2021 has been a major year for Bitcoin mining. The third halving in May 2020 brought more attention to mining as a whole, and the growing interest never subsided.
In 2021, favorable economic conditions have made mining profitable for almost all participants, attracting more and more participants. The emergence of flare gas mining, Elon Musk’s comments on Bitcoin’s ESG footprint, the creation of the Bitcoin Mining Council, and a Western migration that has accelerated due to Chinese regulations have all contributed. to an expanding and rapidly changing mining landscape marked by greater transparency. .
Despite all the attention the historically opaque market has received over the past year, volatility, regulation and supply chain disruptions have made 2021 one of the most surprising years in the history of the market. bitcoin mining, and one of the most formative.
Today’s mining ecosystem
Several verticals, including brokerage, off-grid mining, and hosting, have seen significant numbers of new entrants. Most notably, the industry has seen significant inflows of capital through a record number of public listings, spurred by demand for liquidity and capital that only US public markets are able to provide.
2021 Trends in Bitcoin Mining to 2022
Mining profitability in 2021 benefited from a combination of bitcoin prices hitting new all-time highs and idiosyncratic events, such as the convergence of the global chip shortage and a mining ban in China. . Despite the China ban, we saw a V-shaped recovery in the hash rate and ended the year near all-time highs, and well above where it started.
In 2022, at Galaxy Digital, we expect hash rate to increase significantly and operating margins to compress if price remains constant. Given the amount of hash rate being ordered by public miners, we expect the hash rate to continue to decouple from the price. We see the network hash rate landing somewhere between 300 exahashes per second (EH/s) and 370 EH/s by the end of the year, with a base estimate of 335 EH/s. Even with projections of strong hash rate growth, many publicly traded miners are likely to remain highly profitable.
At the start of 2021, securing machines was a major bottleneck due to supply chain disruptions and a global chip shortage. With high BTC exchanges in 2021, ASICs were in demand and long delivery times became the norm. The secondary market, which trades relatively lightly, reflected strong ASIC price appreciation.
While Chinese miners and hardware manufacturers as well as international competitors had already expanded their operations outside the country by 2021, the floodgates opened when China announced a mining ban in May. . This ban spurred a massive growth in Kazakh, Russian and American mining operations while greatly decentralizing the network out of China, and also resulted in a significant increase in the profitability of miners who stayed online.
The United States was already gaining market share before the ban thanks to its superior regulatory and financial infrastructure, but at the start of 2021 the United States was still a frontier market for mining. Following the ban, North America quickly became the center of the mining industry, with an increasing number of miners turning to the public markets for debt and equity financing, usually after selling stocks. in private markets.
At the start of 2021, there were only two NASDAQ-listed bitcoin mining companies, Marathon Digital (MARA) and Riot Blockchain (RIOT), with several more trading on Canada’s TSX Venture Exchange. At the end of 2021, 16 bitcoin mining companies were listed on NASDAQ, with seven additional listings pending.
As the industry becomes more competitive and creating economies of scale becomes more critical, we expect to see even more mining companies attempt to take advantage of the unprecedented liquidity in public equity markets and use capital raised to invest in additional equipment and infrastructure construction. This trend will be especially pronounced if the price of BTC remains high enough for most miners to continue to operate profitably. In the event of a sustained market downturn, a spike in M&A activity seems likely as larger, leaner miners opportunistically buy up less efficient competitors for durable assets such as machinery and transformers.
With more Bitcoin mining companies now listed on US exchanges, reporting requirements for public companies have opened the door for industry participants to gain key insights into Bitcoin mining operations. One of the biggest benefits of having many publicly traded miners is that it is easier for researchers to estimate future hash rate growth and ASIC market dominance by observing retailer press releases. companies’ machine purchase orders.
We expect the hash rate share contributed by exchange-listed bitcoin miners to increase to 40% to 45% of the network hash rate by the end of 2022 based on the 100+ PE of machines on order for 2022, by company filing and press releases.
2021 has been a very eventful year for mining. Mining has begun to attract more attention both inside and outside the Bitcoin space, with operators and investors interested in its economics and others concerned about its perceived environmental impact. .
As for 2022, we are optimistic. If current trends continue, the industry will continue to professionalize and efficient miners will differentiate themselves from the rest of the pack. North America will play a historically outsized role in the next year, especially as public companies increase their hash rates and continue to gain market share. The expansion of industry in the region will create more jobs in rural communities across the United States and Canada, as miners seek out areas with a surplus of electricity, including former manufacturing centers.
The miners will probably have a good year. The current dislocation between hash rate and price is more likely than not to continue as supply chain failures and hardware constraints limit hash rate growth.
This is a guest post by Karim Helmy and Brandon Bailey. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or bitcoin magazine.