Bitcoin Mining: Riot in crisis, hashrate too high

Riot Platforms (RIOT), among the leading companies involved in Bitcoin mining, revealed a loss in the second quarter of 2024 tripled compared to the previous year, due to the still too high hashrate. 

The cause: the halving

On April 20th, twenty days after the beginning of the second quarter of 2024, there was the fourth halving of Bitcoin. 

This halving has suddenly halved the reward for the miners who mine the new blocks of the blockchain of Bitcoin, reducing it from 6.25 BTC to 3.125.

Although the miners also collect the fees, which have not decreased, the halving has suddenly reduced their revenues significantly. 

The event was scheduled and well known for a long time, but what was not known was by how much the hashrate would decrease. 

The problem of hashrate: Bitcoin mining companies like Riot start to suffer

The Bitcoin mining is in all respects a competition that rewards especially those who have greater computing power.

In the field of crypto mining, computing power is called hashrate, and it is measured by the number of hashes that can be extracted (randomly) every second. 

The higher the overall hashrate of all the miners in the world, the lower the probability percentage of individual miners to successfully mine blocks. 

To increase the probability of mining blocks, a single miner must have the highest possible hashrate, but increasing the hashrate also means increasing costs, as computing power consumes a lot of electrical energy. 

When revenues decrease, inevitably miners must also reduce costs if they want to remain profitable, and they can only do this by reducing the hashrate. 

The reduction of the hashrate post-halving

Taking as a reference the weekly averages, the all-time high peak was reached precisely on the day of the halving, at 650 Eh/s. 

In the following days, the hashrate started to decline, precisely because the miners were forced to shut down the less efficient machines, that is, those that consumed more electricity for the same hashrate produced. 

On May 9th, the hashrate had dropped to 582 Eh/s, and after a brief rise above 650 Eh/s, by the end of June it had fallen to 556. 

The problem is that in the face of a 14% drop in hashrate, revenues in BTC have fallen much more. 

At this moment, less than 3% of the miners’ revenue comes from fees, even though until mid-June it was above 7%. This means that the reduction in income after mining has not been much less than 50%. 

In other words, the hashrate has decreased much less than expected, and this has caused a crisis for some miners. 

Moreover, at the end of July, it also skyrocketed above 670 Eh/s, although only for a brief moment. 

Before the halving, it often hovered around 600 Eh/s, while in June it frequently dropped below 550. However, during the month of July, it often returned above 600. 

Riot: difficulties in Bitcoin mining activities 

These dynamics, however, do not have the same impact on all miners. 

Those who bear the brunt the most are those with higher costs, either because they pay dearly for electricity, or because they use inefficient machines that consume a lot, or because they have many other costs to bear as well. 

Riot Platforms, for example, in the second quarter of the current year lost more than 84 million dollars, precisely due to the increase in costs. 

They stated that they had to face a significant increase in selling, general, and administrative expenses, which rose in a year from 41.4 to 61.2 million dollars (+48%). 

In a moment when revenues have decreased, an increase in costs was the last thing they would have needed. 

Yesterday the RIOT stock on the market lost more than 4%, sliding to -37% since the beginning of the year. 

However, the annual low of 2024 was reached between the end of June and the beginning of July, when it dropped to $9. The current price of $10.2 is still significantly higher, but it is in line with that of 12 months ago. 

Indeed, it has returned to the level of December 2020, when the last great bullrun had just started. In other words, in four years the price of RIOT shares has risen by 160%, while that of Bitcoin in the same period has risen by almost 450%. 

The other mining companies

The most important publicly traded crypto mining company, Marathon Digital Holdings (MARA), is at -20% since the beginning of the year. 

Compared to four years ago, the appreciation has been over +900%, which is much better than Bitcoin. 

This demonstrates how the halving has a different impact on the various companies involved in crypto mining, because much depends on their cost management, which varies from company to company. 

Companies with higher costs, like Riot, can perform well especially when things are going particularly well, but when there are events like the halving, they suffer more.

Instead, companies that are better able to keep costs under control may perform less well during bullish periods, but hold up better during bearish ones. 

For example, from the lows of the bear-market of 2022 MARA recorded a sensational +500%, while the performance of RIOT was about half, in the absence of a true new great bull run. Furthermore, from the annual peak highs of 2024 it lost 44%, compared to -41% of MARA.