To Unplug or Double Down? Crypto Mining in Crypto Winter

Think crypto winter is painful? Try being a bitcoin miner. If you’re an investor who bought bitcoin when the price was north of $50,000, it can cause heartburn to stare at the screen and see your balance dwindle. But these are just paper losses. Unless you sell, no blood is drawn.

Miners play a different game. As I explored in my recent deep dive into home bitcoin mining, generally speaking, there are three main variables that go into a miner’s cost-benefit analysis: the price of bitcoin, the cost of energy and the hashrate – or “difficulty level” (the mining competition) – of the network. For most of the 2021 bull run, home miners could find juicy profits with a do-it-yourself approach.

Now the math has changed. “When bitcoin dipped below $36,000, I actually unplugged my bitcoin miners,” says one of the leaders of the home mining resurgence, a man who goes by the pseudonym @econoalchemist. His cost of electricity was relatively high, and after the price drop, he was mining at a loss. Because he had no fiat as a cushion (he’s a purist), this hardcore miner had to stop mining.

The long-bearded Econoalchemist wears dark sunglasses and camouflage ball cap on our Zoom call. He looks like a younger member of ZZ Top.

Bitcoin mining “has changed a lot” in the last few months, Econoalchemist acknowledges, but perhaps surprisingly, he shares that many miners are still “holding strong” and continuing to crank out bitcoin – even if it’s at a loss.

It’s easy to get whiplash from the daily twists and turns of crypto, but a conversation with Econoalchemist gives a wider lens at what’s really happening in the mining business – and perhaps a glimpse of the future. Could a further price drop cause a mining crisis? Would the network itself be at risk? Econoalchemist has the answers (or at least solid guesses), and he now expects to emerge from the bear market in better shape than before, as “tough conditions force you to start making tough decisions.”

This interview has been condensed and lightly edited for clarity.

Hello sir! When we last spoke, the price of bitcoin was around $44k. Today … it is not. (The price of bitcoin was roughly $20,000 during our conversation.) How have things changed for home miners since then?

Econoalchemist: The thing you need to keep in mind about home miners is that usually they've got a day job.

And their hobbies are usually funded out of pocket, with whatever disposable income they have.

So if they can afford to spend 300 bucks a month on bitcoin, instead of using Cash App or whatever, they’ll use that 300 bucks to pay their electricity bill and get bitcoin that way, right?

Most of these home miners have other sources of income. So what I've been seeing is that they’re still going to work every day, and they're still paying their electricity bill – because their energy costs aren't going up that much. And they're just continuing to mine and stack bitcoin.

Read more: Is Miner Concentration Once Again Jeopardizing Bitcoin? Not Exactly

Even at the lower prices?

Even though there's a bitcoin price dip and even though they might technically be “mining at a loss” (he uses air quotes on the Zoom), they’re still continuing to do it.

Wait, so bitcoin miners are actually sometimes mining at a loss, and they continue to do it?

Yeah. The amount of money they're spending on electricity is more than the value of the bitcoin that they're earning for that day, but they can afford to do it. They've put all this time and effort into getting the infrastructure and learning the technology and setting up their home mining system. They're holding strong.

Now, a lot of home miners were running S9s (the oldest, cheapest and least efficient of the mainstream application-specific integrated circuits or ASICs), and I have seen a lot of people unplugging those. At the beginning of the year, 30% of the overall bitcoin network hashrate was held up with S9 ASICs, and fast-forward to today, it’s more like 5%.

The bitcoin price drop made S9s unprofitable?

Yeah. If you go back to the beginning of the year, if bitcoin is trading at $50,000, then it makes sense to run any ASIC you can get your hands on. Even the most inefficient ASICs are still going to be profitable at those prices. Today, with the price at $20,000, those ASICs just aren't cutting it anymore.

What else has changed?

When the price of bitcoin went down, a couple of things happened. ASICs prices started to go down.

To clarify, you mean the cost of the mining equipment? The S19s and the S9s?

Yeah. In December and January, you were seeing brand-new S19 Pros that would sell for like $12,000. Now you’re seeing them sell for $4,500. This became a lot more feasible for people. Twelve grand is a lot of money for a lot of people, but four grand can make a lot more sense.

So it might actually be easier to start mining. Interesting. How about you? Are you still mining, or did you unplug?

