2023 Bitcoin Mining In-Depth Report: Miners Survive and Prepare for Halving

By Colin Harper, Wu Shuo Published as Hashrate Index Chinese content partner

Summary

It’s been more than two years since China’s bitcoin mining ban and hashrate migration, and the bitcoin mining industry has changed indelibly since the Chinese government drove most of the industry overseas.

After this historic event, the profitability of mining soared, and miners counted the 'good luck' of mining through this short "hash price super cycle", and then experienced a decline in hash price during the 2022 bear market. Dark period. The price of the currency reached $15,000 in November last year, and a few mining commentators speculated that the price may reach $30,000 by mid-2023. But Bitcoin is born to destroy people's expectations.

Now that it has been two years since the mining ban, the Bitcoin mining industry has matured a lot. There is no doubt that the mining business will be low-key, tenacious, and transient in 2023, but the "shadow play" of Bitcoin mining is over, and the inner workings of the Bitcoin mining industry have become more transparent than before.

Today, public and private mining companies dominate the mining landscape. Especially in North America, with the collapse of mining business in China, the Bitcoin mining industry has thrived since its glorious debut. And computing power continues to spill over to new mining centers outside the United States, including Russia, the Middle East, Latin America, and Southeast Asia. The distribution of computing power on a global scale has become more balanced than ever before.

Miners are learning the lessons of market chaos in 2022 as the industry matures from its stumbling early days. They continue to participate in fund management and financing practices, and previously bankrupt mining companies have also restructured and emerged with more sound operating strategies.

For the Bitcoin mining market, 2022 can be described as a shocking year, and it has laid the foundation for active participants to gain a foothold this year. More volatility is still expected as we approach and get past the Bitcoin halving in 2024. Cheap energy is the key to this game, and the procurement of mining machines and the management of funds are also two points of particular concern to miners.

Any cost-cutting measures in these areas and elsewhere will be key to getting through the halving period. For some lucky miners, this can be achieved by negotiating lower electricity rates, especially those large enough to participate in electricity demand response programs; others can only reduce frequency through firmware To reduce the running speed of the machine, thereby reducing electricity costs; some miners are looking for cheaper hardware facilities and logistics costs; some miners are reducing costs by recycling waste heat; for large mining companies, cutting administrative costs is also the most important important.

If so, Bitcoin mining is no longer a “plug and pay” game. Operators who have access to the cheapest electricity and/or have effective expansion and operating strategies in terms of cutting capital and operating costs will be better able to survive the halving. Since the Chinese ban, the axis of the excavation industry has shifted from the East to the West. It is easier than ever for North American investors to enter the industry, and new attention and capital are pouring into this field at an unprecedented rate. In the year ahead, some of the more mundane investors, particularly retail investors with low MOQ escrow trades, may face difficulties.

As the Bitcoin industry continues to grow and become more closely aligned with institutional finance, we expect the consolidation trend that began in 2021 and accelerated in 2023 to continue. At the same time, Bitcoin's computing power has never had such a broad global footprint, and it is expected that Bitcoin's computing power will continue to spread around the world.

North American miners need to remember that they are competing not just with their neighbors, but also with mining booms in the Middle East, China, Russia, Latin America and elsewhere.

Each region and context has its pros and cons, and some forward-thinking miners have begun spreading their hashrate across different jurisdictions by having the connections and resources to do so.

In Q2 2023, we saw many miners taking advantage of low mining rig prices for future expansion. The rebound of Bitcoin and the breathing room (with more than enough help) after the tightening price of computing power in 2022 give miners a chance to breathe in the bottom of the price of computing power in 2022. For medium and high-cost miners who will not be profitable for most of the Q4 period of 2022, the rebound in currency prices and the stability of computing power prices are crucial.

Now that the second quarter has ended, Bitcoin prices have fallen, computing power has increased, and miners are preparing for the brutal fourth halving era. Building on last year's trends, mergers and acquisitions, consolidations, and asset squeeze sales are accelerating in 2023 as poorly positioned miners look for exit opportunities while well-positioned miners position themselves favorably for expansion. We expect the halving to accelerate these trends.

As the respite period for computing power prices in the second quarter is gradually coming to an end, with less than eight months left until the halving, the slogan of the miners is also simple: survive and prepare.

Computing power, mining difficulty and computing power price

The growth of computing power slows down and the difficulty of mining increases

2023 is a big year for Bitcoin’s hash rate growth (albeit not as much as miners expected). The computing power in 2022 will increase more than that in 2021 (the year of China’s mining ban), and the computing power growth in 2023 is expected to exceed that in 2022.

However, in the second quarter, the growth of computing power slowed down, which also shows that the secondary impact of the "great migration" of computing power is emerging.

It can be seen that the high concentration of computing power in North America (45-50%) has formed a new seasonal impact on Bitcoin's computing power: the summer heat wave overloaded power grids across the United States, forcing miners to reduce the scale of mining, thereby inhibiting computing power. growth of power. Specifically, Bitcoin's seven-day average computing power increased by 7.5% in the second quarter of 2023, far less than the 35% increase in the first quarter. This slow growth is largely due to summer temperatures disrupting operations in mining hotspots such as the United States. Although it’s worth noting that this summer’s hash rate growth hasn’t suffered as much compared to last year’s record summer heatwave.

At present, Bitcoin's computing power has increased significantly in 2023. As of July 22, 2023, Bitcoin's computing power has increased by 50% compared to the beginning of the year, from 255 EH/s to 380 EH/s.

Figure 1: Changes in the 7-day and 30-day moving averages of Bitcoin computing power

Bitcoin mining difficulty increased by 8.1% in the second quarter of 2023 and by 52.5% in the beginning of the year (as of July 22, 2023), as Bitcoin's computing power grows.

Figure 2: Overview of Bitcoin mining difficulty changes

Mining difficulty has declined by 2.94% after reaching an all-time high of 53.91 T. Last summer, Bitcoin miners adjusted the difficulty three times in a row as a heat wave raged across the United States and reduced computing power. Since the beginning of 2023, miners have largely avoided the scorching heat, and the heat wave has not caused too much disruption to computing power. But as we enter August (the second hottest month in U.S. history), we may see more negative difficulty adjustments if the weather becomes extreme enough. Although any disruption in computing power can be easily compensated for by the expansion of other mining sites around the world.

Hashrate stalls after surge

Recall what we mentioned in our 2022 year-end report (if you are a miner, you don't need to be reminded), the price of computing power hit rock bottom in the fourth quarter of last year. It reversed somewhat in the first quarter, providing some relief to miners, and in the second quarter, hashrate prices ebbed amid the NFT wave (which we explore further in the ordinal/inscription section), Bitcoin price recovery, and slow hashrate Rapidly rebounded and stabilized under the combination of growth.

The average hashrate price (USD standard) in Q2 was $77/PH/day, a 5% increase from the average of $72/PH/day in Q1 and a 30% increase from the average of $59/PH/day in Q4. The average computing power price (coin-based) of Q2 was 0.00275 BTC/PH/day, which was a 15% decrease from the average of the Q1 period.

Figure 3: List of daily and 7-day averages of computing power prices under the USD standard

Overall, Q2 was a treat for miners with scarce profits. Considering that at an electricity cost of $0.07/KWh, the break-even point of the S19j Pro miner is $51.25/PH/day, you can imagine how many miners will be uneasy at the end of 2022 (especially miners in North America). Q1 provided small relief from this profit shrinkage, and Q2 further mitigated the situation.

Nonetheless, as Bitcoin's rally stalled and difficulty reached an all-time high in July, pressure returned to hashrate prices. The current computing power price under the USD standard is 72 USD/PH/day, and the price under the currency standard is 0.00244 BTC/PH/day.

Figure 4: Comparison of the relationship between Bitcoin computing power price and mining difficulty

Ordinal and Inscription: Miners stop "infighting" and fall in love with "jpeg" images

2023 reminds Bitcoin miners that transaction fees have a huge impact on their bottom line, and they can partly thank Bored Ape and Pepe jpegs for their impact.

In 2022, transaction fees will account for 1.63% of all block rewards. In comparison, transaction fees account for 4.9% so far, 2.3% in Q1 2023, and 8.11% in Q3. This improvement does not come from traditional economic transactions, but from new ways of minting and trading NFTs on Bitcoin.

These digital images, videos, texts, video game files (yes, really) called inscriptions can be arbitrary data that Bitcoin users include in Bitcoin transactions using specific transaction conditions. Unlike other NFTs on Ethereum, Solana, and other chains, these NFTs are actually uploaded to the blockchain. To keep track of them, collectors use ordinal theory, the mathematical method of ordering numbers, to mark each transaction with a single satoshi, the "deed" of the inscription. Based on a first-in-first-out basis, ordinal theory can track every satoshi since the genesis block.

