Ethereum Miners Make Multimillion-Dollar Bet on Upgrade Delay

Major mining machine makers like Bitmain are building more specialized machines for Ethereum mining.

AccessTimeIconAug 12, 2021 at 4:33 p.m. UTC
Updated May 9, 2023 at 3:22 a.m. UTC

Major bitcoin mining firms and miner manufacturers are increasing their investments in ethereum mining despite the second network's impending switch to proof-of-stake.

Public bitcoin mining companies Hut 8 and Hive are increasing their capacities to mine the second-largest cryptocurrency by market cap. In the meantime, miner makers like Bitmain and Innosilicon are set to release new ethereum mining machines later this year.    

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  • This investment may seem strange, given that the Ethereum system is anticipated to migrate from proof-of-work (POW) to proof-of-stake (POS) in five months, and POS mining does not require such advanced machines. The rising demand might be attributed to expectations that the migration will be delayed, industry pros said. 

    “We were told mining was going to end four years ago and it is still going,” said Mark D’Aria, CEO of Bitpro, a New York-based consulting firm with a focus in brokerage and management of Ethereum mining hardware. “It has always been a wait-and-see approach – things tend to take longer than everyone expects.”  

    While last week’s London fork brings the network one step closer to Ethereum 2.0, significant upgrades throughout Ethereum’s six-year history have a track record of multiple delays.

    For example, the Constantinople upgrade – which was a key step toward Ethereum 2.0 – was originally slated to launch as early as July 2018; however, a bug in its code delayed its deployment until February 2019, creating more delays for the migration. 

    Freezing mining with the Ice Age

    Ethereum Improvement Proposal (EIP) 3554 introduced the difficulty bomb that adds artificial miners to increase mining difficulty, making mining operations less profitable. This period has been referred to as the “Ice Age.” Ethereum developers initially presented this EIP in 2015, but it has been postponed to December 2021. 

    As ether's price rises, it may become more difficult to transition the network to proof-of-stake, said Ethan Vera, chief operating officer of Seattle-based mining company Luxor.

    “We have seen ether running up to $3,000, decentralized finance (DeFi) is built on top of the network and [non-fungible tokens] have taken off,” Vera said. “Even those that are bullish on Ethereum’s transition to POS still want to go slowly to make sure that things are being done correctly and there is not any potential doubt, pitfalls or blindspots that the developers are missing.”  

    Besides technical challenges and security issues for assets on Ethereum, potential resistance from the ethereum mining community could be another factor that slows the network’s migration to POS. 

    “One thing that has not been really appreciated is how much resistance there is going to be to that proof-of-stake migration,” D’Aria said. “To think that they are just going to flip a switch and turn off billions of dollars of miners, that’s crazy, that’s not going to happen.” 

    Institutional players

    Ethereum mining has more individuals and fewer large-scale miners than bitcoin mining. 

    Relatively low energy consumption compared to bitcoin miners combined with the small amounts of heat and noise from ethereum mining rigs make it possible to mine ETH on graphic processing units (GPU) at home, Vera said. 

    More than 90% of ethereum mining machines are based on GPUs, which is also a common hardware used by gamers, D’Aria said. 

    However, crypto mining heavyweights are on the move to break into the industry and make profits that are bigger than they would be from bitcoin mining. 

    Public crypto mining company Hive Blockchain claimed it has become the largest public ethereum miner in the world with 3,383 gigahashes per second (GH/s), which was 1.3% of the total hashrate for the Ethereum network at the time, according to a financial report by Hive on Oct. 15, 2020.   

    The Vancouver-based company aims to raise its ethereum mining hashrate to 5,500 GH/s, which is a 62.5% increase compared to that level by the end of this year. Hive acquired a 50-megawatt (MW) data center in New Brunswick, Canada, from data center colocation services provider GPU One in February. 

    Another public crypto mining company, Hut 8, purchased $30 million worth of specialized Ethereum miners from GPU maker Nvidia in May. The company said all miners are expected to be delivered and installed into its Alberta facilities by the end of August. It plans to have 1,600 GH/s hashrate with a 4MW power usage. 

    “This transaction serves to strengthen Hut 8’s objective of increasing revenue diversification and to drive immediate short- and long-term revenue growth objectives forward in FY 2021,” the company said

    Unlike pure-play bitcoin mining companies such as Marathon and Riot, companies like Hut 8 have a mandate to utilize stranded or underutilized energy and turn that into compute power and reward, according to Vera. 

