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The bitcoin mining cyclicality has been prominent for a while now. This has followed the different bull and bear cycles in the space. These cycles of abundance and lack have greatly impacted the profitability of these miners. So in this report, we take a look at this cyclicality and the factors that drive it.
What Drives Bitcoin Cyclicality?
When the market is in a bull trend, the price of bitcoin surges significantly and that translates to higher returns for miners in terms of dollar value. Since bitcoin had touched multiple new all-time highs back in 2021, revenues had grown drastically, attesting to bitcoin’s nature as a commodity.
Since the price of BTC was going up, the demand for bitcoin had risen. In response, miners tried to increase their output. This meant placing new orders for infrastructure such as mining machines, some of which will arrive over the next couple of months.
This over-investment in infrastructure in new production infrastructure had begun to overwhelm the market. Add in the fact that more players had made their entrance into the market, and the profits from mining had gone through a significant drawdown.
Miner revenue declines | Source: Arcane Research
The decline in profits, in turn, leads to a reduction in production capacity. Then profits begin to rise again, more players enter the space, there is an over-investment in production infrastructure and the profitability drops again. Around and around it goes. Hence the cyclicality of bitcoin mining.
Months Of Abundance Will Pass
2021 was no doubt the best year for bitcoin miners so far. Mining revenues had grown drastically during this time and cash flow was ample for both public and private bitcoin miners. These profits of 2021 had triggered various expansion plans presumably based on the fact that miners expected the large mining profits to continue.
Daily miner revenues for 2021 had been as high as $62 million, coming out at an average daily revenue of $46 million. This brought the average daily revenues for miners t $46 million for the year. However, 2022 would prove to be much different.
The cash flow for every bitcoin mined back in 2021 had touched as high as $30,000 for some miners, putting companies in an incredible cash flow position. In 2021, the total mining revenue was $16.7 billion, the largest on record. Whereas, the previous year had only returned $5 billion and 2022’s returns are expected to follow that of 2020.
Featured image from Bloomberg, charts from Arcane Research and TradingView.com