As with banknotes and coins, collectors are also looking for rare coins with monetary value, and the wave of inscriptions has opened up a market for "rare satoshis."

Rumors such as inscriptions and ordinal number theory have caused a burst of block transaction activity on the Bitcoin blockchain, so that transaction fees reached the highest level since October 2020.

Figure 5: List of rare grades of Bitcoin "Satoshi"

Ordinal and inscriptions make transaction fees hit an all-time high

Casey Rodarmor first introduced the concept of ordinals and inscriptions in January, though he and others began experimenting with the technology in December.

Inscription caught the attention of crypto circles in February, and early adopters rushed to inscribe digital art and miscellaneous collectibles. This novel approach to NFTs attracted many NFT traders, collectors, and creators from the Ethereum ecosystem, a migration that accelerated the madness and boom in transaction fees. As of now, there are more than 19.6 million inscriptions on Bitcoin’s blockchain.

The adoption of ordinal inscriptions in February immediately allowed miners to double their 2022 revenue from transaction fees. In 2022, the average share of block rewards from transaction fees will be 1.63%; while so far, the average share in Q1 is 2.3%, the average share in Q2 is 8.11%, and the average share throughout the year is 4.9%.

When the Inscription craze peaked in May, miners were making more from transaction fees than from block subsidies, and even blocks with 12.5 or more Bitcoins in rewards were common, as was the case. It is the block subsidy of the previous halving period.

Figure 6: A list of block rewards and transaction volume as a proportion of transaction fees

Changes in Inscription Subtidal Block Capacity

Inscriptions are controversial for a number of reasons, one of the main ones being that they benefit from SegWit's data concessions. Inscription data is stored in the witness portion of the block (introduced with the 2017 Segregated Witness (SegWit) upgrade). Compared with other data blocks in ordinary transactions, the transmission cost per byte of witness data is lower, so the transaction cost (Satoshi) required per byte of data in inscription transactions is less. We can see the final effect of the SegWit discount in the graph below, from February to May, the gap between transaction count and block size nicely demonstrates the impact of witness discounts on early inscription fee dynamics. Blocks are filled with inscribed data (such as images and text), but the number of transactions (which has increased) has not increased at an alarming rate.

Figure 7: Average daily transaction volume per unit block and average daily block size

Figure 8: Transaction fee ratio block reward and block size overview

In the second quarter, "BRC-20 tokens" dominated the inscription market, and the number of inscription transactions and actual transaction fees began to show an upward trend. The original inscriptions were mostly in JPG and other image formats, but BRC-20 transactions require less space for witnesses and more space for transaction fields, incentivizing a completely different level of transaction activity.

As the chart below shows, transaction activity accelerated in April and peaked in early May.

Figure 9: Average daily inscription trading volume and its total trading volume

Originally launched in April 2023, the BRC-20 token standard finally brought an Ethereum-like wave of minting to the inscription space. Previously, Inscription makers would mint an entire collection and then auction it off in a very basic over-the-counter manner on Discord servers, Twitter, and other forums; unlike other tokens on other chains like Ethereum and Solana. Unlike popular NFT collectibles on blockchains such as Ethereum and Solana, users can mint their own NFTs from auction-earned collections, but for engraving collectors, this option does not exist.

The BRC-20 standard changes that. Now, using Bitcoin's OP_CODE field, collectible creators can create token parameters with a fixed supply. After the template is broadcast, anyone can mint tokens in the series according to the token's parameters. When the BRC-20 became popular in May, a first-come, first-served mechanism encouraged inscribers to bid on fees to be the first to mint tokens of the new series. These minting transactions are also OP_CODE transactions, so they don't gain as much as SegWit discounts because the cost per byte is higher.

Figure 10: BRC-20 OP_CODE example

This minting incentive and BRC-20 transactions do not benefit significantly from the SegWit discount, leading to the spike in transaction fees seen in the chart below in May. We can also observe that minting activity started to level off in July after experiencing a parabolic surge in May.

Figure 11: (Inscription) Daily average transaction fees and its total transaction fees

The first wave of NFT frenzy in Ethereum appeared in the form of CryptoKitties in 2017, but it was not until the historic bull market in 2021 that NFT really began to have a significant cultural impact. For example, Eminem and Snoop Dogg played Boring Apes in a virtual performance at the MTV Video Music Awards (VMAs). NFT has begun to integrate into people's daily life, not to mention its impact on miners' income.

We expect Ordinal Inscription to have similar staying power and create cyclical transaction fee boom and bust cycles during bull market conditions, especially when interest in Bitcoin and cryptocurrencies is high.

But that doesn’t mean miners should bet on Inscription hoping it will keep the price of computing power unwavering. We believe that digital collectibles have captured cultural consciousness and the inscription trend is expected to increase miner earnings in the future, especially as developers and entrepreneurs start experimenting with new applications using space blocks.

Mining machine prices tend to stabilize

Bitcoin mining machine prices have been in free fall since the end of the bull market in December 2021, but in the third quarter of 2023, mining machine prices seem to be showing signs of recovery, at least for now.

Prices are still generally on a downward trend, but market data shows signs that mining machine prices may stabilize in July, especially for new generation equipment. Below we list the quarterly price changes of some popular mining machine models (data comes from Luxor's mining machine trading platform RFQ).

· S19 XP （-2.64%）

· S19j Pro+ （2.07%）

· M30S++ 112TH/s （-10.34%）

· S19 Pro 110 TH/s （-15.63%）

· S19j Pro 104TH/s （-16.88%）

· M30S 88TH/s （-25%）

It can be clearly seen that new generation models with low computing power like the S19 and M30S are gradually falling out of favor, while the premium of new generation models such as the S19 XP is increasing (as miners are looking for more efficient machines in preparation for the halving period) ).

It can also be seen from the mining machine price change chart in the second quarter of 2022 below that although the price of Bitcoin mining machines fell in the second quarter of 2022, it began to rebound in June and July, especially the aforementioned next-generation models.

Figure 12: Price trend chart of popular models

It is worth noting that we saw that the S19j Pro+ showed appreciation at the end of the quarter and a premium per TH compared to other S19j series models. The S19j Pro+ has only just become available, and like every time a new machine comes on the market, the price is lower at a time when miners are placing futures orders and have no idea of the machine's capabilities. As miners gradually observed the S19j Pro+ in action and trading moved from the futures market to the spot market, machine prices rebounded as uncertainty receded and models became more transparent. We also saw this pricing dynamic with the S19XP, which launched last summer.

It’s worth noting that new generation devices like the S19j Pro, S19 Pro and M30S++ are currently being heavily traded. For most operators, the older models of these series, such as the regular S19 and M30S, are starting to become less popular, which can be seen by the price drop of the M30S in the chart above (in November 2022, counting When the price dropped to an all-time low, you can see that the value of the M30S dropped sharply).

For miners whose mining operation electricity costs are flat or higher than the average electricity price (eg $0.075/KWh), any model with an efficiency value below 34 J/TH is not worth investing in (unless Bitcoin is in the next 12 months Of course, we will not bet on this situation. This will be further analyzed in the mining machine return cycle section of this report). With the Bitcoin halving in 2024 and a slew of new machines launching in 2023 and 2024, yesterday’s next-gen machines will become tomorrow’s Mesozoic machines. However, depending on the price per TH, investing in mesozoic and new generation machines might be a good strategy to double profits, provided 2024/2025 is a bull market. Just like miners bought S9s for pennies last year and sold them for $50/TH at the peak of the bull market in 2021.

S19XP premium increases

As miners expand their mining operations in preparation for the 2024 Bitcoin halving, hashrate prices and Bitcoin prices are not the only factors that miners weigh when evaluating mining hardware. Bitmain and MicroBT launched several new models in 2023, and like all new hardware, miners are unsure about their performance. As the flagship of Bitmain's next-generation mining machine, the Antminer S19 XP has been tested in the field for a year now, but there are still some areas in the design that need to be improved (for example, covering one side of each hash board with an aluminum panel, such as (as reported by Compass’ Mining Memo), but miners generally consider it a stable machine.

As the halving period approaches, miners are prioritizing machines with advantages in efficiency and computing power. Therefore, the premium of next-gen hardware like Antminer S19 XP, Whatmsiner M50S++ is rising compared to its older devices.

