The overarching goal of a mining operation is to produce bitcoin as cheaply as possible. The bitcoin production cost of a mining operation directly measures how efficiently it can convert inputs into bitcoin, which is the key distinguishing factor between different mining operations.

The challenge is that there are several ways to measure the cost of producing one bitcoin, leading to potential misunderstandings about what a mining operation’s bitcoin production cost actually is.

To build a solid understanding of what it truly costs for a company to mine Bitcoin, it is necessary to take a multi-angle view of the Bitcoin production cost. This article explores three ways to measure how much mining
operations spend to produce one bitcoin.

1. The Direct Cost of Producing One Bitcoin
2. The Cash Cost of Producing One Bitcoin
3. The Full Cost of Producing One Bitcoin

Together, these metrics will help you navigate the bitcoin mining landscape more confidently.

The direct costs of mining one bitcoin is arguably the most important metric for bitcoin miners. It provides a clear measure of how efficiently mining operations convert inputs, primarily electricity, into bitcoin. The direct production cost can effectively be viewed as the cost of goods sold, and it is determined by a mining operation’s electricity costs and mining fleet efficiency.

The most important input variable is a mining operation’s power costs. This is because bitcoin mining is an energy-intensive industry. It consists of hundreds of thousands of Bitcoin mining rigs that consume vast amounts of electricity in order to participate in a competitive mathematical guessing game that rewards the miner who first finds a valid solution.

As a result, electricity costs make up a significant share of a bitcoin miners cost structure. On average, between 70-80% of miners’ operational costs are electricity costs, which makes it among the most energy-intensive industries in the world. As a result, access to cheap power is critical for a mining operation to remain successful over the long term.

A bitcoin miner’s direct production cost is also influenced by the efficiency of its deployed mining rigs. Efficient mining rigs use less energy to produce a unit of hash rate compared to less efficient mining rigs, which gives them a competitive edge on the mining scene. Over time, the average efficiency on the bitcoin network improves in tandem with technological advances and optimizations, and today the average network efficiency sits at 28.5 J/TH.

We have now examined the controllable factors that impact a mining operation’s direct bitcoin production cost. In addition, the direct production cost is influenced by network competitiveness, which is outside any individual miners control. In Q2, a record number of miners was connected to the network, which means that more resources were required to mine 1 bitcoin compared to prior periods.

The chart below illustrates the direct production cost for the top 4 largest public mining companies and a mining operation consisting of one Whatsminer M63S with an all-in power cost of $0.069 per KWh, which is the setup you get by mining with Hashlabs in Finland.

In Q2, when the average bitcoin price was $65,978, we observe that all these operations operated profitably by a large margin. Cleanspark achieves the lowest Bitcoin production cost at $25,511, which indicates that the company is operating with access to relatively cheaply priced power. Meanwhile, Marathon, Bitfarms, and Riot, all have direct production costs ranging from $33,208 to $45,621, which is higher than Cleanspark, but still significantly below the revenue they generated per mined bitcoin.

We have now established that all our selected mining operations look very profitable by using the direct production cost metric. One seemingly plausible implication is that these companies should attempt to scale their operations to capitalize on the potential for additional profits.

The direct cost of mining one bitcoin is arguably the most important metric to use when we evaluate most mining operations. This is because it reflects how efficiently each miner converts electricity into bitcoin, which is the key distinguishing factor between different mining operations.

However, relying solely on this direct production cost metric provides an incomplete view of the overall profitability of these companies, which can lead to poor business decisions, such as overly aggressive scaling. To achieve a more accurate assessment of a miner's financial performance, it is crucial to consider additional cost components beyond just direct production costs.

The cash cost of producing one bitcoin takes into account all cash expenses a mining operation incurs when producing bitcoin. This metric layers sales, general and administrative (SG&A) costs on top of the variable costs by including includes costs like salaries to administrative staff, marketing, and sales, insurance as well as professional services.

The chart below shows how sales and administrative expenses affect the cash cost of producing one bitcoin for our mining operations. Notice how miners that mine with Hashlabs in Finland achieve the lowest cash cost of producing one bitcoin, as they operate without incurring any corporate overhead costs. In contrast, public mining companies have relatively high SG&A costs, which drives the bitcoin production costs upward and creates an additional performance drag.

