Bitcoin Mining: More Than Just "Digging Coins"—What Investors Need to Consider in the Energy and Hashrate Landscape

TradingKey - As Bitcoin's mining power continues to evolve, the business of mining has become far more complex than simply running machines to earn money.

The consistent upgrade in computational capabilities has increased the difficulty of mining, while energy policies affect costs like a rubber band, adding layers of complexity to the "profit equation" beyond mere price fluctuations.

In this article, we will break down the logic of competition over computing power and the impact of energy policies.

We will guide you in calculating mining costs and revenues so you can understand investment opportunities within the mining industry.

The difficulty adjustment mechanism in Bitcoin aims to stabilize block generation speed, ensuring that a new block is added approximately every 10 minutes.

This system automatically adjusts the mining difficulty of the network every 2016 blocks, roughly translating to a period of two weeks. Regardless of how much computing power is present, blocks continue to be generated at an average rate of one every 10 minutes.

The system compares the actual time taken for the past 2016 blocks against the expected total time (20,160 minutes) and adjusts the difficulty proportionally upwards or downwards based on this comparison.

Who adjusts this difficulty?

No one manually adjusts it; it's all executed automatically by code.

For instance, in recent years, with new types of mining machines being deployed on a large scale worldwide, global hash rates have soared. What used to take several hours for calculations can now be accomplished in just minutes.

However, simultaneously, the system will immediately raise its difficulty level, making mining notably more challenging.

(Source: Freepik)

Bitcoin is Becoming Scarcer, Yet Difficulty Keeps Increasing—Isn't That Contradictory?

Sounds a bit contradictory, doesn’t it? Bitcoin halves its rewards every four years, which means there should be fewer miners. Yet the mining difficulty continues to rise.

The logic works the other way around: even though rewards are decreasing, prices are increasing, making mining still profitable.

Moreover, to maintain the goal of "one block every 10 minutes," the system cannot lower the threshold even if rewards decrease.

Instead, it counteracts the acceleration in block generation due to rising hash rates by increasing difficulty.

If you’ve followed the history of Bitcoin mining, you know that China was once the absolute epicenter of this industry.

At its peak, China's hashrate accounted for 65.08% of the global total.

Out of every ten Bitcoin blocks mined worldwide, more than six were produced by Chinese miners.

Why did so many mining operations choose China?

The reason is simple: cheap electricity and abundant resources.

This was especially true in Sichuan Province, known for its hydropower; during peak water seasons, electricity prices were irresistibly low.

However, to achieve its "dual carbon" goals, the Chinese government began imposing strict regulations on cryptocurrency mining.

As Chinese mines shut down, many mining enterprises chose to "go abroad" in search of new habitats.

Kazakhstan became one of the popular destinations. Rich in energy resources and with a relatively lenient policy environment, companies like Bit Mining and Canaan Technology launched new projects there.

Texas in the United States also made strides in attracting numerous mining firms with its low electricity prices and favorable policies. For example, Bit Mining established a new facility in Texas.

Additionally, companies like 9F decided to look towards Canada to embark on new mining ventures there.

This series of migration efforts led to a rapid rise in hash rates across North America, gradually positioning it as a new center for Bitcoin mining globally.

(Source: Freepik)

Bitcoin Network Security

The security and stability of the Bitcoin network are significantly dependent on how the hashrate is distributed.

When hashrate is evenly distributed, the network becomes more decentralized, making it extremely difficult for any single entity or organization to control it. This significantly enhances the network's security.

However, what happens if hashrate is concentrated in a few regions or mining pools?

For instance, if a particular area experiences a sudden surge in hashrate, claiming a substantial portion of the total global hashrate, miners or pools from that region could potentially initiate a "51% attack."

This would allow them to alter transaction records, double-spend coins, or even disrupt the network's normal functioning.

As such, a wider distribution of hashrate contributes to increased security within the Bitcoin network.

Mining Costs and Profits

The policies and energy costs in different regions directly influence miners’ costs and profits.

In areas rich in energy resources with low electricity prices—like certain countries in Central Asia and Texas—the cost of mining is relatively low. Miners can achieve higher profits with fewer investments. However, in regions where policies are strict and energy costs are high, situations are quite different.

The policy environment is a key factor that determines hash rate distribution.

Some countries and regions have introduced favorable policies—such as tax breaks, land incentives, and electricity subsidies—to attract Bitcoin mining enterprises.

These measures significantly reduce operational costs for mining companies and draw considerable hashrate into those areas.

Conversely, other regions have enacted stricter regulations aimed at environmental protection and energy conservation.

Faced with increasingly stringent energy policies, the Bitcoin mining industry is undergoing a "green revolution."

Miners are gradually realizing that transitioning to renewable energy sources is essential for survival within these constraints.

For example, Iceland harnesses geothermal energy to provide green power for mining operations; this allows miners to meet their energy needs while minimizing environmental impacts.

On a positive note, such policy guidance encourages continual innovation within the industry by driving technological advancements and enhancing energy efficiency. This transition will help propel the Bitcoin mining sector toward a greener and more sustainable future while boosting overall competitiveness.

However, from a negative perspective, overly strict regulations might stifle industry growth or even lead to contraction.

