Written by Øyvind Sjaastad

Bitcoin mining is a highly cyclical industry. The profit margins of a mining operation move up and down over time in a cyclical fashion, creating waves of opportunities and challenges for mining operators, where those who understand the patterns are positioned to thrive, and those who don´t quickly can find themselves in an uncompetitive situation.

In this article, we’ll explore the powerful forces that drive these mining profitability cycles, from historical patterns in bitcoin’s price to network competitiveness, which together shape the profit levels mining operators can expect.

Whether you are a keen observer of the industry or a mining operator looking to run your business more efficiency, understanding the cyclical forces that underpin mining profitability will help you navigate this dynamic sector more effectively.

The profitability of a bitcoin mining operation is determined by a combination of economic, operational and technical factors. To understand how a mining operation’s profitability levels evolve we must first dissect all the interconnected components that impact a miner's bottom line.

Bitcoin miners’ primary revenue source is block subsidies. Block subsidies are rewards miners receive from the Bitcoin protocol in return for protecting the network and validating transactions. The block subsidies miners receive per block halve approximately every four years, impacting profitability by reducing the total bitcoin-denominated reward miners can earn per block they solve. When bitcoin was first released in 2009, bitcoin miners earned 50 bitcoins per block — a number which since has been halved four times to the current level of 3.125 bitcoins after the latest halving in April 2024.

Bitcoin miners also receive transaction fees from users who utilize the network. The fee levels tend to rise during periods of high network activity, which typically takes place during periods where the bitcoin price goes parabolic, as reflected by the increased transaction fees levels we saw during the 2017, 2021, and 2024 bull runs. Apart from these periods, fees have historically remained low, accounting for a relatively small percentage of miners’ overall revenue.

We have now established that bitcoin miners collect block subsidies and transaction fees that both are denominated in bitcoin. This means that the bitcoin price will always be a critical factor for determining the total revenue that is distributed to miners. When the bitcoin price shoots higher, miners earn a lot more per mined bitcoin compared to periods of suppressed price action.

Historically, the bitcoin price has surged in the months following the halving. Parts of this dynamic is attributable to the fact that halving events reduce bitcoins liquid supply by lowering the bitcoin-denominated revenue miners receive and subsequently can sell in the market. The halving also strengthens bitcoins scarcity narrative, which unlocks new trenches of buyers by making more people aware of bitcoins properties as sound money. The chart below shows how the bitcoin price has appreciated rapidly after each of the four past halvings, before retracing into a bear market when the market gets overexhausted.

A critical part of Bitcoin miners’ profitability equation is their power costs. As mining is an inherently energy-intensive industry, access to low-cost electricity is essential to maintain healthy profitability levels. The electricity costs associated with a mining rig that runs at full capacity will be constant regardless of fluctuations in revenue. This fixed cost structure ensures that bitcoin miners have high operation leverage, as any increase in the price of bitcoin directly boosts profitability, all else equal.

The cost of mining is also impacted by the network competitiveness. Technically, the network competitiveness is measured by the network difficulty, which adjusts up and down in response to changes in the network’s hash rate to maintain a steady block production time of 10 minutes. When more miners connect to the network, both the hashrate and difficulty rises, resulting in lower profitability for miners as it becomes more expensive to mine bitcoin.

The dynamic relationship between miners' rewards, the bitcoin price, and network competition creates a cyclical pattern in mining profitability. Miners who strategically adapt their operations to shifting market conditions are better positioned to stay competitive over the long term.

Bitcoin mining has historically displayed highly cyclical profitability patterns. The profitability level for a mining operation is determined by a combination of the bitcoin price, the amount of bitcoin-denominated revenue miners collect, and the network competitiveness, all of which are dynamically evolving with time.