Figure 13: Price premium comparison between S19XP and other models

As the chart above shows, the S19 XP premium hit its lowest point in the second quarter but has been trending upward since June. Heading into the third quarter, S19 XP premiums are near the highs seen late last year, when Bitcoin was trading at $15,000 to $16,000 and every analyst was calling for a price cut. As Bitcoin recovered rapidly in the second quarter and transaction fees soared amid the Inscription craze, hashrate prices continued to rise, and last quarter’s relatively low premiums were in response to improving market dynamics. When the marginal cost of mining improves, miners do not need to urgently replace efficient hardware, so the premium of XP also decreases. Now the price of computing power has returned to an uncertain level, especially since the halving is still 9 months away, and miners are increasingly inclined to refer to the mining economy after the halving, causing the premium to rise again.

We also noticed that the M50S series carries a higher price premium compared to the Antminer S19 XP. We speculate that there are two reasons for this premium: 1) Bitmain produces more machines than MicroBT and therefore can get better prices from the chip manufacturer, and 2) Whatsminer is becoming a serious competitor to Antminer.

As miners prepare for the halving, the next-gen model is their first choice. Its premium has also increased steadily over the year.

New models and water-cooled and oil-cooled models

Speaking of new equipment, here are some new miner models launched in the last quarter.

· S19j XP（151 TH/s) - 21.5 J/TH

· S19k Pro（136 TH/s) - 24 J/TH

· M50S++（150 TH/s) - 22 J/TH

· M56S++（immersion 230 TH/s) - 22 J/TH

· M53S++（Hydro 320 TH/s) - 22 J/TH

We are starting to notice more and more water-cooled and oil-cooled mining rigs starting to pop up, especially as the halving approaches and manufacturers expand their offerings for these types of miners. Under normal conditions, these machines can provide miners with double the computing power with the same energy input, and when they are overclocked, they can even provide more computing power.

However, this output comes with costs: higher capital expenditures, more hardware, and more maintenance costs.

1. Hydro Cooling: Hydro cooling, also known as liquid cooling, utilizes cold plate water cooling technology and uses deionized water as the heat transfer medium. Unlike immersion cooling, hydronic cooling typically uses a closed loop system in which water circulates through heat exchangers without touching electrical components. This method allows efficient heat transfer due to the higher heat capacity of water than air and oil. Hydronic cooling offers advantages such as improved cooling efficiency, scalability, flexibility, and lower operating costs compared to air-cooled solutions.

2. Immersion cooling: Immersion cooling immerses electronic components, such as servers or mining chips, in a non-conductive liquid or coolant. This cooling method puts components in direct contact with the coolant, providing better heat dissipation. Immersion cooling offers many advantages, including improved cooling efficiency, reduced thermal stress, increased performance, longer equipment life, and a smaller physical footprint. By eliminating the need for air cooling, immersion cooling enables higher-density deployments and reduces noise pollution in computing environments.

There are many similarities in the infrastructure supported by immersion and hydronic cooling systems. The main components of a liquid immersion cooling system include:

· Water tank

· Coolant

· Pump

· filtering system

· Heat exchanger

· Control System

· Power Distribution Unit (PDU)

The main components of a hydronic cooling system include:

· Rack

· Coolant

· Pump filter system

· Heat exchanger

· Control System

· Power Distribution Unit (PDU)

The biggest difference is the coolant (water or dielectric oil or similar non-conductive fluid) used in the cooling system. The hydraulic cooling system uses special deionized water as coolant. Maintaining water quality and minimizing environmental impact are key aspects of a hydro mining setup. Miners employ a number of techniques and measures to keep their hydronic bitcoin miners in tune, such as filtration systems for sediment and impurity removal, regular water quality testing, pH adjustments, removal of pollutants through chemical treatments, and compliance with environmental factors. Implementing a water recycling and reuse system helps reduce water consumption and compliance with local regulations ensures proper discharge management. In between, MicroBT recommends using primary deionized water that complies with the national standard GM/T 6682-2008.

Whereas in a liquid immersion cooling system, the liquid must be non-conductive since it directly contacts the miner components. Choosing a coolant depends on various factors such as dielectric properties, thermal conductivity and compatibility with electronic components. Miners typically use fluorocarbon-based liquids such as 3M, Novec or Galden in immersion cooling systems because they are non-conductive and have a high boiling point. These coolants allow efficient heat transfer while ensuring the safety of submerged components.

It is expected that oil-cooled and water-cooled mines will continue to steadily generate Bitcoin’s total computing power over the next few years. We are already seeing it become the standard in Middle Eastern markets like the UAE, which are emerging and will continue to see huge investment in the industry.

New models and 3nm chips coming in 2024

There is news that Bitmain’s next-generation Bitcoin mining machine, the S21 series, may be released next year. The Antminer S21 was originally planned to launch in 2025, but it may become available for pre-order next year. The efficiency of these machines is expected to be 14-15 J/TH, but their exact specifications and computing power cannot yet be determined. This is just a rumor at the moment, but it is clear that Bitmain is working on a new Antminer series that is more efficient and powerful than the current models.

While this is just speculation, we believe these devices will use 3nm chips, and MicroBT is reported to have used 3nm Samsung chips on the Whatsminer M56s++ oil-cooled model.

Electricity market situation is stable

In 2023, the electricity market appears to be gradually returning to normal, especially in many states in the United States, where electricity prices have begun to decline from their highs in 2022. Bitcoin miners around the world can now finally "breathe a sigh of relief" as prices are slowly returning to normal, and the industry has now paid relatively little attention to the topic, at least publicly and in media reports.

Although things are looking better than last year, miners should still be cautious and not think they have seen the end of the energy crisis. There are still serious imbalances in global energy markets, which are likely to lead to higher electricity prices again, especially in the event of extreme weather.

This chapter will discuss energy market trends that may have a positive or negative impact on miners' access to cheap electricity. Based on historical data and future forecasts, we also analyze which electricity price miners will need to calculate their computing power after the halving.

Natural gas prices gradually normalize

In most modern electricity markets, the price of electricity is determined by the last litmus test of ease of dispatch: the marginal cost of production of the power source, typically a natural gas-fired power plant. Given the importance of natural gas prices to the electricity market, this subsection analyzes the current status of the global natural gas market and introduces the latest developments in the international electricity market to better understand future trends.

As you can see in the chart below, natural gas prices surged to all-time highs in Europe and the United States in the second half of 2022. True to form, electricity prices also rose, causing the unhedged portion of the global Bitcoin mining industry to suffer serious problems. At the end of 2022, Compute North and Core Scientific, two of the largest Bitcoin mining hosting providers in North America, declared bankruptcy, in part due to rising electricity costs.

Figure 14: Comparison of natural gas prices in Europe and the United States

Fortunately, nature has miraculously gifted Europe with the mildest winter on record. This resulted in significantly lower gas demand, allowing European countries to replenish their inventories. As a result, the European gas benchmark price (Dutch TTF) has fallen sharply and is now at its lowest inflation-adjusted level since September 2020, at $25.96 per MMBtu, equivalent to having fallen since its peak of $346 per MMBtu in August 2022 93%.

The U.S. natural gas benchmark (Henry Hub) also fell, albeit to a smaller extent than in Europe. It is currently priced at $2.56 per MMBtu, down 73% from its peak of $9.34 per MMBtu in August 2022.

However, natural gas prices are likely to increase slightly over the next few months, according to the EIA and market consensus. The EIA expects Henry Hub prices to average $2.80 per MMBtu in the second half of the year, 10% above the current price of $2.56 per MMBtu. This forecast is in line with the market consensus, which, based on the futures curve in the chart above, expects natural gas prices to rise slightly next winter before falling in the spring.

Natural gas prices are extremely difficult to predict

Therefore, experts believe that natural gas prices will remain at relatively comfortable levels in the coming months. We have no reason to object to this consensus. However, it remains to be emphasized that in this era of volatile market conditions, any energy price forecast comes with uncertainty. Forecasting gas and electricity prices is more complex and unpredictable than historically due to ongoing geopolitical events and structural energy market issues in Europe.

Miners should therefore prepare for the worst-case scenario and ideally hedge their electricity input costs over the coming months and year.

U.S. electricity prices fall from record highs

Natural gas and electricity prices are interconnected, so the trajectory of natural gas is a common crosshair for global electricity prices. In this section, we take a closer look at projections of future industrial electricity prices by state in the United States.

As the chart below shows, electricity prices in most U.S. states have dropped significantly over the past year.

Figure 15: Comparison of average industrial electricity prices in US states in Q2 2023 and Q2 2022

Lower natural gas prices have helped in many states, and the summer of 2023 will be more forgiving than last year's record heat. As we'll mention later, colocation rates have either fallen or held steady in individual states based on electricity prices.