We observe that Riot has the highest cash cost of producing one bitcoin, and is the only miner that mines at a loss in Q2 looking at this metric. It clocks in at $69,211, which is 4.9% higher than the revenue earned per mined bitcoin. The remaining 3 mining companies achieved cash-based production costs below the revenue earned per bitcoin, meaning that they still look profitable. Cleanspark was the most cost-efficient miner in Q2, only spending $40,648 per bitcoin, which is not insignificantly better than both Marathon ($59,608) and Bitfarms ($50,679).

When a mining operation has relatively high cash costs, it can indicate that the organization is bloated and doesn’t have control over its corporate overhead. SG&A costs can quickly balloon if the company is not careful, which is why effective management of administrative expenses is crucial for ensuring that a mining operation remains profitable over the long-term.

In conclusion, the high SG&A costs associated with public mining companies are a key reason why investing in hosted mining is the more prudent choice. By owning mining rigs outright and avoiding the return-eroding corporate overhead, investors gain more control over their expenses, and can achieve lower production costs and greater profitability.

To get a complete picture of what it costs to acquire and operate a bitcoin mining business over time we can look at the full cost of producing one bitcoin. This metric layers depreciation costs and stock-based compensation on top of the cash cost, thereby giving us the full cost picture of the mining activity.

Bitcoin mining rigs lose value as they age due to wear and tear and technological obsolescence. For this reason, we need to find a depreciation schedule that lets us take capital costs into account appropriately by spreading them out over time. However, It is a difficult task to accurately determine the useful lifetime of a mining rig, as it is dependent on the model, usage patterns, weather conditions as well as many other factors.

Meanwhile, public bitcoin mining companies use stock-based compensation as a tool to attract and retain talent in a highly competitive and volatile industry. Generally, providing employees and management with a stake in the company's future success helps align the interests of executives, employees, and shareholders, incentivizing them to focus on long-term growth and sustainability. However, excessive stock-based compensation programs can also be a costly affair for existing shareholders, as they can put downward pressure on miners’ profitability levels and result in share dilution for existing shareholders.

The chart below shows the mining cost of producing one bitcoin for our selected mining companies. We observe that while mining seemed profitable when we only took direct and cash-costs into account, it becomes clear that mining was, in reality, a very unprofitable business for three out of four selected public companies last quarter.

Marathon, Riot and Bitfarms incurred full bitcoin production costs ranging between $116,041 and $146,790, far above the revenue they generated per coin. Cleanspark performed significantly better than its competitors, achieving a full production cost at $65,308, slightly below the revenue generated per bitcoin. Meanwhile, those who mined with hashlabs in Finland enjoyed a full production cost of $52,373, giving them a respectable 21% profit margin.

This full production cost metric shows that most public mining companies are operating at heavy losses per produced bitcoin. A high mining cost of producing one bitcoin either indicates that mining rigs have been purchased at relatively high prices, leading to high depreciation costs, or that there is excessive stock based compensation.

Evaluating what it costs to mine a bitcoin is not a straightforward task. Different methods can be used to measure the bitcoin production costs, and each metric provides valuable insights into the cost base of a bitcoin mining operation.

When we look at a mining operation’s direct production cost, we receive important information regarding how cheaply it can access electricity, and how efficiently it uses its power. As the only long-term strong competitive advantage in bitcoin mining is access to cheap power, this is valuable information we can use to evaluate mining operations.

The cash cost to produce one bitcoin is also important because it gives us an idea of how efficiently a mining operation is run. As corporate overhead doesn't contribute with any revenue, we want these costs to be as low as possible in order to maximize miners’ financial performance.

Finally, the full cost of producing one bitcoin paints the most complete picture of the true cost of running a mining operation over time. Sometimes, a mining operation can seem profitable when looking at the two first metrics, but it is unprofitable when depreciation costs and stock-based compensations are factored in, which is the case with multiple publicly listed miners.

By choosing to mine with Hashlabs at our facilities, you gain access to highly competitive electricity rates, enabling you to achieve low direct bitcoin production costs. Furthermore, you avoid the excessive overhead costs that are often associated with public mining companies, ensuring that you can sustainably maximize your mining profitability in a highly competitive environment.

Feel free to contact us if you want guidance on how to set up your own mining operation.