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Most bitcoin miners have been living the good life as bitcoin’s price goes parabolic, but now with the launch of futures trading, their lives may have gotten even better. Unlike traditional miners, bitcoin miners aren’t digging through dirt. Instead, they’re running specialized hardware devices day in and day out in order to obtain small chunks of bitcoin over and over again.

Setting up a bitcoin mining operation requires a little technical know-how and a bit of money (competitive bitcoin mining devices retail for about $3,000, although the sudden spike in demand for them has pushed prices as high as and above $6,000 for a single mining device). However, once the devices are up and running they can operate 24/7 with just occasional maintenance, generating “free bitcoin” with the primary cost being the electricity it takes to run them.  The more mining devices you have, the more electricity you’ll use, but the more bitcoin you’ll be able to mine.  When bitcoin prices rise, the mining operation becomes more profitable.

Suppose a bitcoin miner wants to reduce his exposure to bitcoin and sells a futures contract to lock in profits. Considering how wildly the prices swing, locking in some profits early may not be a bad idea for many of these miners who have high electricity and equipment costs to consider. Just how high are these electricity costs, and what does the profitability look like for bitcoin mining operations? Below is a table illustrating an example setup for a small-scale bitcoin mining operation:

Mining Unit Antminer S9
Cost per unit ($) 3000.00
Total units 20
Watts per unit 1400
Electricity cost ($/kwh) 0.12
Total Antminer electricity use (Watts) 28000
Total Antminer cost ($) 60,000.00
Cooling fan cost ($) 550.00
Cooling fan electricity use (Watts) 598
Shelves ($) 200.00
Internet cost per month ($) 35.00
Video surveillance ($) 100.00
Network Equipment ($) 100.00
Maintenance costs ($/month) 100.00
Total 1 time cost ($) 60,950.00
Daily cost ($) 86.86

An operation using the parameters above would generate approximately 0.056 bitcoin per day, but this amount varies depending on the number of other active miners on the bitcoin network. An estimate for the bitcoin mined per day can be calculated quite simply. First, divide the total hash rate of the mining operation by the total hash rate of the network. The resulting figure is the bitcoin operation’s % of the total hash rate. Multiplying this by the sum of total bitcoin mined per day and total fees collected per day gives a rough estimate of how much bitcoin that mining operation should produce per day. Total bitcoin mined per day is fixed (there is a standard reward that is halved periodically), and the fees may vary day to day.

Many miners also opt to join a mining pool, which allows small miners to earn income directly from the contribution of hash power, rather than relying on the “luck” required to successfully mine a bitcoin. The mining pool operator will collect 1-2% in fees from the miners, and in return, the miners get an income stream of small frequent payouts, instead of the large but inconsistent payouts they would receive mining alone.

Below is a chart showing the break-even point for the mining operation above. To lose profitability, bitcoin would have to fall over 85% from current price levels.  On the other hand, if bitcoin moves up to $20,000, this mining operation is making over $1,000/day in profits.  Not bad!

If bitcoin stayed around its current price of $15,500, the total network hash rate would have to multiply by a factor of 10 for this mining operation to become unprofitable.  That’s a total of 10x as many miners as there are now!

If mining is so profitable, why isn’t everyone doing it? The demand for mining equipment has risen so rapidly that supply hasn’t had a chance to keep up. The original price of the Antminer S9, the most efficient and popular bitcoin miner, was $2,100. Now you’d be lucky to find one on Amazon or any other re-seller for less than $6,000.  Even at $6,000, though, it’s still a very profitable operation as long as bitcoin prices remain high. However, as the supply of mining hardware expands, miners’ profit margins will begin to shrink; all miners compete for a finite supply of bitcoin.

With the new futures contracts, institutions who previously could not trade bitcoin due to a lack of regulation will now have a regulated avenue to be long or short bitcoin. How this might affect the price or compare to the volume of hedges by miners remains unknown, but we do know that the futures market will offer hedging opportunities for miners and change market dynamics.

Below is a chart showing profit per day with 10x the miners that there are now. Break-even point is around $15,500 per bitcoin.

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