Speculations on future industrial electricity prices across U.S. states

As political parties divide citizens on every topic from affirmative action to the new Barbie movie, energy policy is bound to be caught in the crossfire of the culture wars. Generally speaking (Texas is a notable exception), red states prioritize fossil fuels and nuclear battery baseload, as well as hydropower (with renewables where it makes sense). Meanwhile, blue states, especially California and New York, prioritize renewable energy sources like solar and wind over the expense of nuclear power and natural gas.

Analysis of summer production reduction situation in Texas

Summer is the most challenging season for North American bitcoin miners for two reasons. Not only does cooling demand increase during the high summer heat, but spot electricity prices tend to go up because everyone is turning on the air conditioners, and summer is usually the time of high peak season and tourist activity. These rising electricity prices often force miners to periodically reduce their operations. In this chapter, we analyze how high summer temperatures affect mining operations in Texas.

Still, the summer was relatively mild in most states, although power grids in Texas and California underperformed during periods of high temperatures and storms.

Fortunately, Texas has so far escaped the worst of the record-breaking heat wave, so except for some special periods of stress, miners have cut production less than expected.

In Texas and other power markets, there are several drivers of production cuts. One common factor is that miners typically cut production during periods of spikes in spot power prices. As the chart below shows, spot electricity prices in the West Texas day-ahead market have been lower in July this year compared to the same period last year.

Figure 16: Comparison of average hourly electricity prices in Texas in July 2023 and July 2022

We see that the average price between midnight and noon is much lower than it was last summer. However, prices typically peak around 5 p.m., and this year's summer peak averages slightly higher than summer 2022.

With spot electricity prices exceeding the red line of mining revenue per MWh, most Bitcoin mining in Texas will reduce load, as shown. As we can see, this usually happens during the six hours between 3pm and 9pm. The six-hour cut means most Bitcoin miners in Texas can expect to achieve roughly 75 percent uptime during July.

Figure 17: Overview of Riot’s monthly machine online time proportion in 2022

Riot's significant reduction in effective summer operating hours at its mines provides us with a real-life case study of ERCOT's production reductions. As the chart above shows, Riot's expected uptime between January and April is approximately 90%. As temperatures and power prices rose, the Texas-based mining giant's expected uptime dropped significantly, operating at just 54% to 71% of capacity from June to September. Similar to many other miners in Texas, Riot can significantly reduce its effective electricity bills by reducing load during peak hours.

1. Different forms of “production reduction”

Miners and commentators often talk about "demand response" and "production cuts", and it turns out that Riot has been compensated for this, while some other large operators in Texas have not, so not all "production cuts" are equal.

ERCOT offers four basic types of production reduction services. (Special thanks to Evan Neel of ERCOT for providing information for this section).

a. Economic cut: This method depends on the spot price in the day-ahead or real-time market. For miners hedging through PPAs, their contracts almost always have an option to give up their contracted power and have the power provider sell it into the spot market. Miners then financially settle with their power suppliers and collect the difference. This means that for some miners who choose to hedge, it is in the best financial interest to reduce production when spot electricity prices are high, even though they are already mining profitably at a fixed price. They cut production because arbitrage opportunities outweighed mining returns. Non-hedging miners also operate this way, but without arbitrage. If spot power prices rise above their mining revenue per MWh, they will cut production. Significantly lower their actual electricity costs by avoiding the most expensive price range (time).

b. 4 Coincident Peak (4CP) Scenario: This demand response program aims to allocate transmission costs based on total average consumption during the four summer months (January to September) between peak loads. By avoiding consumption during these intervals, loads can save significant money in the long term. Typically, most miners operate more conservatively during the summer to avoid consuming electricity during one of the intervals (usually early afternoon to evening). Much of miners' summer production losses may be attributed to this.

c. Ancillary services: Ancillary services are reliability products competitively procured by ERCOT in the day-ahead market. Since they are reliability products, they serve as tools for operators to perform dispatching to balance the grid. Eligible Large Flexible Loads (LFLs) can participate in these markets if there are registered uncontrolled load resources or registered controlled load resources with sub-frequency relays installed. For LFLs granted obligations, they will receive the market clearing price of the product and be required to maintain specific MW consumption thresholds over a period of time that the contract stipulates that they must flexibly coordinate with their loads (if the grid requires power, they will utilize it; if not If needed, miners will keep mining).

d. ERCOT issues an alert: In the event of an energy shortage (such as Winter Storm Elliott), some LFLs may reduce production when ERCOT issues an alert. This type of yield loss is rare and usually occurs in the winter, but is almost impossible in the summer.

2. Summer 2023 is more “human” than expected

This summer has been milder than expected. August and September are also historically hot months in the United States, but certainly less hot than July. Now that the hottest months are long behind us, this summer’s threat to Bitcoin miners in Texas and other parts of the United States appears to have faded.

U.S. colocation prices and electricity markets stabilize

In 2021, even US-based retail miners will be able to negotiate an all-inclusive hosting rate of $0.07 per kWh. But these favorable market conditions were short-lived, as rising electricity prices forced co-organizers and hosters to increase their prices in the third and fourth quarters of 2022.

According to the Luxor Colocation Rate Index, in January 2023, the average retail colocation rate in the United States reached an all-time high of $0.081 per kilowatt-hour, very close to the Antminer S19j Pro’s break-even electricity price at that time ($0.082 per kilowatt-hour) . Fortunately for miners, electricity prices cooled in the first quarter of 2023, so hosting rates fell accordingly. Electricity prices and hosting rates are currently stable. The current average retail hosting rate in the United States is $0.077 per kilowatt-hour, which is 6% lower than at the beginning of the year.

Figure 18: Average Managed Electricity Prices by State

As the chart above shows, colocation providers in Minnesota, Oregon, Wisconsin, Michigan, Oklahoma, and South Carolina are currently charging $0.075 per kWh or less. Idaho and Illinois are the “most expensive states” with prices of $0.095 and $0.09 per kilowatt-hour.

Keep in mind that our observations in these states are much smaller than in larger mining states like Texas or Ohio. As the table below shows, states with more data points tend to give us a larger gap between small MOQ rates and large MOQ rates because of stronger rack space markets.

Generally speaking, hosting rates rise or fall based on changes in electricity prices in each state, with states with the most data points reflecting this correlation most clearly. Additionally, managed service providers are learning from the electricity market volatility of 2022; contracts are becoming more flexible, short-term, and subject to monthly adjustments, and long-term contracts of 2-5 years are becoming increasingly rare. Hosting providers are increasingly signing "power pass" contracts that allow them to pass on power cost changes to their customers; this is especially common in the oil mining sector, where operators understand the economics of computing power prices better than ever before , using balanced contracts on a monthly or quarterly basis to weather periods of rising natural gas prices.

1. Canadian managed electricity price

Figure 19: Average managed electricity prices by province in Canada

Historically, hosting rates in Canada have been slightly lower than in the United States. The country is rich in hydropower, but new miners struggle to break into the market due to a lack of regulatory clarity (see the section on Canada at the end of this report for more on this). Operators in Labrador offer services with the lowest hosting rates averaging $0.065 per kilowatt hour. Meanwhile, New Brunswick and Saskatchewan are the most expensive provinces, averaging $0.080 per kWh.

2. About Hosting

As natural gas prices have risen since 2020, so have prices generally for well stations and stranded gas operators. Conservation measures and stranded gas operators are also increasingly leaning towards hashrate price economics, and knowing the bitcoin mining market, they are opting for a more balanced profit share; whereas miners used to get 80/20 or Whereas a 70/30 profit-sharing contract, where gas operators would get 20-30% of mining profits (or revenue in some cases), miners are now getting 60/40 or 50/50 sharing contracts. Stranded colocation sites are increasing colocation rates as more gas is brought online. Hosting in a hydro facility provides the best combination of uptime and cost.

The United States and Canada offer the most liquid and transparent hosting markets, so prices are higher compared to other countries. European miners also appear to be willing to pay a premium to host their machines in relatively close proximity to the Nordics, pushing up retail hosting rates in the region, around $0.09 per kWh.

Miners unwilling to pay the premium generally look for hosting solutions outside of North America, such as Paraguay or Russia, where hosting fees are much lower. Paraguay has not seen any significant changes in colocation fees over the past few months, with the average retail price being $0.0625 per kWh.

According to Luxor's business team observations, hosting rates in Russia have increased slightly, and electricity prices for retail customers average $0.055 per kWh. Over the past year or so, many European and North American miners have pulled out of Russia due to economic sanctions and the war in Ukraine. This exodus left a vacuum in rack space that was quickly filled by miners from China, Kazakhstan, Iran, Russia, and certain risk-taking Western miners. You can read more about mining in these countries in Chapter 5.

