Why is mining an unstable and too risky area for investment?

30 January 2024

Although the mining industry is developing rapidly, with large companies investing tens and hundreds of millions of dollars, the risks of entering this market not only remain consistently high but continue to grow.

Cantor Fitzgerald released a report stating that 11 public mining companies will be on the verge of collapse after halving if the price of Bitcoin stays at $40,000.

Why is mining an unstable and too risky area for investment?

However, the price of Bitcoin is not the only threat to the mining business, which regularly faces challenges due to regulatory actions, market instability, and much more.

What factors create risks for the mining business?

Cryptocurrencies are a promising but very young market, subject to legislative pressure on the one hand and market fluctuations in digital assets on the other. However, there are other factors. Let’s list all the factors influencing the mining market:

  • Taxation. Government organizations can set a special tax regime for miners, for example, by increasing the rate, negatively affecting the profits of mining companies.
  • Legal regulations. Besides regulatory pressure, there is a risk of banning mining in certain jurisdictions. Currently, mining is officially banned in China, Kazakhstan, Iran, Abkhazia, and Kosovo.
  • Cryptocurrency volatility. Digital assets can rise and fall in price by tens of percent in a short period. Mining profitability directly depends on the cryptocurrency exchange rate.
  • The constantly increasing network difficulty. The Bitcoin network is structured in such a way that with the addition of new miners, leading to an increase in hash rate, the network difficulty also rises. On one hand, this mechanism protects the Bitcoin network from high inflation, preventing the accelerated generation of new BTC coins. However, at the same time, the increasing network difficulty reduces mining profitability and demands a continuous increase in computational power.
  • Halving. The Bitcoin protocol includes a mechanism that halves the reward to miners approximately every four years. Currently, for each mined block, miners receive 6.25 BTC, but after the halving, expected in April 2024, the reward will decrease to 3.125 BTC. As a result, for many companies and individuals, mining may become unprofitable unless the Bitcoin price experiences significant growth.
  • Inflation. The rise in prices for mining equipment increases companies’ expenses for its purchase and maintenance. Moreover, equipment prices may rise not only due to inflation but also due to growing demand, which is typical during periods of a bullish trend in the cryptocurrency market.
  • Risk of loss and equipment breakdown. No one is immune to theft or, for example, natural disasters, and business insurance will lead to additional high costs.

Should you invest in mining?

Before attempting to answer this question, we would like to remind you that the material is advisory in nature, and we are only analyzing the market, providing research data. We recommend that you independently study the market before making any investment decisions.

It can be said unequivocally that the period preceding the halving is definitely not the best time for such investments. But in the long run, much depends largely on the Bitcoin exchange rate. As statistics show, in the months leading up to the halving, it enters a correction phase. The reason for this is uncertainty: miners’ rewards are halved, but expenses remain the same, which can lead to bankruptcies of mining companies and mass sales of bitcoins.

Why is mining an unstable and too risky area for investment?

The decline in the exchange rate will negatively impact profitability, and moreover, it is still unknown how the situation will unfold after the halving. Experts have calculated that for the mining business to remain profitable in May 2024, the Bitcoin price should not fall below $58,500. Otherwise, miners risk serious losses, and some may even shut down their businesses.

All of this could lead miners to start increasing sales now to build up cash reserves in case of an extended wait for BTC to rise to $60,000, when they can turn a profit again.

According to CryptoQuant data, the reserves of mining companies decreased by more than 13,000 BTC in the last quarter, equivalent to $550 million at the current exchange rate. If miners continue to reduce reserves, they will create additional pressure on the market, which could lead to a decline in cryptocurrency prices.

Why is mining an unstable and too risky area for investment?

It’s challenging to provide a definitive forecast for the future of cryptocurrency mining. However, it can be confidently stated that earning quickly and without significant investments in mining is no longer possible. As long as Bitcoin remains in demand and not all coins are mined, mining will persist. Yet, each year, engaging in mining will become increasingly difficult as network difficulty rises in tandem with hash rates.