The graph below illustrates the changing economics of mining one bitcoin since mid-2020, assuming a mining operation that always runs at the average network efficiency and with a power cost of $50 per MWh. It highlights that during periods of rapid bitcoin price appreciation, like in 2021, miners experience significantly increased revenue per mined bitcoin, resulting in heightened profitability levels. Conversely, when the bitcoin price declines, like we saw in 2022, miners face financial strain, as the reduced revenue negatively impacts profitability. This relationship underscores the high operational leverage of bitcoin miners, where the cyclical fluctuations in the bitcoin price are directly reflected in miners’ short-term profitability due to their fixed cost structure.

Over the long term, we observe that the cost of mining one bitcoin steadily trends upwards. This is attributable to increased industry competition, which drives up the costs miners must incur to successfully mine a block. In early 2024, Bitcoin miners experienced a profitability boost in response to the bitcoin price increasing from around $40k to $70k leading up to the halving in April. However, the increased profit was partially offset by the halving event, which effectively doubled the cost of mining one bitcoin overnight, thereby putting miners in a more pressured economic situation.

In recent weeks, we have seen the bitcoin price skyrocket, going from $68k on November 5th to $90.5k as of November 14th. This uptick is much attributable to the election of the bitcoin-friendly president Donald Trump in the United States, who is expected to remove the regulatory uncertainty that long has hung over the industry while also setting the stage for the nation to begin accumulating a national strategic bitcoin reserve. As a result, we are yet again seeing explosive price action that resembles prior periods, resulting in heightened revenue and profitability levels for bitcoin miners.

We wouldn't be surprised if the bitcoin price continues to appreciate in the coming months and years, building on the cyclical pattern it has displayed before. Such price action would create a very profitable environment for bitcoin miners, but will also incentivize more miners to connect to the network, eventually competing away the profits.

Miners who possess deep knowledge regarding the cyclical nature of mining profitability can strategically adjust their operations to position themselves for maximizing returns during favorable market conditions and building resilience against market downturns.

First, it allows miners to make more informed decisions about when to scale their operations. During periods of low mining profitability, which typically takes place when the bitcoin price is suppressed, mining rigs tend to be priced lower. This is because of their impaired cash-flow generating abilities, and because such situations often trigger shallow demand for mining rigs and an oversupply from distressed miners selling off their rigs. As a result, miners can capitalize on such situations by acquiring mining rigs relatively cheaply.

Currently, mining rigs are priced close to an all-time low. This is because of record high industry competition putting pressure on mining profitability, miners’ post-halving revenue reduction, and mining rig supply and demand dynamics. However, if we believe the bitcoin price will explode in the coming months and years, miners might face a period of heightened profitability, which could lift mining rig prices upward. If this happens, now could be a great time to consider entering the mining game without overpaying for the mining rigs.

Second, miners with deep knowledge of their industry’s cyclical nature are more likely to enforce sustainable treasury management strategies. For example, miners can strategically build cash or bitcoin reserves during peak profitability periods instead of wasting it on wasteful corporate overhead. This financial cushion will help miners build resilience and allow them to better navigate the financial pressure they will face in the next market downturn.

Bitcoin mining is a uniquely cyclical industry. Those market participants who understand the forces behind this cyclicality — such as Bitcoin’s price swings, the impact of halving events, and shifts in network competition— are well equipped to navigate fluctuations in bitcoin mining economics efficiently.

As the Bitcoin mining industry continues to evolve, miners who strategically respond to its inherent cyclicality will find themselves best prepared for the challenges and rewards ahead. Those who capitalize on periods with low profitability by investing in low-priced mining rigs, while also efficiently managing their operational costs, are well-positioned to thrive when the industry’s profitability rises again. By aligning operational decisions with the discussed profitability cycles, miners can harness the full potential of this promising industry while also building resilience for the future.

We are now seeing rising optimism in the bitcoin industry as the price has surpassed $90,000. If the price continues to move upward, as many expect and historical price cycles suggest, bitcoin miners may have an extremely lucrative period ahead of them.

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