Is it still profitable to mine bitcoin now that the price has dropped?

"Is it still profitable to mine bitcoin now that the price has dropped?" This is a common question, but also a common misconception. Even supposedly serious analysts and financial organizations get this wrong all the time. Articles in the Financial Times, Wall Street Journal, and research reports published by JP Morgan Chase, say that it is no longer profitable to mine bitcoin, or it will not be profitable to mine bitcoin soon. You can translate this into common English as "I don't understand how Bitcoin works." "But I like to write articles about it anyway." Basically, the difficulty retargeting algorithm creates a dynamic relationship between... the behavior of the miners in that market and the issuance of new blocks [in Bitcoin]. Think about it this way: at any moment in time, there are thousands of different mining farms operating... thousands and thousands of pieces of mining equipment, hardware ASIC miners as they are known. Imagine you are operating one of these farms within your factory or warehouse. You would probably have a variety of equipment; 80% of it is the very latest, most efficient equipment... at a certain cost and number of hashes [generated] per kilowatt of energy consumed. That is how you estimate the efficiency of your mining equipment. It will not be at the same level. Some of it will be less efficient; it requires more kilowatts per hash to power [security] for the network. At the same time, you will be thinking about the electricity costs, as well as various other expenses: maintenance and staff expenses to rack, mount, dismount, and recycle equipment. All of these things. The electricity costs may be on a three-month, six-month, or even daily contract. That gives you a certain price per kilowatt. Then you can estimate whether, at the current level of difficulty and bitcoin price, your equipment is profitable. The answer you get will [vary] for different classes of equipment. Less efficient equipment will become unprofitable earlier than more efficient equipment. When you [assess] your warehouse, you may find that a batch of miners is no longer profitable. This means the overall costs, specifically the cost of the electricity they consume, does not produce enough bitcoin at the current price to pay for the electricity. Therefore, the longer they are turned on, the more loss you will have. You have passed the break-even point. That group of miners is no longer profitable. You may have other miners that generate enough... bitcoin to pay for electricity and maintenance costs while still making a profit on average. Those are profitable; some of your equipment isn't. What should you do? Turn [unprofitable equipment] off. It is very simple. You turn that equipment off as long as it is consuming electricity without paying for it. Just the equipment that is not profitable, leaving the equipment that is profitable on. Imagine this as a ripple effect across the entire industry. This is something that happens on a day-to-day basis. Thousands of miners around the world decide to turn new equipment on or off. They are constantly replacing equipment. They have truckloads of ASIC miners in their loading docks to... mount and install; at the same time, they unmount old miners that are no longer profitable, a constant churn. Now imagine an industry where the mining farms with the lowest operating costs and the best location, they remain profitable while others are no longer profitable, even perhaps at the same electricity costs. [There may be] higher maintenance, staffing, and location costs. They may turn off their warehouses. When they do that, it reduces the hash power across the entire network. You will see that happening all the time. It changes up and down a few percentage points every hour as... new machines are turned on, old machines are turned off, warehouses suffer power cuts, new warehouses are turned on, etc. If a large number of miners are unprofitable and turn off their least profitable equipment, that drop in hash power [contributes to] the difficulty retargeting after two weeks. When the difficulty retargeting happens, miners who are still operating will be more profitable. As the difficulty lowers, their hash power will generate more bitcoin for the same amount of electricity. As the difficulty lowers, their mining equipment becomes more profitable, perhaps so profitable that the equipment they turned off is profitable again, so they turn it back on. This will cause the hash rate to increase, so by the next difficulty retargeting it will be less profitable again. Effectively, people will turn machines on and off as the profitability changes. The same thing happens if the price goes down; that [also renders some] equipment unprofitable. As a result, the older equipment will be turned off, until [the difficulty] finds equilibrium [again]. Supply and demand are constantly finding equilibrium at the right level, where the average miner is profitable. How do we know that the average miner is profitable? Because they are still running. If they weren't profitable, they would have turned off [their mining machines]. The average miner is always profitable, [though] the average miner is a statistical fiction. They leave their machines on. Some miners are not profitable, so they turn [machines] off. Some miners [with the newest equipment] are more profitable, so they turn machines on. Anytime the bitcoin price moves, that entire equation recalculates; the least profitable will turn off [machines], the most profitable to will keep operating. The difficulty will retarget [every two weeks] to keep everything in equilibrium. On average, the profit margin of a miner is near zero, and the reason for that is economics. A perfect market is where supply and demand reach equilibrium, so the price approaches the point of cost... as closely as possible and profit margin goes to zero. If the profit margin is above zero, then more people will join the market, which increases the hash power, which increases the difficulty, which will [cause some miners to turn off machines], and it drops back to zero. On average, it will hover around zero and most miners will be operating just about break-even. The average is at the center of a bell curve: some miners are very profitable, others are very unprofitable. That is how the industry works. The price can never make mining unprofitable [on average]. The unprofitable miners turning off [their inefficient machines] will make the rest profitable again. 'Hard Fork Cafe' made a very important comment. I discussed this purely from an operating cash flow perspective. When the price goes up or down, you calculate [the cost per] kilowatt based on the current practice of bitcoin. Of course, some miners take risks and [still] mine [while] anticipating that the price will increase in the future. They will make their profits by having access to bitcoin and investing now. This is a very risky proposition. You can't do it at scale, because you need to sell bitcoin to pay for electricity, unless you have another source of income. On a small scale, that still applies.

