pace of Hashrate growth, as we noted on Saturday. That is good for mining economics. Additionally, we assess relocating that equipment to the US could bring new hosting customers, helping US miners and hosting providers scale faster. On the other hand, forced liquidations and movements of funds appear to be driving the price declines. This volatility could persist as the Chinese mining ecosystem reconfigures itself to the new reality.

Hashrate has generally been ~14–16% lower since the last reset on 5/13. This could be a result of miners shutting down and relocating operations.

Total BTC earnings per PH/s are ~5.57 mBTC, up from ~5.35 mBTC / PH/s last week. (1mBTC or milliBTC = 1/1000 BTC.) Transaction fees rose 377 bps WoW to 9.8% of miner rewards, or 0.55 BTC per block, with moderate congestion levels in the “Mempool.”

Bitcoin mining revenue decreased to $194 / PH/s per day and $210/MWh due to the price decline, offset slightly by higher transaction fees. The next difficulty reset on 5/29 should result in improved BTC flow / PH/s, driving better revenue metrics if price stays near current levels.

Correspondingly, the BitOoda North American Hash Spread™ fell 23.4% WoW from $249 to $191.

We define the BitOoda Hash Spread™ as the difference between the cost of power per MWh and the Bitcoin mining revenue per MWh. This gives miners a quick sense of the surplus generated by their business to cover personnel, overhead, depreciation, and profit. Bloomberg data shows a weighted average around the clock U.S. wholesale industrial power price of $19.04 / MWh, leading to an aggregate spread of $191 across 5 power markets.

Older-gen S9-class devices saw their Hash Spread™ fall ~30% to $40 / MWh. S17-class devices, the bulk of the installed base, saw a hash spread of about $134 / MWh.

The 166 MWh required to mine 1 BTC with S19-class rigs translates into $3,153 in power expense. It costs $11,213 using S9 rigs, still a 65%+ margin, excluding labor.

Takeaways

•Chinese actions are weighing on Bitcoin price due to forced liquidations

•We assess this presents an opportunity for US-based miners to gain share and acquire rigs and new hosting customers

•Slower Hashrate growth, a potential consequence of developments in China, improves mining economics for US miners

•Recent volatility reinforces our support for hedging tools to mitigate project risk for miners, although mining remains an attractive way to gain Bitcoin exposure