So, what's going to happen to hosting costs in the coming months? Let's focus on the largest market - the United States. Like any other market, hosting rates are determined by supply and demand. In 2022, supply shrinks as electricity prices soar. At the same time, electricity demand is strong as many mining investment backlogs are assumed during the bull run in 2021 and many western miners pull out of Russia. We expect that hosting rates may remain stable in the coming quarter. Nonetheless, power contracts, especially for industrial consumers, will become more complex. For electricity operators, demand response, curtailment and similar power management strategies will be key to keeping operating costs low, especially before and after the halving. Some contracts, such as those for wind or solar mining farms, may offer low uptime (10-16 hours) for lower electricity bills ($0.03-4 per kWh); conversely, hosting at nuclear or hydro sites , where uptime can reach over 95% and costs can be even higher ($0.06-8 per kWh).

Since China’s mining ban, retail mining investors have become increasingly interested in North American Bitcoin mining. Typically, these miner operations have smaller deployments (perhaps 1-10 miners), which prevents them from having the same negotiating power for better rates as custodians or power generation companies. Therefore, all retail miners with combined hosting/power costs at or above $0.075 per kWh should evaluate their post-halving strategies.

3. The United States will add 25.6 GW of capacity in 2023

This section will touch on general trends in the electricity supply chain and introduce some large-scale electricity generation projects related to Bitcoin mining. While we will focus on the United States, we will also mention some projects in emerging mining countries such as the United Arab Emirates and Finland.

Let’s start by looking at trends in the U.S. electricity supply chain. The big trend in U.S. electricity supply over the past few years has been the replacement of coal with natural gas for baseload generation, along with the rapid expansion of wind and solar capacity. This trend reaches its peak in 2023, both in terms of coal plant retirements and solar plants coming online.

Solar energy will account for more than half of the planned growth in electricity supply in the United States in 2023.

Figure 20: Estimated increase in production in 2023 by each power component in the United States

As shown in the chart above, the EIA estimates that in 2023, developers will add 25.6 GW of solar, 8.2 GW of natural gas, 5.9 GW of wind, and 2.2 GW of nuclear power. At the same time, we will not see meaningful new power plant additions in biomass, geothermal, hydro, oil, or coal.

4. Will the European electricity market fluctuate due to Bitcoin mining

In recent years, miners have been flocking to the Nordic outposts of Norway, Sweden, Iceland and Finland, while shying away from southern European countries where electricity costs are significantly higher. But if electricity markets return to normal, mining may become feasible in other European countries.

As shown in the chart below, electricity prices in most European countries have fallen sharply over the past year, with spot prices in France, Spain, and Germany falling by more than 50%, but electricity prices in these countries are still far from the word "friendly". For example, the current spot price in France is US$100 per megawatt hour, which is nearly twice the highest mining rate of Bitcoin before the halving.

Figure 21: Comparison of average electricity prices in Europe during the Q3 period of 2022 and the Q3 period of 2023

At the same time, spot electricity prices in the two electricity price zones of NO4 and NO3 in the far north of Norway averaged US$26 and US$39 per kilowatt-hour in the second quarter of 2023, which is far below the maximum Bitcoin mining fee threshold. Interestingly, during the European energy crisis in Q2 2022, Norwegian miners in this price area received even lower prices, paying only $13 and $26 per kWh in the spot market. In hydro-rich northern Norway, miners are effectively insulated from Europe's chaotic power markets in 2022 due to limited high-voltage transmission connections to the continent.

It can be seen that miners in Sweden's northernmost price zone also enjoy relatively cheap hydropower resources like Norway, with prices of US$46 per kilowatt hour. Swedish companies such as Hive Digital Technologies and Prosperity Digital were lucky enough to escape the energy crisis due to transmission line limitations.

Norway, Sweden and Iceland have been European mining powerhouses for many years, but Finland is gradually emerging as a new mining star. The country recently launched Europe's largest nuclear reactor, which is expected to output about 55% of its electricity. This massive nuclear investment, along with generally low electricity prices, has reduced electricity prices in Finland by 62% over the past year to a relatively competitive $47 per megawatt-hour. Due to a large amount of idle capacity and cheap electricity, Finnish regulations will not restrict the development of the mining industry. Over time, Finland may surpass Norway and become the largest bitcoin mining country in Europe. While electricity prices in other European countries have fallen significantly, they are still too high in comparison to better justify its viability in the Bitcoin mining industry.

**5. Europe is unlikely to be a promising land for Bitcoin mining, but we still have hope. **

European electricity prices are unlikely to continue to fall, but power supply issues will continue to be faced during the coming winter. German electricity futures contracts for delivery in 2024 and 2025 are priced at $153 and $161 per MWh, a considerable increase from the current spot price of $101 per kWh.

There are serious structural problems in European energy markets, which could cause electricity prices to spike at any time. The continent has severely underinvested in baseload generation for years, creating a fragile electricity market that has led to wild price swings.

Even if Europe is lucky enough to experience another unusually mild winter, these deep structural cracks in Europe’s energy system will not go away. Therefore, the risk of high electricity prices makes it unfeasible to invest in industrial-scale mining facilities in most of Europe, unless investors can somehow achieve a long-term electricity price hedge, or the price miraculously falls.

Figure 22: Forecast of wind and solar energy development in Europe

Even so, miners and energy producers can use smaller-scale Bitcoin mining operations to solve various energy problems. For example, in the context of large investments in wind and solar power in Europe, periods of negative electricity prices are becoming longer and longer, leading to greater volatility in electricity prices. Bitcoin mining machines can absorb excess solar and wind energy from the grid. For wind energy, the production time is usually at night and in the morning, while for solar energy, it is in the early morning.

Europe’s Bitcoin mining industry will continue to be concentrated in powerhouses such as Norway, Sweden, Finland and Iceland.

Stock performance of listed mining companies rebounds

It is no exaggeration to say that Q2 of 2023 will be the "resurrection season" for listed mining companies.

Shares of listed mining companies suffered a disastrous collapse late last year, with share prices falling 90-99%. However, in the first half of 2023, the stocks of these companies rebounded, rising by as much as hundreds of percentage points (possibly). The stock's rally peaked in July but has since faded.

This report covers only selected data points for listed mining companies and provides high-level commentary on them. Since these mining companies will release their Q2-2023 "10-Q" reports in August, the data from Q1 in this report will soon become outdated. So we will reissue a stock report in August.

Bitcoin sales by listed mining companies increase

In 2023, due to the increase in production capacity of listed mining companies, the output of Bitcoin will also continue to increase, which will also provide support for the next step of business expansion and the deployment of next-generation mining equipment. In early 2022, miners have been choosing to hold Bitcoin and refusing to sell. As the aftermath of Terra Luna and FTX hit the crypto market and impacted hashrate prices, there was a significant decline in Bitcoin hoarding by listed miners. In a bull market, these companies can finance their operations with a mix of debt and equity; but in 2022, their shares are worth only limited bull market valuations, and with the federal government raising interest rates, financing options dry up. As liquidity from these two funding sources dries up, miners are forced to sell bitcoin to meet their operational needs, often for less than $30,000 a coin.

The chart below shows that sales peaked last June when Bitcoin first fell to $16,000. Most large-scale sales have occurred to highly-indebted miners who took out large-scale equipment loans at the height of mining machine prices, leaving them with unsustainable debt.

Figure 23: Overview of monthly Bitcoin mining and sales by listed mining companies

In May 2023, listed mining companies will substantially increase Bitcoin production. However, the production capacity dropped significantly after June. In May, listed miners mined 6,079 bitcoins; but in June, they mined only 4,859 bitcoins. One thing is clear, that the hot summer and higher network difficulty affect the overall mining efficiency.

Figure 24: Overview of Bitcoin mining volume/sale volume ratio

Bitcoin miners sold more Bitcoins on average in the first quarter of 2023 than in the second quarter. As you can see from the chart above, the largest sales of Bitcoin occur during periods of significant price decline. When Bitcoin reaches bear market lows in late 2022, most listed miners are selling their entire Bitcoin holdings. Miners adjusted their plans as spring came, with most starting to sell two-thirds of their bitcoin holdings each month to fund their business operations and growth.

Miners are expected to continue developing financial management strategies to avoid making the same mistakes.

Marginal production cost of listed mining companies

Figure 25: Bitcoin marginal production cost

We derived the listed miner's marginal cost of production by dividing the cost of revenue (excluding depreciation charges) by the number of bitcoins mined during the period. The dataset is based on each company's latest quarterly financial report. According to the current mining economics, most listed mining companies will still get some mining revenue in the range of $15,000 to $20,000.

