Three bitcoin mining metrics point to uncertainties in a post-halving era

For bitcoin miners, there are a few variables that matter the most when it comes to making money: hash rate, the cost of electricity, and bitcoin's price. 

Among these variables, the hash rate depends on what mining machines miners use and how they're maintained. Power costs are affected by one's location, the weather, and any special arrangements with the local government. And, of course, there is the price of bitcoin – the ultimate wild card.

Combined, these factors make May one of the most uncertain periods for the mining industry. Mining equipment manufacturers are shipping out new models, the upcoming rainy season that, in some regions of China, will significantly cut electricity prices, and last week's block reward halving reduced the per-block subsidy from 12.5 BTC to 6.25 BTC. 

As expected, the network hash rate took a notable dip after the halving, dropping from 137 EH/s to an 87 EH/s bottom on May 14, according to data compiled by BitInfoCharts. This drop was the result of miners turning off less-efficient machines that were no longer profitable.

During the two days following the halving, bitcoin's price still hovered around the $9,000 level – which gave a negative profit margin of 56% for Antminers S9s with an electricity price of $0.05 per kWh, according to a calculator published by F2Pool. This caused many miners to shut down their S9s and trigger a lowering of the network hash rate. 

"A greater majority of Chinese hash rate has switched off compared to non-Chinese hash rate. Which makes a lot of sense because a lot of the older generation machines are still floating around in China," F2Pool global business director Thomas Heller told The Block. 

Tight profit margins may have made other blockchain networks – BCH and BSV in particular, given that they share the same algorithm – more attractive for miners whose operations are less efficient or reliant on older hardware. 

At the time of writing, mining on BSV and BCH generates around $0.09 daily revenue per TH/s, while BTC offers $0.085 per TH/s. This means that for a mining farm possessing 1000 TH/s in capacity, mining BSV or BCH will earn roughly $432,000 more than mining BTC. 

Rainy season blues?

Another uncertainty is whether the upcoming rainy season in the southwest region of China may give older machines a second life. 

During the rainy season, an abundance of water creates a large volume of excess electricity via hydropower generation. This, in turn, drives down the cost of power in regions like Sichuan province. As such, less-efficient machines like the S9 may become profitable when used in that region because the cost to miners will plummet.

According to F2Pool's website, some mining farms will see an electricity price as low as $0.032/kWh during the rainy season, which is 10% less than last year, said Heller. However, even if bitcoin's price breaks above $10,000, the S9s will still remain unprofitable, generating a -17% margin. 

These uncertainties also impact miners' selling behavior. Miners’ Rolling Inventory (MRI) – a metric created by crypto data company ByteTree to measure changes in bitcoin miner inventory – indicates that miners experienced a few days of "hoarding" prior to the halving. But now they're looking to sell, ByteTree founder Charlie Morris told The Block.

MRI calculates the ratio between the number of bitcoins first spent from addresses associated with miners and the number of bitcoin generated per day, with a 100% meaning that the numbers are equal. 

For the majority of 2020 so far, the 3-week rolling MRI has stayed above 100%, indicating that miners spent more BTC than they could produce. However, at the beginning of May, the index consistently stayed below 100% for almost half a month before it surged back to above 100% again after the halving on May 11.

Although Morris suggested that miners are now more confident selling into the market as BTC's price trends upwards, it's also possible that miners are selling more BTC to sustain their operations, given that their revenues were effectively cut in half.