Recently, bad news has abounded, and the resulting fear is very real. DeFi looks dead, altcoins have completed their life cycle returning to $0 (I guess it’s a joke), and the price of Bitcoin (BTC) has fallen lower than even the smartest brains of the room were not expecting it.
A unifying theme of the most recent bull market appears to have been greed. Everyone has become overconfident and overly greedy, and it shows in the amount of debt and leverage that is unwinding as 3AC, Celsius, BlockFi and Voyager face the real threat of bankruptcy.
It seems that Bitcoin miners and BTC mining companies were also not immune to the feeling of excessive exuberance and the belief that “only” was a fact until the price of Bitcoin reached the long-awaited target of $100,000 that most analysts stuck to.
Historically, Bitcoin miners have been an elusive species that is silent and unwilling to spill the gravy on the public, but TSWT managed to secure a moment with HashWorks CEO and Founder Todd Esse to discuss the current state of the mining industry and his predictions of where the market might be headed next year.
TSWT: Bitcoin is trading below the realized price, and it is also below the production cost of miners. The price is also below the previous all-time high and the hash rate is falling. Typically, on-chain analysts identify these metrics hitting rock bottoms as a generational buying opportunity, do you think?
Todd Esse: I believe that current prices represent an investment opportunity, as current prices are unlikely to reflect profitable mining margins as the industry is currently structured. In our view, however, prices may continue to remain under pressure as the mining industry and the leverage around it is reset or reconfigured.
CT: What is the state of the BTC mining industry right now? We’ve heard of leveraged miners going bankrupt, sub-optimal and inefficient miners dying out, equipment could be being seized or liquidated at a sellout. Share prices and cash flows of listed miners are also pretty bad right now. What’s going on behind the scenes and how do you see it affecting the industry over the next six months to a year?
AND : In our view, mining still offers an attractive return on investment for those who are selective in their approach and have long-term goals. Much of the mining capacity currently installed is with ASICs in the sub-85 TH/s range and with power contracts that have not been managed as a traditional large-scale power consumer would.
We’ve seen this movie before, haven’t we? Easy money + bad discipline = unbalanced risks. We could easily see an extended period here where the mining industry consolidates and allows different investment capital to enter the market.
Related: Friday’s $2.25B Bitcoin Options Expiry May Prove $17.6K Wasn’t BTC’s Bottom
CT: Why is now a good or bad time to start mining? Are there any particular on-chain metrics or profitability metrics that you look at or is that just your hunch?
AND : Typically, times of distress and shifts in the accepted paradigm will provide benefits to new entrants. Our sole objective is to take advantage of these emerging opportunities.
CT: If I have $1 million in cash, is it a good time to set up an operation and start mining? What about $300,000, $100,000, $10,000? In the seed fund range of $40,000 to $10,000, why wouldn’t now be a good time to set up a home-based or industrial-sized mining farm?
AND : If you had $1 million in cash, now might be a good time to opportunistically buy BTC. Full-load production prices for major miners are not far from these levels. I consider it difficult to maintain these levels until the value of ASICs drops further. I think the days of home mining are largely over due to the new dynamics in the energy industry.
I encourage those looking for yield to seek mining opportunities with companies like Compass Mining or other “cloud” miners whose equipment and energy contracts can generate attractive investment as these dynamics change.
We believe that due to current and anticipated market disruptions as well as greater acceptance of immersion solutions, there will continue to be exciting opportunities to build large-scale mining operations.
CT: Does the price of Bitcoin drop below its previous all-time high for the first time, does it have any major future ramifications on asset and industry fundamentals?
AND : In our opinion, no. It is difficult to trust historical comparisons when dealing with an emerging commodity and a transformative technical asset such as BTC. Miners produce BTC, given a set of inputs (computing power, access to capital and energy) and the price of production does not always reflect the cost of production.
Large-scale BTC mining, fundamentally, is not much different from producing oil and gas or other commodities. Improvements in drilling technology have transformed North America’s position in world energy markets.
When oil and gas prices crashed at the start of the pandemic, no one questioned whether or not we needed to drive cars or heat our homes. Mining supports blockchain, and proof-of-work computing will prove to offer our network the ability to transition to a renewable energy future.
We are committed to being an innovative and constructive player in this industry as it continues to mature.
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