Here's some irony for you. When bitcoin dipped below $36,000, I actually unplugged my bitcoin miners.

I wouldn't have guessed that. You’re not holding strong?

Here's the thing about me. My situation is a little bit different than most [home miners]. When I was saying most people have a fiat job and they're paying their electric bill out of pocket, you have to remember I was fired from my job in October last year. (He was fired after a dispute with his employer over COVID-19 vaccines, and then used that as a trigger to work on bitcoin full-time. More in my mining story.)

Right, right.

I have just been working for bitcoin ever since. And my electricity prices are like 20 cents per kilowatt hour. That’s really high. And when bitcoin dipped below $36,000, I had to sell more bitcoin, because I don’t have any fiat.

No fiat at all?

My bank account is $0. All my money is in bitcoin. When I earn money for my content, it's paid in bitcoin. When I want to pay my bills, I have to sell bitcoin to do that. And so my electricity bill is one of them.

I was having to sell more bitcoin to pay the electricity bill than my miners were generating. When we continued to go down below $36k, I was like, "Dude, I can't be selling a million sats (satoshis) a month to earn 750,000 sats." You know what I mean? So I unplugged my miners.

That sounds devastating. What’s your plan for the future?

I've got that shipping container in my [backyard]. And I have arbitraged a very favorable electricity rate. I published a guide with Braiin's that shares how to do this. My new setup is going to be at a commercial rate, and it’s going to come out to around five cents a kilowatt hour.

And you were at 20 cents before, so with my crude math … that lowers your operating costs by 75%, right?

Right. But dude, it took me seven months.

What’s the new magic number for you, the price of bitcoin where it’s profitable for you to mine?

(Here he consults an online mining calculator and punches in some inputs, such as the current hashrate difficulty of the network.) Just below $13,000 is my break-even point.

How common would you say your situation is?

There are a lot of people who are now getting commercial meters installed in their backyard or getting a shipping container like I did. Even though we're in a bear market, you'd be surprised how many people are out there trying to step their game up to this next level of home mining.

Let’s pivot to the larger miners. I imagine they’d face similar challenges as you?

The large mining companies that have been in this game for a while, like Foundry or Slush Pool, they're going to be totally fine. Those aren't the ones that are going to be unplugging. Those aren’t the ones scrambling to try and figure out their balance sheets.

But at the end of 2021, you saw this huge infusion of capital into bitcoin mining. And it was happening with bitcoin mining companies that were publicly traded, selling equity, or getting debt or raising capital in some way.

There were a lot of commitments made, but they haven’t been able to follow through. There have been supply chain hiccups. Logistics issues. A lot of that is related globally to the pandemic; it has made building out infrastructure extremely difficult. These companies have to get the permits, get the titles and get the electrical infrastructure in place.

I’m kind of surprised by your answer. I would have thought the big issue for the larger miners is the price drop?

For the large mining companies, I don't think it's so much an issue of the bitcoin price drop. The main issue is that they're overleveraged, and then they're not able to deploy that hashrate and get it up and running. A lot of them signed contracts with ASIC manufacturers to spend billions of dollars on hardware throughout 2022, and then they don't have a place to plug that hardware in.

A lot of them have loans on their ASICs. They're overleveraged, they've got these loans, and now the price of ASICs – of a brand-new ASIC – has fallen from $12,000 when they took out these loans to $4,500 now. And it's now aged seven months and hasn't even plugged in.

Read more: Crypto Miners Face Margin Calls, Defaults as Debt Comes Due in Bear Market

The companies that are in trouble are the ones who were trying to get off the ground, they overleveraged. The value of the hardware – which is their collateral for them – has now been cut in half, or even more. Now they're really in trouble.

But I’m guessing the price crash has to be an issue too, right? Just as you had to unplug at $36k, if the price gets even lower, at some point, they’d have to shut down. What’s your guess for that price?

It really depends on what their power agreements are. If you look at companies like Riot, they've got these power purchasing agreements behind the meter. And I have no idea what they pay for their electricity, but, dude, they could be paying like two or three cents a kilowatt hour.

If that's the case, the price of bitcoin could drop to like $10K or $7K, and they're going to be fine.

Interesting. Just as a thought experiment, what happens if the price drops even below $7k and stays there? Wouldn’t most miners need to shut down? And isn’t that a systemic, existential risk to the Bitcoin network?

