Bitcoin mining profitability declines - Glassnode

The most recent Glassnode report focuses on today's topic: bitcoin mining. While the price of bitcoin has been disconcertingly flat for some time, the difficulty adjustment has come and reached an all-time high. Do the miners know anything that we don't? Is there a power shift going on behind the scenes? In their latest, The Week On-Chain, Glassnode gives a working theory. To begin, Glassnode puts the difficulty of adjustment in context:

“Bitcoin hashrate has reached a new all-time high of 242 Exahash per second. To give an analogy for scale, this is equivalent to all 7.753 billion people on earth, each completing a SHA-256 hash calculation approximately 30 billion times every second.” 

The problem is that we are in a bear market. The sentiment is fearful. There is trouble brewing worldwide, and bitcoin has been boring for quite some time. What could be causing an all-time high in hash rate? Is it "a new dynamic as more of the hash power is held by better capitalized publicly traded mining companies," as Glassnode theorizes? Or is it just the game theory at work with bitcoin? Remember that mining revenue is declining, and the cost of producing one bitcoin is rising in lockstep with electricity prices. 

Making matters worse, miner revenue for bitcoin is at an all-time low. This "should, in theory, put a strain on the mining industry's income." " What do we get when we add bitcoin's stable prices to the equation? "It is extremely rare for BTC prices to remain so stationary for so long, implying an increased probability of volatility on the horizon."  

Bitcoin Hash-Ribbons Unwind, Sending a Positive Signal

According to Glassnode, "the Bitcoin hash-ribbons started unwinding in late August, indicating that mining conditions were improving and hashrate was returning online." But what does this mean and why is it bullish? "Almost all historical hash-ribbon unwinds have been followed by greener pastures."

Since bitcoin's price is still flat, the "hashrate rise is due to more efficient mining hardware coming online and/or miners with superior balance sheets having a larger share of the hash power network," according to Glassnode. That is the foundation of Glassnode's takeover theory.

"The Mining Halving" Concept Proposed by Glassnode

Glassnode claims that "a 66% increase in Difficulty and Hashrate since Oct-2020 corresponds to an approximate halving in revenue per hash." To back this up, they provide the following statistics: "the revenue earned per Exahash has been in a persistent and long-term downtrend, with the BTC-denominated reward currently at an all-time low of 4.06 BTC per EH per day."

So, if market conditions are destroying miners, why is the hashrate at an all-time high? The answer could be found in the Puell Multiple, "a cyclical oscillator that compares current daily mining revenue to its yearly average." According to this indicator, the mining industry is actually improving in comparison to previous performance.

"In June, the Puell Multiple fell to around 0.33, indicating that miners were earning only 33% of their yearly average revenue." It has since recovered to around 0.63, indicating some relief from stress and adjustment to this new pricing regime." This relief, according to Glassnode, could suggest that "a true bear market low has been established."

Glassnode believes there is still a risk of capitulation

To be clear, bitcoin is currently walking a tightrope. The market is about to hit, and the pendulum could swing in either direction. Despite the fact that there are reasons to be optimistic, the prudent investor should plan for the worst. "We estimate that the average cost of BTC production is just below current prices, so any significant price decline could turn an implied income stress into acute and explicit stress," according to several models.

Glassnode calculated the risk by determining "the aggregate size of miner balances" to be 78.4K BTC. The owners of those reserves "may face income problems," but "it is extremely unlikely that the entire amount would be distributed."