As a key point in the calculation of marginal production costs, we calculate a mining company’s current mining capacity through its operating costs in the first quarter. For example, Marathon Digital and Terawulf may see their marginal cost of production reach $10,000 after releasing their second-quarter financial reports, and other mining companies may also see their marginal costs increase or decrease. We plan to continue to refine this analysis in future reports.

** Listed Mining Enterprises Expansion of Computing Power **

In the first half of 2023, most Bitcoin mining companies have completed the expansion of computing power. Iris Energy leads the way with 254% hash power growth, even though they did not meet their equipment loan repayment obligations last year. Marathon Digital's computing power capacity increased by 152% after opening its new facility in North Dakota. Terawulf increased its mining capacity by 80% after starting operations at its Lake Mariner facility in March this year. Bitfarms received an operating license for its Argentina data center, using all 50 MW of electricity to increase mining capacity by 70%. Greenidge solved last year’s equipment loan problem and successfully increased its mining capacity by 127%, becoming a “dark horse” in 2023.

It is expected that the computing power of listed mining giants will continue to grow significantly. Cleanspark deployed a large number of mining facilities in July, increasing the hashrate capacity from 6.7 EH/s to over 8.5 EH/s. Marathon Digital's Garden City will be put into operation in August, and with the expansion in North Dakota, its total capacity is expected to increase by 21-23 EH/s. After the Hut 8 transaction with US Bitcoin is completed, the computing power will double. The last is Core Scientific, which is currently undergoing restructuring, and the expansion of computing power needs to wait until it comes out of bankruptcy.

Figure 26: List of computing power increases of major listed mining companies from January to July 2023

Don’t blindly follow the AI trend

This industry is no stranger to hype and following trends, so there has been a wave of AI hype.

With the advent of ChatGPT, Midjourney, and other AI tools, some miners are living up to the hype by touting their ability to perform HPC and/or AI tasks.

High performance computing is used as an umbrella term for any data center function. However, when miners talk about high-performance computing, they're specifically referring to cloud computing, graphics rendering, and similar high-computational tasks. Hut 8 generated $4.5 million in revenue from these services in the first quarter, while HIVE's pilot program brought in $230,000 for the company.

In fact, an AI data center may cost 10 or even 20 times as much as a Bitcoin mining farm, and may incur twice as much power cost to operate (as much as $0.15/kWh). Computing devices such as Nvidia's A100 and H100 GPUs cost tens of thousands of dollars each. Additionally, these data centers require more cooling and backup power infrastructure.

Figure 27: Data center electricity cost per megawatt

Riot has provided estimates for its upcoming Corsicana facility, saying the cost of electricity per megawatt will reach $832,000, with a total facility capacity of 400 MW, and a total cost estimate of $333 million. The average cost in Turner and Townsend's 2022 Data Center Index is just $9.5 million per megawatt.

Figure 28: Comparison of electricity cost per megawatt between Riot Corsicana and other data centers in North America

Except for those machines that can provide GPU graphics rendering services, no miners will use their computers for Chat-GPT. So when you see a headline or news release about AI, don’t take it too seriously; it’s not what you think it is.

Bitcoin mining list by country

In this section, we outline the bitcoin mining landscape in countries with significant or noteworthy mining activity. As the rest of our report delves into the North American market rather than providing a high-level overview of mining activity in the United States and Canada, we summarize recent regulatory actions affecting the industry.

USA

Overall, Bitcoin, Bitcoin mining, and cryptocurrencies are becoming more real in the United States in 2022 and 2023. We see this particularly in the Bitcoin mining industry, particularly when it comes to traditional capital markets, as well as the regulatory aspects of the industry. The second quarter of 2023 saw some positive developments on both fronts.

For example, much of the ESG pressure built up during the last bull market has dissipated. The culture wars have cast their shadow over nearly every social/economic/political topic in this country, but currently, neither side has policies on the national level that are causing serious harm to the industry.

Still, the current administration and Congress are trying. The industry has shrugged off some executive and legislative attempts to impose excessive taxes or additional regulatory burdens on the bitcoin mining industry. In particular, Biden's digital asset market participant tax, which would raise the tax burden on bitcoin miners to 30%, is currently on hold following the ever-rising debt ceiling deal reached by Congress. Instead, the CHIPS Act sparked a rush among states to find suitable land to house chip factories and data centers.

As the DAME tax is currently on hold, nothing could be reported on this past quarter’s federal level meeting regarding industry developments in the Bitcoin mining industry, but there is a lot of action worth exploring at the state level.

1. State Acts

In addition to the impact federal regulation may have on Bitcoin miners, individual state regulations may also have a larger impact. The separation of powers in the United States ensures that certain state laws override federal laws (marijuana is one of them, and the extreme example is that there may be differences between state and federal laws).

In 2023, states with historically conservative laws have introduced a wave of so-called “mining rights,” which stipulate that miners cannot be discriminated against as long as they abide by local and state laws and regulations. These laws are among the first in the country to address bitcoin mining and set clear guidelines for regulation.

Other states have introduced neutral to negative legislation this quarter and in the past, though most have yet to materialize or have failed.

2. Texas

One of the more troubling pieces of legislation comes from America’s mining mecca, Texas.

On April 12, the Texas Senate passed Bill 1751. The bill, introduced in March by a bipartisan group of lawmakers on the Texas Senate Commerce and Commerce Committee, would, among other things, limit the degree of demand response that Bitcoin miners in the state can provide and ban their use Certain property tax reliefs available for industrial-scale businesses. The bill's main sponsors often get campaign money through energy companies that invest in peaking plants. A peaking plant is a type of natural gas power plant that operates only during periods of peak demand. Bitcoin mining farms have become competitors of peak power plants because of their ability to provide flexible loads for the power grid. The above measures will be a serious blow to the Bitcoin mining industry in Texas.

The bill is awaiting a vote in the House of Representatives, where many critics and miners expect it to be defeated.

3. Arkansas

Arkansas passed legislation regulating the bitcoin mining industry as part of its Arkansas Data Center Act of 2023. The bill, which has become Bill 851, provides tax breaks for data centers while also formally providing direction for Bitcoin miners to ensure they can operate in the state in compliance with the following regulations:

a. State business and tax laws

b. Local and state operating, safety and noise pollution regulations

c. Any rules or rates for utility services provided by public entities and states

d. State and Federal Employment Laws

Reaction to the bill has been mixed so far, with some counties trying to oppose it.

4. Mississippi

In February, the Mississippi State Senate passed SB 2603, its own kind of “mining right.” Unfortunately, the Mississippi House of Representatives voted this down in April.

5. Missouri

In March 2023, the Missouri House and Senate also passed the state’s own “mining rights” bill, SB 692, but Governor Parson has not yet approved it. The bill would ensure that Bitcoin mining farms are treated the same as traditional data centers and prohibit any state and local legislation against mining in residential or industrial areas. Additionally, it exempts cryptocurrencies from state and local taxes. If Parson approves the bill, it will take effect on August 28 of this year.

6. Montana

Montana passed a “mining right” bill similar to Arkansas’, stipulating that bitcoin miners can operate within the state “without undue discrimination or requirements.” Governor Gianforte signed the bill on May 2, 2023.

7 Oregon

Oregon lawmakers attempted to push House Bill 2816 last quarter, which would impose emissions targets on Bitcoin mining and data centers. The bill failed to pass committee in April after Amazon planned to build five new data centers in the state.

8 Pennsylvania

Pennsylvania Bill 1476 was sent to the state's lower house in June. The bill proposes a moratorium on electricity consumption by Bitcoin mining and states that a study will be conducted on the environmental impact of Bitcoin mining.

9. Washington State

Last quarter, Washington state took drastic steps to regulate data centers and bitcoin mining farms. Governor Jay Inslee signed Washington State Bill 1416 on May 3, 2023. The law sets emission limits for data centers and bitcoin mining farms, in line with the state's green energy goals for 2021.

Canada

Similar to the United States, Canada also has a federal government that regulates Bitcoin mining mostly in its respective provinces. Before China’s mining ban, the nation of deer, maples, and hockey pucks was the North American leader in Bitcoin mining.

In November and December, some Canadian provinces imposed an 18-month moratorium on new mining power contracts in what appeared to be a coordinated effort to prevent miners from expanding in Canada's energy-rich regions. Miners are therefore finding it increasingly difficult to expand or enter the Canadian market, not to mention Canada's federal carbon tax, one of the highest in the world, priced at approximately CAD$30,000 per megawatt.

