by Phillip Ng, VP of Corporate Development

Breaking Down Bitcoin Mining Economics: Revenue, Costs, and Key Metrics

This memo describes how to model revenue and cost in Bitcoin mining. Understanding profitability’s critical components will enhance your decision-making and strategic planning.

Understanding Hashprice

Hashprice is the cornerstone revenue metric in the Bitcoin mining industry. It represents the income a miner earns per unit of computational power (hash) over a given period, typically expressed in dollars per petahash per second per day ($/PH/s/day). Several key factors influence hashprice:

• Bitcoin Price: Bitcoin’s market value directly impacts the value of block rewards, making it a crucial determinant of mining profitability.
• Block Subsidy: This is the fixed number of Bitcoins rewarded for mining a block. As Bitcoin undergoes halving events, the block subsidy decreases, impacting hashprice.
• Network Difficulty: This dynamic metric adjusts roughly every two weeks to ensure the stable production of blocks. As network difficulty increases, more computational power is required to mine a block, which generally reduces hashprice.
• Transaction Fees: Miners also earn transaction fees from the blocks they mine, which provides an additional revenue stream and helps buffer against fluctuations in Bitcoin price.

The actual equation for hashprice is complex and based on observable metrics on the blockchain. You can access the actual equation here. However, the equation is simplified into the following inputs: 

USD Hashprice = Total BTC Network Income Total Network Hashrate

*Price per BTC

Market Dynamics:

Understanding how hashprice behaves in different market conditions is essential for making informed decisions.

• In Bullish Markets:
  • Rising Bitcoin Prices: As Bitcoin prices increase, mining becomes more profitable. This attracts more miners to the network, raising network difficulty.
  • Increased Competition: The surge in network difficulty moderates the profitability per unit of computational power, gradually bringing hashprice back to equilibrium.
• In Bearish Markets:
  • Falling Bitcoin Prices: When Bitcoin prices decline, mining profitability decreases, leading some miners to unplug their machines.
  • Decreased Competition: As miners exit the network, the total hashrate decreases, which lowers network difficulty. This moderation helps stabilize hashprice, even as overall profitability declines.

Modeling Cash Flows for Hosting Bitcoin Miners

Revenue – This is the product of three factors:

• Hashprice: As explained above, we prefer to model hashprice as the primary revenue driver (as opposed to BTC price, $/MWh, etc.) 
• Installed Hashrate: The total computational power that is actively mining.
• Asset Utilization (aka Uptime): This is where uptime comes into play. Soluna decomposes uptime into availability and capacity factors, discussed below.

Operating Costs: 

• Electricity is usually the most significant cost. 
• Operating Expenses: including staffing, security, and facility maintenance
• Machine Maintenance: Regular upkeep of machines, which is critical to maintaining uptime.

Hidden Costs – Many miners overlook certain costs that can significantly impact profitability:

• Downtime: Reductions in availability due to equipment failure can severely impact revenue.
• Credit Support/Working Capital: Necessary to protect operations and ensure liquidity.
• Sales Taxes and Property Taxes: Frequently forgotten but impactful on the bottom line.
• Insurance: property, business, and general liability insurance.  
• Monitoring Fees/Software: Tools and software for monitoring performance and optimizing operations come at a cost.
• Pool Fees/Aftermarket Firmware Fees: Additional charges that can eat into profits if not accounted for.

Utilization based on uptime: Capacity Factor and Availability

Utilization metrics are vital for understanding how effectively your mining assets are being used. Two key metrics are Capacity Factor and Availability:

• Capacity Factor: This metric measures the contractually allowed utilization of the site. It answers the question, “Of the hours you could have run, how many were you allowed to run?” This metric helps assess how much you are structurally able to utilize a site. 
• Availability Factor: This measures the hours you ran within the hours you were allowed. It answers the question, “Of the hours you were allowed to run, how many did you actually run?” For example, if your uptime was 84.6% and the Capacity Factor was 95.0%, the Availability Factor would be calculated as 89.1%. This metric is crucial for understanding operational efficiency and identifying areas where performance can be improved. 

If you don’t decompose out capacity factor, you can’t measure execution. It’s often overlooked by miners. 

Strategic Considerations

• Operational Excellence: Miners and hosting providers that can achieve operational efficiencies, such as low-cost electricity and effective scale management, are better positioned to weather periods of low hashprice. The ability to maintain profitability during downturns is crucial for long-term success​.
• Flexibility in Adverse Markets: Hosting providers should consider contract structures that protect against prolonged low hashprice periods. This might include minimum volume payments or profit-sharing arrangements that adjust based on market conditions.

Continue to Part 2: Mining Profitability in Bull and Bear Markets and the Role of CapEx