Bitcoin miners lament falling fees, but debt ceiling negotiations cut 30% tax

Key Takeaways

• A proposed 30% tax on crypto mining appears to have been cut as part of US debt ceiling negotiations 
• Decision a win for crypto miners, who are struggling amid rising hash rate and increased electricity costs 
• Miners also held onto Bitcoin reserves through pandemic bull market, a mistake which proved fateful

When you break down the Bitcoin mining business into simple terms, like any business, you get revenue and costs. Revenue comes in the form of Bitcoin, earned via the block subsidy reward and transaction fees. Costs, on the other hand, are mainly derived from electricity. 

Firstly, revenue: in the last couple of years, the Bitcoin price has fallen precipitously, thus hitting miners where it hurts. While 2023 has seen a bounceback, with Bitcoin currently trading up 68% on the year at $28,000, the asset remains 60% off its peak in late 2021. 

This spike in revenue also led a lot of miners to increase their investments across the space, scaling up their operations and adding new equipment. With the surge in demand, hardware prices spiked. Since then, demand has fallen off in line with the Bitcoin price, meaning not only is the revenue down, but many miners are in the red on their hardware investments. This is particularly painful for mining companies who levered up through increased debt in order to make these investments, getting hit twice as hard as interest rates have also been hiked. 

The other side of the equation has also gone against miners: cost. Russia invading Ukraine triggered an energy crisis, while inflation is rampant globally, even if it has come down since the peak last year. This has sent miners’ biggest expense, electricity, vertical – at the same time that the price of Bitcoin has fallen. 

Exacerbating this effect is the increase in hash power, which refers to the computing power on the Bitcoin network. This increases as more miners join the network, meaning there is greater competition and greater dollar outlay required of miners to fight for revenue. The hash rate is currently at all-time highs, putting a further squeeze on miners. 

The below chart shows how miners’s reserves jumped significantly during the bull market in USD terms, yet in BTC terms, not much was sold. In other words, miners were betting on Bitcoin continuing to rise – a fateful mistake given their ongoing…