Look at what happened in the summer of last year, when there was the Chinese mining ban. Fifty percent of the overall network hashrate went offline like within a couple of weeks, right?

Right.

Then the bitcoin network corrected itself. When the hashrate went offline, the difficulty corrected. The difficulty went down to match the new perceived hashrate. And when that happened, for any of the miners that were still online, their hash value – the number of sats per terahash per day – went through the roof. So for anyone who was home mining at the time, we all looked like geniuses.

Read more: Crypto Carbon: Can Blockchain Networks Fix Carbon Offsets?

And that's what would happen again. If big companies do unplug, the bitcoin network difficulty will change accordingly. And for anyone who's still on the network, it's still going to be profitable.

But what about the overall network security? How would that be affected in this scenario?

Let's say there was an attack on bitcoin. You know, what we saw during the Chinese mining ban, with all the hashrate going offline – that's what an attack would look like. Where the hashrate drops very quickly, and therefore, it becomes easier for an attacker to come up with that 51% it needs to do a hashrate attack.

Lemme see if I’m getting this. If the price drops below $7k and stays there for a while, a lot of the bigger miners might be forced to unplug. The network would stay running because the hashrate “difficulty” would lower, enticing smaller miners to stay plugged in. But because the difficulty is so much lower, the network is more vulnerable to an attack?

The barrier to carrying out an attack like that is lower. They would have to expend less resources in order to get to that 51% mark.

For some historical context, how did this play out after the price drop in 2018?

If you look at 2018, bitcoin came off the $19,000 peak of 2018, and the price dropped to $6k and then it fell off a cliff to $3,500, right?

Oh, I remember.

And then it just kind of stayed under $4,000 for months and months and months. All throughout that period, if you look at what was happening to hashrate, more and more hashrate was going online at that time.

You’re saying that even in a dark and frosty crypto winter, the network took care of itself?

It's almost like a self-correcting mechanism. If the price did crash to $6k for an extended period of time, there are a lot of people out there who would absolutely thrive while there's blood in the streets. They would thrive because they're doing smart things. They’re arbitraging very good electrical rates, like what I did. Or they’re finding very cheap energy sources. They're going to places where energy is being generated that doesn't have a large demand. You're seeing a lot of bitcoin miners flock to Texas, for example, to access the power being produced by these windmills.

It almost feels like the price crash has a silver lining? It’s forcing miners to be more efficient.

Yeah. Tough conditions force you to start making tough decisions. For me, it's been a lot of grueling work, trying to get all the infrastructure in place and do it right.

Predictions for the future of mining?

I think you're going to see energy producers leapfrog these large bitcoin mining companies.

How so?

The business model of these large bitcoin mining companies is to play the fiat game, right? They're selling equity in their company, they're raising debt, they're raising capital, they're becoming overleveraged. The price of bitcoin crashes, and then suddenly they're in trouble, they can't get their hashrate deployed. That business model isn't sustainable.

Read more: Jeff Wilser - Don’t Call It a Comeback: The Unlikely Rise of Home Bitcoin Mining

What we're going to see is large power-generating assets, like coal mining power generation stations, they're going to start using bitcoin as a tool. They're going to use it as a tool to stabilize the demand on their power-generating assets. (He recently gave a speech at a coal mining conference about this very possibility.)

Last question. What has it been like having to sell bitcoin – after the price crashed – to pay for things?

Let me put it this way. I have never regretted actually using bitcoin to transact. Money is meant to be circulated. Yeah, it's great when bitcoin is trading for $69,000, and I can kind of daydream about what I'm going to do with my bitcoin.

But at the end of the day, I approach it as more of a tool, a tool that can be used to transact without permission, to continue interacting economically with the world around me without having to rely on any sort of third party.

Look at what happened with the Canadian trucker Freedom Convoy. If your political views can get you in a situation where you're cut off from basic financial services, then we're living in a pretty scary world. And it's in your best interest to learn how to transact with bitcoin today, when you are not in an emergency situation.

So it doesn't really bother me that the price of bitcoin crashed. Yeah, it kind of sucks watching larger and larger chunks of your savings get broken off to pay the bills each month, but I would not have it any other way. Because the alternative is that I'm at the mercy of someone else's permission.

You’re walking the walk. Best of luck to you going forward.