This day was expected, just not so soon. Miners who pay average electric rates or higher are likely about to experience (financial) death by a dozen cuts.
After three months having passed so far this year the exchange rate currently sits about even with where it was at the beginning of the year. However difficulty is up – way up (about 38% YTD including this next upcoming adjustment).
This has brought mining profitability down to levels such that if a mining operator’s electric rates are much above the U.S. average of $0.11 per kWh then those operators who use GPUs are losing money on every bitcoin mined (when valued at the current exchange rate, a little under $5).
Not all miners are facing hard times though. Some miners operate from residences where electricity usage is included in the rent. They are doing well. Others are located in areas where the electric rates are very low (e.g., near coal and hyrdroelectric generation sources or where government subsidies exist). They too should be able to survive at higher difficulty levels for a while yet.
But today’s GPU miners face a new threat – FPGAs today and eventually as well, ASICs. While the capital investment for mining with these is greater than it is for GPU hardware, the electric consumption per mhash for GPUs is 5X to 10X higher than it is per mhash when using FPGA systems. The difference is even greater when comparing GPUs to ASICs which can be ultra efficient for mining.
In the short term, scarcity in the supply chain for these new efficient devices will limit how many of these units reach mining operators. As a result the difficulty won’t be doubling overnight. But for those who are already hitting breakeven or suffering losses, equipment liquidation of mining rigs may be the next course of action.
Because the primary market for GPUs is their use in gaming systems there currently is still strong demand (with thanks to the upcoming May 15th release of Diablo III). Miners are yet able to exit mining completely without suffering big losses or they can use the proceeds of liquidation for re-investing into the new, more efficient hardware.
Others will liquidate and use the funds to partner in a mining-related venture. Joining efforts makes sense as mining using FPGAs or ASIC is an endeavor that is more capital intensive than GPU mining is and combining funds may allow economies of scale to help make some miners more profitable.
Some used GPUs that were used for mining may not work well for gaming, however. The graphics hardware was just not made for the type of use that mining performs. This is just like how your car’s engine wasn’t made to be raced 24/7 for months at a time either.
It is not yet known what will happen once the market becomes flooded with these used post-mining GPUs. If they aren’t suitable for gaming and are no longer valued for mining, they may not find many buyers and thus the amount they will sell at could drop rapidly.
Since gamers are not yet viewing GPUs previously used in mining as being flawed, the present might be the best time for a miner to liquidate.
Overall though miners are risk takers who generally are willing to keep mining until the losses can no longer be ignored. Those whose mining revenues have not yet been enough that it has paid off the investment in their rigs will generally let themselves be victims of the sunk cost fallacy as well.
Or perhaps all this worry is much ado about nothing and the BTC/USD exchange rate will indeed increase faster than the supply of these more efficient devices. That would allow GPU miner’s to stay alive for a while longer – perhaps until about December when the currency generation drops by half to 25 BTC per block.
Unless the exchange rate rises dramatically (e.g., in the $10 or higher range) by then, those paying for electricity and use GPU hardware will likely be looking for something else that can be done with their rigs.
Written on 27 Mar 2012.