Fast facts:
- Impacted by a mix of the market collapse and significant protocol changes, Bitcoin and Ethereum miners experienced a troubling 2022.
- Bitcoin and Ethereum miners and stakers generated over $18 billion in revenue in 2022, a 40% decline YoY.
- Ethereum’s Merge upgrade completely decimated the Ethereum mining sector.
2022 was 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 bitcoin 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 significant escalation in the Russo-Ukrainian war.
Against 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 hit an ATH this year, growing from 168 exahash per second (EH/s) in January to 273 EH/s in November on a 7DMA basis.
Foundry USA, a barely two-year-old bitcoin mining subsidiary for a crypto conglomerate, Digital Currency Group (DCG), is leading the charge in this growing hash rate. 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 significant bitcoin mining pools and is currently sitting at 28%, contributing 45 EH/s of hashpower.
Like Bitcoin, Ethereum’s hash rate 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, the 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.
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 market leader and a trusted brand, Flashbots saw nearly 450,000 validators sign up for MEV-Boost within two months of introducing the software.
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 62% 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 comply with the Office of Foreign Assets Control (OFAC), blacklisting addresses associated with the privacy software Tornado Cash after OFAC sanctioned it 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 46,000 bitcoins collectively. This year’s leading bitcoin miner was Core Scientific, the largest bitcoin mining firm in North America. Core Scientific mined over 11,000 bitcoins or 25% of the bitcoins mined by the 15 publicly-traded miners tracked by BitcoinMagnates.
As bitcoin’s price slid from ~$48,000 at the beginning of 2022 to ~$16k, 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 struggled to find financing deals 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 mining over 5,000. The firm did not sell its bitcoin until June, following the Feds’ first significant rate hike and over 30% price drop in bitcoin.
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 worth over $550 million.
Bitcoin Mining market in 2022: Miner Revenue
After a record year of revenues in 2021, miners in 2022 saw significant drops in 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.
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 $9.7 billion in revenue, representing a YoY decrease of 46%. 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.