Will the ongoing reduction in energy prices effect the bitcoin price and Bitcoin mining?

"Will the ongoing reduction in energy prices effect the bitcoin price and Bitcoin mining?" No, it is not. These are dynamic markets. Energy prices don't change everywhere simultaneously. They don't change uniformly. All miners do not operate at the same level of efficiency. The miners who gain an advantage due to lower energy prices will make more profit... than miners who don't [have access to lower energy prices]. This will change the market gradually, in different places at different times. This doesn't happen all at the same time. A reduction in energy prices will probably shift the mining industry... to other forms of energy [generation], [such as] where there are opportunities to use cheaper [methods]. [However], the cheapest energy on the planet is not a particular production method, but rather [particular] supply and demand [conditions]: energy which is not being consumed, excess energy. Energy that is being produced, but cannot be [easily] distributed for consumption. The cheapest energy is surplus energy produced in locations where it can not easily be distributed. Miners gravitate towards these sources of energy because that is where [economic incentives] drive them. In many cases, Bitcoin mining acts as a mechanism for monetizing energy that would otherwise [be wasted], but is being produced anyway due to imbalances. For example, renewable energy [such as wind, hydro, and solar], is being produced whether you need it or not. If it can't be distributed, that energy is wasted. But you still produce it. You can't profitably turn off a solar panel. It will produce whether you need it or not. That energy is the cheapest because there is no demand, but there is supply. Its price drops to zero. If you don't have bitcoin mining in the local area, the price will remain at zero. Mining creates a buyer where a buyer didn't exist [before], increasing the price of that energy... from zero to a fraction [of what it would be elsewhere], thereby investing in that energy company. This appreciates the [value] of capital and infrastructure of that electricity company. If you think about it, that is an investment in renewables. So a reduction in energy prices doesn't damage Bitcoin. In fact, it increases profitability for miners and electricity companies with an oversupply of renewable energy. Therefore, they [are incentivised to] invest in renewable energy, which is great.

After 2140, when the Bitcoin block reward is zero and all coins have been issued, should we expect transaction fees to rise, in order to maintain an incentive to secure the Bitcoin network?

"After 2140, when the Bitcoin block reward is zero and all coins have been issued, should we expect transaction fees to rise, [in order to] maintain an incentive to secure the Bitcoin network?" Transaction fees will rise long before this [event]. It is a gradual change with each halving [of the block subsidy], which changes the profitability of miners. The difficulty, price, and profitability determines whether a miner will disconnect their equipment, thereby reducing the difficulty and making more efficient miners more profitable, etc. This is a calculation that happens every two weeks, for every miner in the world. It puts pressure on them and creates the fee market, the mining market, [and contributes to the futures market]. All of these markets operate with some overlap and price signaling between them. Fees are and will be considered as part of this profitability equation. We don't need a zero block subsidy for miners to consider how much fees contribute to their profitability. That is part of the equation today and it constantly changes, at least every two weeks. It is affected by other things, like the price of electricity, the efficiency of operations, and staffing costs. [The recycling of] new equipment and removing old equipment, etc. We will see transaction fees respond to market pressures. Many things will change between now and 2140: block subsidy, network capacity, [off-chain technology, etc.] Of course, the price of bitcoin [will change too]. By the time we get to 2140, the number of transactions supported by the network... [with] layer one and layer two, all of these are unknowns. The market will have a long time to adapt [to these conditions]. We will not go blindly up to 2140 and then something dramatic happens. [The change] is happening every single day, [among] every miner, in a free market with price discovery. Profitability calculations happen every day. Nothing sudden will happen. It is a bit like your eighteenth birthday. [Mentally], you don't suddenly become an adult overnight. You don't wake up the next morning and [feel like] an adult. Your maturity has been building up to that point. It is a gradual process with milestones and checkpoints. [The date] itself is relatively meaningless.