Moreover, uncertainty surrounding policies makes it challenging for companies to formulate long-term strategies; this can affect stability within the industry.

(Source: Freepik)

Mining Costs Determine Profit Margins

Mining requires a significant upfront investment, including costs for mining machines, electricity consumption, and other hidden expenses.

These factors directly influence how much profit you can make.

Cost Acts as a "Floor" for Prices

If you closely observe Bitcoin's historical prices, you'll notice a pattern: the price of Bitcoin rarely stays below mining costs for extended periods.

Why is this?

Because when prices drop below mining costs, miners start incurring losses.

Some miners may choose to shut down their operations and exit the market, resulting in a decrease in overall network hashrate and a subsequent lowering of mining difficulty.

As a result, the remaining miners benefit from reduced costs until prices rise above the cost threshold again.

It acts as a "floor" that prevents prices from plummeting indefinitely.

Price-Cost Dynamics

•  Prices Rise

As Bitcoin prices increase, there is more potential for profit, attracting more investors into the mining sector.

This increased interest leads to a surge in demand for mining equipment, which can drive up prices for those machines as well.

At the same time, the total hashrate of the network will likely surge due to an influx of new miners joining in.

During this phase, the mining industry may experience what could be termed a "boom period," although it will also intensify market competition.

•  Prices Decline

Conversely, if Bitcoin prices fall or remain consistently below mining costs, miners will face heightened risks of losses.

Some smaller operations may decide to cease their activities to cut losses or even sell their equipment to exit the industry.

This scenario can alleviate cost pressure on remaining miners but simultaneously dampens overall confidence in the industry.

Mutual Support Between Costs and Prices

Increasing mining costs often lead to reduced supply of Bitcoin in the market (as less efficient miners are pushed out), thereby providing some support for prices.

On the flip side, price increases tend to attract more computing power into the sector; however, this influx often comes with some time lag.

As hashrate increases lead to higher Bitcoin production rates, supply and demand dynamics gradually reach equilibrium—potentially slowing down further price increases.

There are several investment models:

1. Direct Investment

One option is to directly set up a mining operation. However, the downsides are quite evident: it carries high risks and substantial initial investment, requiring extensive resources and specialized knowledge.

2. Cloud Mining/Hosted Mining: Can You Mine Without Buying Machines?

If you prefer not to purchase mining equipment or build a facility, cloud mining or hosted mining might be a suitable option.

This involves renting someone else’s hashrate for mining purposes. You won’t have to worry about the complexities of machines, electricity, or facilities; all you need to do is pay a certain fee to participate in Bitcoin mining.

This model has a lower barrier to entry, requiring less capital investment and allowing for flexibility in adjustments.

However, it is important to assess the trustworthiness of cloud mining services. If the platform goes bankrupt or mismanages funds, your investment could be lost.

3. Equity Investment/Mining Company Stocks

If direct mining isn't appealing but you still want a share of the Bitcoin mining industry, investing in stocks of mining companies (such as Bitdeer, Riot Blockchain, Marathon Digital Holdings, Canaan Technology) can be an excellent choice.

The advantage of investing in these stocks is that you can indirectly engage with the mining sector through capital markets without needing to operate any machinery yourself.

Additionally, these companies provide public financial reports and operational data that allow for straightforward analysis.

However, stock prices of these companies tend to be highly volatile and influenced by multiple factors such as Bitcoin prices, regulatory policies, and energy costs. Therefore, thorough research before investing is essential.

4. Digital Asset Allocation: Using Financial Derivatives in the Bitcoin Ecosystem

By purchasing Bitcoin ETFs, you can invest indirectly without holding actual Bitcoins. Other financial instruments, such as options and various derivatives, offer opportunities for hedging risks or magnifying returns but require some degree of expertise and experience.

Investing through financial markets targeting the Bitcoin ecosystem may suit those familiar with traditional capital market operations.

Nevertheless, it's important to remember that trading derivatives carries higher risks—especially for beginners—who may incur significant losses due to leverage effects.

(Source: Freepik)

If you're considering investing in a mining enterprise, here are key aspects you should evaluate:

Hashrate Scale

The scale of hashrate is an important indicator of a company’s competitiveness. The larger the hashrate capacity, the greater its influence within the Bitcoin network—and the higher its probability of successfully mining Bitcoins. For example, Marathon Digital Holdings (MARA) and Riot Platforms (RIOT) possess significant hashrate capacities and occupy important positions in global markets.

Cost Control Capabilities

Examine aspects such as energy prices for miners, hashrate procurement strategies, equipment upgrades, and energy efficiency levels. Be mindful of their pricing structures and how they change over time.

Technological Innovation Ability

The Bitcoin mining industry is technology-intensive; innovation capabilities are crucial for long-term growth potential. For instance, upgrading hardware or adopting new mining methodologies can boost hashrate performance while maintaining industry leadership.

Compliance

Compliance represents another major challenge faced by mining companies. In some countries or regions where they operate—such as New York State—their activities require licenses that undergo rigorous scrutiny regarding qualifications and energy usage. If there are compliance risks associated with a company’s operations, investors should approach with caution.