A look at the mining market for the two largest cryptocurrencies in the space and new mining trends.
Quick Take
Impacted by a mix of the market collapse and major protocol changes, Bitcoin and Ethereum miners experienced a troubling 2022.
Bitcoin and Ethereum miners and stakers generated over $18 billion revenue in 2022, a 40% decline YoY.
Ethereum’s Merge upgrade completely decimated the Ethereum mining sector.
2022 started off as a fruitful year for Bitcoin and Ethereum miners, as prices for bitcoin and ether were just slightly below their ATH mania in 2021. However, as the year progressed, many miners soon ran into trouble as global macro and crypto markets collapsed from central bankers’ desperate attempts to maintain control of runaway inflation through various monetary policies and a major escalation in the Russo-Ukrainian war.
Against the backdrop of concurrently occurring major macro events, Ethereum miners also faced an existential crisis when the Ethereum community executed their move to Proof-of-Stake (PoS) via The Merge. As a result, many old Ethereum Proof-of-Work (PoW) mining machines were rendered nearly worthless.
Despite rapidly declining bitcoin prices nearing the end of 2022, Bitcoin’s hash rate actually hit an ATH this year, growing from 1G8 exahash per second (EH/s) in January to 273 EH/s in November on a 7DMA basis.
Figure 19: Bitcoin’s hash rate (7DMA) in 2022 Source: The Block Data Dashboard
Leading the charge in this growing hash rate is Foundry USA, a barely two-year-old bitcoin mining subsidiary for a crypto conglomerate, Digital Currency Group (DCG).
Foundry USA benefited from 2021’s Chinese cryptocurrency mining ban, forcing many miners to relocate to other parts of the world, with the United States benefiting most from the policy. Foundry USA started the year with a 17% share amongst major bitcoin mining pools and is currently sitting at 28%, contributing 45 EH/s of hashpower.
Figure 20: Bitcoin mining pool market share by hash rate in 2022 Source: The Block Data Dashboard
Similar to Bitcoin, Ethereum’s hash rate also reached ATHs in 2022, as miners joined in their last attempts to generate as much revenue as possible before Ethereum’s September Merge activation. The hash rate on Ethereum started the year at 883 terahash per second (TH/s) to 1,039 TH/s in May, on a 7DMA basis. On September 15, 2022, Ethereum hash rate dropped to 0, as Ethereum moved to PoS, leaving mining operators rushing to mine compatible chains like Ethereum Classic or ending their operations entirely.
Figure 21: Ethereum’s hash rate (7DMA) in 2022 Source: SEC filings compiled by The Block Research
With Ethereum’s transition to PoS, a new market leader emerged for PoS validators, who perform similar roles to original PoW miners. Flashbots, a research organization established in 2020 to create a “permissionless, transparent, and fair ecosystem” for maximal extractable value (MEV) introduced “MEV-Boost” shortly after The Merge to provide validators access to an off-chain marketplace for block-building. As a result of being a market leader and a trusted brand, Flashbots saw nearly 450,000 validators sign up for MEV-Boost within two months of introducing the software.
Figure 23: Flashbots’ market share of proposed blocks Source: The Block Data Dashboard
Nevertheless, Flashbots’ popularity also gave it an almost monopolistic dominance in the block-building process on Ethereum. While Flashbots MEV-Boost only proposed 12% of blocks on Ethereum post-Merge, it currently holds a G2% market share of blocks proposed, reaching as high as 71% in November. More on MEV can be found in the Layer-1 section.
The dominance of Flashbots led to outcries amongst Ethereum community members, as Flashbots’ software was configured to be compliant with the Office of Foreign Assets Control (OFAC), blacklisting addresses associated with the privacy software, Tornado Cash, after it was sanctioned by OFAC in August this year. This move meant that all blocks proposed through Flashbots’ software automatically rejected any transactions that engaged with Tornado Cash, resulting in concerns about the censoring of transactions on a blockchain that is supposed to be neutral. As of the writing of this report, Flashbots continues to censor blocks proposed by validators using its software.
Public Bitcoin Mining Firms
Given the mania of 2021, a handful of bitcoin mining firms conducted initial public offerings to much fanfare. In 2022, publicly-traded bitcoin mining firms mined over 4G,000 bitcoins collectively. The leading bitcoin miner this year was Core Scientific, the largest bitcoin mining firm in North America. Core Scientific itself mined over 11,000 bitcoins, or 25% of the bitcoins mined by the 15 publicly-traded miners tracked by The Block.
Figure 24: Total bitcoin mined by publicly-traded bitcoin miners in 2022 Source: Public filings and press release
As bitcoin’s price slid from ~$48,000 at the beginning of 2022 to ~$1Gk, many public bitcoin miners faced increasing financial distress. In October, Core Scientific announced that it might have to explore bankruptcy if its financial situation did not improve. The firm cited “the prolonged decrease in the price of bitcoin” as one of the primary reasons for its situation. Additionally, firms like Argo Blockchain also continued to struggle to find financing deals to continue to maintain operations.
One of the many reasons why bitcoin mining firms struggled during a price downturn of bitcoin was because many miners held portions of their mined bitcoins in their treasuries, in part as a speculative bet on the future price of bitcoin. Using Core Scientific as an example, the mining giant sold zero bitcoins from January to May despite having mined over 5,000. The firm did not sell its bitcoin until June, following the Feds’ first major rate hike and over 30% price drop in bitcoin.
Figure 25: Ratio of bitcoin sold and mined by Core Scientific Source: Public filings and press releases
In fact, some major bitcoin miners like Marathon Digital, continue to hold all the bitcoins they mined this year. At the time of writing, the 15 publicly-traded bitcoin mining firms tracked by The Block hold over 33,800 bitcoins in total, worth over $550 million.
Figure 26: Total bitcoin holdings of publicly-traded bitcoin miners Source: Public filings and press releases
Miner Revenue
After a record year of revenues in 2021, miners in 2022 saw significant drops to their bottom lines. YTD, Bitcoin miners generated a total of $8.8 billion in revenue, representing a YoY decrease of 42%. The decrease can be attributed to the plummeting price of bitcoin in 2022, after reaching new highs in 2021.
Figure 27: Monthly revenue for bitcoin miners Source: The Block Data Dashboard
Following the popping of the non-fungible token (NFT) hype bubble, which drove a lot of fee revenue for miners, and the complete obliteration of Ethereum miner subsidies due to The Merge, total ETH issuance dropped 88%, Ethereum miners, and soon validators, saw a collapse in total revenue. Miners who previously made an average of 13,000 ETH a day from mining subsidies are no longer receiving them. Meanwhile, PoS validators continued to receive 1,700 ETH a day in staking subsidies.
YTD, Ethereum miners and validators generated a total of $9.7 billion in revenue, representing a YoY decrease of 4G%. The Merge in September may result in dramatically lower revenue for validators relative to pre-Merge in the foreseeable future, unless transaction fees rapidly increase. With the ongoing bear market, many miners and mining operations will have to tighten their belts, revisit their finances, and prepare for a potentially prolonged winter.
Figure 28: Monthly revenue for Ethereum miners and validators Source: The Block Data Dashboard
