This article was compiled and organized by BlockWeeks
2021 was a revolutionary year for the Bitcoin mining industry. The third halving in May 2020 brought mining broader attention, and interest has continued to heat up since then. Favorable economics allowed almost all participants to be profitable, attracting more and more capital and miners to enter. The rise of flare-gas mining, Elon Musk's comments on Bitcoin's ESG footprint, the establishment of the Bitcoin Mining Council, and the Western migration triggered and accelerated by Chinese regulation together drove the rapid expansion and restructuring of the mining landscape, and industry transparency also improved markedly.
Despite the unprecedented attention this long-opaque market received, volatility, regulation, and supply chain disruptions still made 2021 one of the most unexpected and most formative years in mining history.
A Bull Market Start and Volatility Throughout the Year
2021 began in the euphoric phase of a bull market. Multiple local all-time highs were broken throughout the year, but each new high was followed by a significant drawdown. Bitcoin experienced surges, crashes, range-bound trading, and rebounds, and uncertainty became almost the only constant in the market. Miners and other participants all felt the price volatility, but because the disconnect between price and hashrate was large enough, almost all mining operations remained profitable throughout the year.
Hashrate plunged at one point due to special events—the global chip shortage and the China ban combined—but its V-shaped recovery was faster than most analysts expected. By year-end, hashrate had returned to a level close to its all-time high and was significantly higher than at the start of the year. Event-driven risks are difficult to price, and most models published at the start of the year ultimately proved insufficiently accurate.
Supply Chain Shocks: From Mining Machines to Transformers
The mining industry experienced multiple major disruptive events this year, many stemming from the long-term effects of the pandemic and overly complex supply chains. At the start of the year, acquiring mining machines was the main bottleneck; supply chain disruptions and the global chip shortage led to strong demand for ASIC, and lengthening lead times became the norm. The relatively thin secondary market also reflected a marked increase in ASIC prices.
By mid-year, the ban in China—historically the center of the mining industry—triggered significant market volatility, but also caused a sharp drop in hashrate, sending mining profitability soaring. The ban briefly eased the hardware shortage, as a large number of Chinese miners began selling machines on the secondary market. Another shortage emerged toward year-end, less intense than at the start of the year, but its impact extended from mining machines to equipment such as transformers. This shortage stemmed from pandemic-related supply chain disruptions and manifested as higher prices and longer delivery times.
The China Ban and the Great Hashrate Migration
More importantly, China's ban on Bitcoin mining demonstrated the resilience of the network. Hashrate returned to all-time highs faster than most expected, making 2021 a pivotal year for the industry's maturation and growth.
2021 was also a growth year for Bitcoin mining, with maturation as another main theme. The mining ecosystem expanded in both depth and breadth. Verticals such as brokerage, off-grid mining, and hosting saw a large influx of new entrants. Most notably, the industry received large-scale capital inflows through a record wave of listings, driven by the need for liquidity and capital that only the U.S. public markets could provide.
The geographic migration of miners was the industry's most prominent ongoing phenomenon and arguably the defining feature of 2021. A year earlier, China was far ahead by online hashrate, accounting for more than half of the network's total hashrate. Although Chinese miners, hardware manufacturers, and international competitors had long been expanding overseas, after China announced its ban in May, the floodgates opened completely. This ban remains one of the largest geopolitical blows to the Bitcoin network to date, driving substantial growth in mining operations in Kazakhstan, Russia, and the United States, while significantly de-Sinicizing the network.
After the China ban, geopolitical risk became a better-understood force in the mining industry. Miners increasingly located operations in politically stable environments, hoping to avoid regulatory uncertainty like that in China or, more recently, Kazakhstan. In the United States, miners flocked to energy-rich and regulatorily friendly regions such as Wyoming, North Dakota, and Texas, a trend expected to continue. Beyond hardware leaving China, hashrate in non-Chinese pools also grew significantly. Slush Pool, Foundry Pool, SBICrypto Pool, and others expanded substantially this year, further indicating that miners are reducing geopolitical risk.
Public Companies Step Into the Spotlight
The China ban significantly accelerated the already ongoing hashrate migration. More Bitcoin mining companies listed on U.S. exchanges, and public company disclosure requirements opened a window for industry participants to understand mining operations. One major benefit of the increase in publicly listed mining companies is that researchers can more easily estimate future hashrate growth by observing press releases about companies' mining machine purchase orders. This not only provides details such as company growth plans, capital expenditures on new hardware, and the additional capital that may be needed to finance purchases, but also provides valuable information on pricing in the mining machine manufacturing market.
Based on these public filings, we can better understand the market share advantages of various ASIC manufacturers and determine which machines constitute which portion of current and future network hashrate. At the end of the fourth quarter of 2021, publicly listed mining companies accounted for approximately 18% of network hashrate. Based on mining machine orders exceeding 100 EH for 2022, this proportion is expected to rise to 40%-45% by the end of 2022.
As more mining companies go public through IPOs or SPACs, standardized methods for calculating the mining cost per bitcoin and other metrics will become increasingly important so that analysts and investors can properly evaluate these companies' operations.
Third-Party Firmware and Energy Integration
Third-party firmware typically does not charge through upfront investment, but instead takes a developer fee from the increased hashrate of mining machines. The main obstacle to adopting third-party firmware is losing the manufacturer's warranty, but as market competition intensifies, miners are likely to accept this risk and treat it as a cost of doing business.
In the medium term, the integration of mining with the broader energy industry will become closer. Bitcoin miners have an incentive to seek low-cost energy, which provides natural expansion opportunities for off-grid and behind-the-meter mining because they can obtain near-free electricity. Miners will also continue to establish operations in areas with surplus power, especially former manufacturing centers, bringing jobs to economically struggling rural areas. Although Bitcoin has been criticized for its energy consumption, a growing view holds that Bitcoin mining is an innovation in both financial markets and the energy industry. Several mining companies have already partnered with traditional and renewable energy suppliers, and more partnerships are expected as mining becomes a more easily understood load-control mechanism.
2022 Outlook: Hashrate May Reach 335 EH/s
Beyond these more conceptual trends, some market trends may also continue. Network hashrate follows price; at present, hashrate lags sufficiently behind price that mining is extremely profitable, incentivizing more miners to come online.
Although hashrate growth is constrained by the global chip shortage, unless another major geopolitical shock occurs, hashrate is expected to be far higher than current levels a year from now. If prices remain unchanged, this will compress operating margins, but in most cases the disconnect between hashrate and price is so large that only a severe and sustained bear market would create real downward pressure on hashrate. Combining the above factors, network hashrate is expected to land between 300 EH/s and 370 EH/s by year-end, with a baseline estimate of 335 EH/s.
Even with strong hashrate growth, many publicly listed mining companies may remain highly profitable. Based on third-quarter financial reports, for a sample of 10 mining companies with publicly available data, the average marginal production cost was $10,725, the average direct production cost was $19,543, and the average total production cost was $29,619.