It is worth noting that electricity imports are not affected by the carbon tax, while Canadian utilities also export large quantities of electricity to the much more populous US (Canada has 38.25 million people, the US has 331.9 million people, but has an installed capacity of up to 4 per 1,000 citizens. megawatts, which is 19 percent higher than the US figure of 3.4 megawatts per 1,000 citizens). In most cases, Canadian utilities make more money selling electricity to U.S. cities than selling electricity to local electricity consumers like bitcoin miners.

Finally, Canadian officials have proposed implementing a “shadow tax” that would prohibit Bitcoin miners (and other data center operators) from receiving input sales tax credits like other export industries.

If the proposal passes, companies engaged in the development of digital assets would no longer be eligible for input tax credits for the value-added tax. This unprecedented proposal would create a hidden tax that would increase the cost of Bitcoin mining by 5%-15%, making Canada significantly less competitive.

In response, Canadian miners formed the Fair Taxation Alliance for Responsible Digital Asset Development. So far, they have successfully suspended the proposed changes and have been pleading with officials to consult to understand the industry, understand the status of digital asset development, and how to promote a healthy Canadian digital mining industry through fair taxation and regulation.

In addition to the above alliances, the Canadian Blockchain Alliance is a recently formed organization composed of cryptocurrency, Bitcoin and mining industry professionals that has been educating policymakers and pushing back against excessive policies.

1Alberta

Alberta is a cowboy province that has at times played against the tide, trying to include bitcoin miners in the electricity market.

The oil-saturated province has moved to attract Bitcoin miners, a trend that other provinces are shying away from. In addition to its abundant oil resources, Alberta's energy market has relatively few controls compared to socialist provinces such as Hydro-Quebec and is a free market.

While there is no specific legislation right now, the Alberta government has said it wants to push forward with policies that will make Alberta a "modern electric powerhouse."

2. British Columbia

British Columbia’s BC Hydro power regulator imposed its own 18-month moratorium on Bitcoin mining power contracts in December. At the time, it said it had received requests from 21 miners for 1.4 GW of power contracts, while it currently only serves seven miners with a combined load of 273 MW.

3 Quebec

In December 2022, Quebec's electricity company Hydro-Quebec canceled approximately 270 megawatts of power contracts previously awarded to Bitcoin mining companies. The power agency has a habit of implementing a stop-and-go mechanism for new Bitcoin mining contracts, making it difficult for new Bitcoin mining companies to take root in the region. Even older miners, such as Bitfarms, which had similar previous power contracts, left the province when Hydro-Quebec refused to grant new power purchase agreements to its expansion plans.

Due to its abundant hydroelectric energy, Quebec became an early mining center. In 2022, it exported 16.5% of the electricity it produced. In 2022, Hydro-Quebec sold 216.2 billion kilowatt-hours of electricity, of which 35.6 billion kilowatt-hours were exported, mainly to large cities in the northeastern United States, such as New York, at an average price of $0.082 per hour.

Figure 29: Hydro-Quebec Power Sources and Sales

4. Manitoba

Manitoba imposed an 18-month moratorium on new bitcoin mining projects in December 2022.

5 New Brunswick

New Brunswick implemented a moratorium on new mining contracts in March 2022.

6 Newfoundland and Labrador

Newfoundland and Labrador has taken no action against Bitcoin miners in the past few years, and the province is emerging as one of the most promising mining regions in Canada.

Latin America and Paraguay

While bitcoin miners in the western hemisphere look for cheaper electricity, Paraguay is emerging as a hashrate leader in Latin America.

Apart from Paraguay, Argentina, Uruguay, and Brazil are starting to emerge as promising mining countries. Colombia and Venezuela also have a small number of mining sites, but these countries lack economic and political stability, and even with the lowest electricity prices, most miners cannot afford the risk. Tariff imports can be tricky to deal with.

This section focuses on Paraguay, the largest Bitcoin mining center in Latin America.

Paraguay has leapt forward in Latin America since unrest in Venezuela, Colombia and Argentina prevented miners from setting up operations in those former hotspots. This gap is filled with the Itaipu Dam.

Second only to China's Three Gorges Dam, the Itaipu Dam is capable of generating 14 gigawatts of electricity. Since it became operational on May 5, 1984, the dam has supplied electricity to Paraguay, Brazil and Argentina and is jointly owned by Brazil and Paraguay.

More than 99% of Paraguay's electricity comes from the Itaipu Dam and its "cousins", the Yacyretá and Acaray Dams. However, Paraguay's 6.7 million people cannot consume the energy generated by all its dams, causing it to export 90% of its energy to neighboring Brazil, Bolivia and Argentina.

Figure 30: Top ten dams in the world (ranked by production capacity)

Paraguay's state-owned electricity agency ANDE has what miners consider liquid gold, and they know it. Last year, Paraguay’s Congress passed a Bitcoin-friendly bill that will formally regulate miners and reduce electricity rates. President Benítez vetoed the bill, and when it returned to Congress from the president, Congress did not have enough quorum to vote, so the vote was delayed for a year. However, the miners were not deterred and continued to flock to Paraguay. Sources say Paraguay’s power sector is working on at least six 100-megawatt contracts for industrial-scale miners, some of which are also listed miners such as Bitfarms.

Bitfarms signed a long-term power contract for 150 MW, with 50 MW allocated to its existing Vilarrica mine and 100 MW to a new site near the Itaipu hydroelectric plant.

There is no doubt that Paraguay is extremely attractive for mining, but miners need the right relationships to deal with Paraguay's somewhat complex licensing and registration. Bitcoin miners must form a limited liability company to import Bitcoin mining hardware in bulk, and they must pay a certain amount of power deposit for their power contracts. In addition, they need to obtain a license to import the cables and other electrical equipment needed to maintain mining operations. The cost of mining machine import fees can be 17-20% of the machine's market price (compared to the 50-80% tariffs miners pay to import machines to Brazil and Argentina, or the additional bribes required in places like Venezuela and Colombia, a steal) . In addition, miners also need a license from the Ministry of Commerce to build a Bitcoin mining farm, but this license can be obtained within a few days. Finally, Bitcoin miners must pay environmental taxes to remain compliant.

Barring any drastic action by the government or overall socio-political instability, Paraguay’s position in Latin America’s mining industry will continue to solidify over the next few years.

Bitcoin mining gradually gaining acceptance in Russia

Russia’s Bitcoin mining industry, like most countries, has grown and operated without supervision. However, recent discussions between Russian miners' groups and different ministries suggest that the Russian government is looking to regulate the industry.

The Department of Energy, Treasury and the mining industry itself are all pushing for industry regulation. The regulations will provide three main advantages to the mining industry and related regulators.

First, it would establish a tax system that would clarify how much tax miners should pay and who should pay it. Second, it will simplify the corporate structure of Russian mining companies, as Russian miners are currently unable to conduct personal mining through Russian entities due to current accounting laws that do not accept Bitcoin revenue. Third, and most importantly, the industry will become more attractive to investors under regulation, and listed miners will be allowed to list on the Moscow Stock Exchange and to borrow money from the market. Many Russian investors and financial institutions want to acquire investment in the mining industry, but because the industry is not yet regulated, they naturally put their investment on hold.

Another interesting aspect of the upcoming mining regulation is that it may prohibit or severely restrict home mining. Because home-based mining has already caused problems for the electricity distribution network in some Russian cities. BitRiver CEO Igor Runets is leading the charge to limit home mining due to its negative PR.

However, such comprehensive regulations will not be implemented overnight, especially given that different government departments, such as the Ministry of Energy, Finance and the Central Bank of Russia, have different views on how to move forward. For example, while the Treasury wants miners to pay extra tax on their profits, the Energy Department recommends that miners pay no corporate income tax or value-added tax and instead be heavily taxed based on their electricity consumption. One thing seems certain: Russian miners are likely to see their taxes increase, whether in the form of additional corporate income taxes or taxes on electricity, after mining is regulated. The Russian government plans to develop regulations for Bitcoin mining around 2024. Even though Bitcoin mining has been a minuscule industry compared to oil and gas or traditional mining over the past two years, the Russian government still seems to be very focused on this emerging industry, most likely due to its future strategic importance.

In a highlight at the St. Petersburg International Economic Forum, the Russian Ministry of Finance explained the Russian government’s strategy on how it plans to use mining as part of its domestic and international payment schemes. The specific idea is that miners must sell their mined Bitcoins to Russian banks in exchange for digital rubles (Russia’s CBDC). As a result, miners will help drive the circulation of the digital ruble while providing Bitcoin liquidity to the Russian central bank.

The Bank of Russia will use these Bitcoins for international transactions in close cooperation with the Russian government, most likely to avoid sanctions. This strategy is similar to what previous Iranian governments have adopted.