    “I think the companies that are going into ethereum mining right now this late in the game are looking at a bigger picture of how they can capitalize on their computing power,” Vera said. “Crypto is one vertical of many that they would pursue.” 

    Faster pay

    More powerful ethereum miners, which shorten the payback period on such mining operations and increase profits, are coming to the market. 

    The specialized ethereum miners, also called application-specific integrated circuits (ASIC), are designed by miner makers such as Bitmain specifically for mining, whereas most GPU miners are made by repurposing graphic cards for gaming. 

    Nvidia unveiled its first ethereum miner in early 2021, while Bitmain and Innosilicon are set to deliver their latest model to mine ethereum by the end of this year. 

    Miner manufacturer iPollo has raked in over $200 million in revenue from pre-orders of its latest model of ethereum ASICs, which will be delivered by the fourth quarter in 2021, said Paul Yao, vice president of global business development at iPollo. It aims to increase its production when the company reaches a higher capacity and is able to make miners all year round in 2022, according to Yao. 

    The Singapore-based company will set up an office in the U.S. in the coming year and shift its focus from the Chinese market to North America’s, “We are seeing growing demand in North America and some of the Asian markets,” Yao said. 

    “With an ASIC/GPU ROI (return of investment) of five to six months, and ETH 2.0 being very likely more than six months away, I can understand how most would accept the risk especially with prices looking strong,” said Azam Roslan, senior sales associate at Wattum, which is a New York-based crypto miner brokerage and management company. 

    Vera estimated the payback period for Ethereum mining could be as short as four months if miners use the latest generation of ASICs. “For bitcoin mining, depending on the price they are paying for the operations, the public companies are looking at a year’s time frame for payback,” Vera said. 

    By comparison, some of the existing GPU cards for ethereum mining, such as the 3070 GPU card produced by Nvidia, still need about 18 months for the miners to cover all their costs, Arseni Grusha, Wattum’s CEO said. 

    “You want the payback period to stay under 12 months, meaning that either ETH goes up in value or the GPU prices have to go down,” Grusha said. “GPU prices are not expected to go down, and even if ETH goes to $4,000, it would have to stay there for ETH mining ROI to be attractive.” 

    Profit margins

    A strong market price and relatively low operating costs are among the main reasons that Ethereum mining has been generating more profits than bitcoin mining since last year. 

    While the London fork has enabled the Ethereum network to burn a portion of the gas fee that would otherwise be paid to miners, Ethereum mining appears to be even more profitable since the fork thanks to Ethereum’s price.  

    Daily miner revenue in U.S. dollars has rather increased by 7.1% and hit a two-month high, according to data from Coin Metrics. The network has burned about 33% of the new coin supply growth since the update, which is 22,708 ETH and worth $76.1 million. 

    Besides priority fees (gas fee minus the base fee burnt), block subsidies (similar to Bitcoin block awards) and maximal extractable value (MEV) are the other two sources of revenue for miners. MEV is the amount of money an ethereum miner can make by helping traders to insert, leave out or reorder transactions in a block.  

    “After EIP 1559, we are still getting the MEV, 2 ETH from block subsidies and quite a bit of the gas given from some of the wallets,”  D’Aria said. “So it is really not that big of a deal.”

    Miners are already expecting gas fees to go down in the long run as more scaling solutions on Ethereum roll out, which will reduce congestion and transaction fees, D’Aria said. 

    DeFi saw explosive growth last summer due to a new reward mechanism for investors that use DeFi protocols, where they can earn new tokens beyond the returns on deposits. More trading activities across various protocols on Ethereum has drastically increased transaction fees, which is paid to miners for their work to validate transactions. 

    “You get two ETHs from the block subsidies and five to seven more from the fees,”  D’Aria said of the high transaction fees during the DeFi boom. However, with lower transaction volumes on DeFi, gas fees have declined for Ethereum miners. “That was an anomaly and miners feel like enjoying it while it lasts.”  

    Ethereum mining tends to have low operating costs compared to bitcoin mining. While GPU miners are expensive and it is more labor-intensive to run the machines, low power consumption could make up those costs and reduce the overall cost even lower than bitcoin mining, Vera said. 

    The exact date of Ethereum’s historic migration to POS is anyone’s guess but a well-timed investment in Ethereum mining could make a big profit, Vera says. 

    “The miners who betted against proof-of-stake two years ago made an absolute killing,” Vera said. “If you can bet against that, the return could be quite lucrative.”


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