Kazakhstan

Over the past year and a half, Kafkaesque bureaucratic processes have weakened Kazakhstan’s once-great Bitcoin mining industry, which is now a far cry from its former self. Since parts of the power grid were cut off at the end of 2021, miners in Kazakhstan have been hoping that the Bitcoin mining regulations introduced on April 1 will provide better regulatory clarity and operating conditions in all aspects. However, things don't look to be improving.

Nordic

The Nordic countries of Norway, Sweden and Iceland have for years been among the most popular European destinations for bitcoin miners because of their cheap, renewable energy and relatively simple business environments. Recently, Finland has joined the ranks as an attractive country for Bitcoin mining due to falling electricity prices. In this section we will summarize the most important trends and recent events in the Nordic Bitcoin mining scene.

1 Summer is a time of low electricity prices for Nordic miners

The main selling point of the Bitcoin mining industry in Northern Europe is the stable, low electricity prices provided by the abundant hydroelectric power in Norway and northern Sweden. So how will the electricity prices in these areas change in 2023?

These countries (with the exception of Iceland) all have relatively free electricity markets, so comparing historical electricity spot prices is very simple. As you can see from the chart below, these countries will have very low electricity prices in 2023 compared to countries in southern Europe. As usual, average monthly spot prices in northern Norway this year have ranged from $0.020 to $0.047 per kWh.

Figure 31: Average Electricity Spot Prices in Nordic Countries

Although not as high as northern Norway, Bitcoin miners in northern Sweden also have access to very competitive electricity prices. In 2023, average monthly spot electricity prices in Sweden's northernmost region fluctuated between $0.027 and $0.068 per kWh.

At the same time, Finland, which has been severely affected by the energy crisis, has seen a sharp impact on electricity prices and has continued to decline so far in 2023. The average price in July dropped to US$0.022 per kilowatt hour.

Because the Icelandic electricity market has a utility structure and Bitcoin miners must negotiate power purchase agreements directly with local utility companies, we were unable to obtain data on their electricity prices. However, we do not expect significant changes in electricity prices due to the volcanic island's extremely stagnant hydro and geothermal resources.

It can also be seen from the chart that electricity prices in all Nordic countries have been falling steadily since January. This phenomenon is completely normal in this area for two reasons. First, rising temperatures have led to a significant drop in heating demand. Secondly, as snow melts in the mountains of Norway and Sweden, hydropower generation has increased significantly, and electricity supply has also increased sharply.

Electricity prices in Northern Europe are expected to remain very low until at least November.

If you want to learn more about mining in Finland, read this article. If you want to learn more about mining in Sweden, read this article. If you want to learn more about Bitcoin mining in Iceland, read this article. If you want to know more about mining in Norway, read this article.

middle East

The Middle East is quickly emerging as one of the fastest growing Bitcoin mining regions. This article mainly talks about the Gulf countries of the Arabian Peninsula, including the United Arab Emirates, Saudi Arabia, Kuwait, Oman, Qatar and Bahrain.

These countries have great potential for Bitcoin mining due to their abundant energy resources, high degree of business friendliness, and strong will to continuously promote economic modernization.

1. Why the Middle East can become a hot spot for Bitcoin mining

The power systems of Middle Eastern countries are perfectly suited to Bitcoin mining. In these hot, dry countries, up to 70 percent of energy consumption is used for cooling and producing fresh water. However, temperatures vary greatly between the hottest and coldest months, causing large seasonal fluctuations in the electricity consumption of all air conditioners. Because of this consumption pattern, base demand in winter is about half of peak demand in summer.

These seasonal fluctuations naturally put stress on the power system. And the inability of power plants to reduce output during the winter to accommodate lower demand makes the situation even more challenging. This is because these countries use combined power generation and desalination units to desalinate seawater. Due to the critical need to deliver fresh water, these units must operate at relatively continuous capacity throughout the year, with large fluctuations in electricity demand even between the hottest and coldest months. This results in a large amount of wasted electricity. Bitcoin miners can provide much-needed baseload to these power systems and monetize the excess generated power. This stabilizes the grid and increases utility revenue.

Historically, almost all electricity consumption in these countries has come from natural gas. In recent years, however, they have been steadfast in trying to diversify their electricity supply from other sources such as nuclear, wind and solar. The UAE recently opened the largest nuclear power plant in the Arab world, with a capacity of 5.4 GW, and plans to build the world's largest solar power plant with a capacity of 5 GW by 2030, and other countries in the region have similar plans to expand their electricity generation capacity, including Saudi Arabia's plan is the most ambitious.

Figure 32: Mohammed bin Rashid Al Maktoum Solar Power Park

Asia

Until 2021, China has been the center of the Bitcoin mining industry, holding 50-70% of the total global Bitcoin computing power.

Now, mining has not completely left China, and the country remains the dominant player in Asia. However, after the mining ban, the computing power flowing out of China has poured into neighboring countries.

We will cover some of these countries in this section, while giving a brief introduction to the latest developments in China’s mining scene.

1. China

China has imposed a ban on Bitcoin mining in various provinces in the summer of 2021, but that hasn’t completely extinguished the industry. It is estimated that as much as 20% of the computing power may still be in China.

In fact, miners with political connections (or those able to survive without special treatment) still operate in the region, and dams in the Sichuan region and elsewhere are still the site of much of the mining activity. center of gravity.

During the rainy season (May to September), electricity prices range from $0.03 to $0.035 per kilowatt hour. Since home mining is still officially banned in the country, most mining operations are small-scale (1-2 MW).

When China dominated Bitcoin mining, it was difficult for Western observers to peek into the situation, and it still is. What we do know is that mines are much smaller today than they were before the ban, and those that are still operating are usually people closely connected to the Chinese government, a privileged class that are allowed to operate with certain restrictions .

The remnants will continue to stay in China, and in the foreseeable future, a considerable part of Bitcoin's computing power will still come from China.

2.Bhutan

This quarter, the Bhutanese government’s investment agency (DHI) finally confirmed that they have been using stranded hydropower resources for Bitcoin mining for years. This veteran mining country is said to have been mining Bitcoin since the price of Bitcoin was only $5,000. Now, after making its operations public, the mountainous country hopes to take mining to new heights.

Bhutan recently announced that they have reached an agreement with Bitdeer to expand their bitcoin mining capacity to 600 megawatts within three years, with the first phase of the project having a capacity of 100 megawatts scheduled to start in September. Bitdeer is currently raising $500 million from international investors to support the project. Several factors make Bitcoin mining a smart choice for Bhutan. First, due to its vast hydropower resources, Bhutan has more electricity than it knows how to handle. Historically, most of the country's excess hydropower was exported to India. However, being overly dependent on one industry and one trading partner is very dangerous, and Bhutan has very little negotiating leverage when it comes to negotiating with India. So instead of just exporting it to India, Bhutan could diversify its economy by mining bitcoin domestically using its hydropower to generate electricity, turning it into a higher value.

Bhutan currently has 2.4 GW of hydropower capacity and plans to open two new power stations by the end of 2024 with a total capacity of 1.4 GW. This capacity growth further increases the country’s power surplus. With Bhutan and El Salvador leading the way in national Bitcoin mining, we expect other countries to follow suit in the coming years.

Conclusion

As Bitcoin miners approach the fourth halving, the game is changing at a rapid pace. Computing power is spreading to new geographical areas, power management strategies are maturing, and miners are working hard to open up new capital pools and financing.

It’s hard to imagine what the Bitcoin mining industry will look like when the next halving period ends. But as the block reward drops to 3.125 BTC, the profitability of higher-cost miners will be significantly reduced or even shut down the machine and exit the network, so we expect to see some serious reconstruction of computing power. On the other hand, in the coming time, further growth in production will occur in emerging mining regions such as Latin America, the Middle East, and Russia. That’s not to say that North America won’t retain a significant share of the network’s computing power. It’s just that if the price of computing power is low enough, miners of all sizes will start looking for opportunities elsewhere.

Some bitcoin holders, including miners, believe that the rise and fall of bitcoin prices are linked to the inflation of the halving cycle. Miners should bet cautiously, strategizing ahead for the post-2024 scenario and looking for ways to improve machine efficiency, reduce power costs or reduce other operating costs. The best time to plan for the halving is during the current halving period, which starts on May 11, 2020. But any time now is a good time for miners to prepare, and if they can’t lock in low-cost power contracts or escrow agreements, now is the time to get creative and look for opportunities. Hedging strategies against electricity and computing power prices will be crucial to prepare for the years ahead. Bitcoin’s price could change anywhere before and after the halving, so it’s wise to consider multiple possibilities when modeling the future.

Good luck to everyone!