It's counterintuitive-- Bitcoin prices are edging up, but that's a bad thing for Beijing Bitmain's/Allrise Capital's Usk bitcoin mining facility

Last May, crypto prices collapsed amid revelations of widespread fraud. Bitcoin prices are just now beginning to tentatively surpass the market price levels from last May. You would think that would be a good thing for Beijing Bitmain's and Allrise Capital's massive bitcoin mining facility at the converted former PNC paper mill site in Usk, WA. 

But you would be wrong. Counterintuitively, as Bitcoin prices have edged higher, the Usk facility's revenue potential has fallen.

Here's why: Bitcoin mining in simply a guessing game in which miners use highly specialized computers in a competition to be the first miner to correctly guess a secret code. The winner gets 6.25 bitcoin and the right to charge fees for the next "block" of bitcoin transactions. As the price of bitcoin increases, more miners join the competition. This increases the difficulty for any individual miner to win the competition.

A recent article in the crypto news site Bitcoinist explained it this way: "The mining difficulty is a built-in feature of the Bitcoin blockchain that decides how hard miners would currently find it to mine blocks on the network. This concept exists because the BTC blockchain aims to keep the block production rate (or more simply, the rate at which miners handle transactions) at a constant value.

"When the network hashrate (a measure of the total computing power connected to the chain) goes up, miners are able to hash blocks faster. But as the chain doesn’t wish for this to happen, it increases the difficulty to slow down miners just enough to get them back to the desired pace.

"Because of the difficulty’s existence, revenues for individual miners shrink whenever the hashrate goes up. This is due to the fact that the block rewards always remain the same (except for during halving events, where they are halved), meaning that if more miners connect to the network, the individual shares of everyone involved become smaller." Bitcoin Miners Are Still Under Pressure, Here's Why (bitcoinist.com)

The problem for the Usk miners is that the difficulty level is outpacing the price of bitcoin. The hashrate, which is the number of guesses bitcoin miners are making each second, recently set an all-time high of 427 quintillion guesses per second compared to an average of 225 quintillion guesses last September when the Usk facility reached full operational capability. The translates into a difference in the daily bitcoin earning potential of 5.7 bitcoin at the hashrate at the time of writing (402 EH/s) compared to 9 bitcoin per day last September. From another perspective, Bitcoin would need to be at nearly $40,000 to earn the same revenue today as the facility could earn last September when Bitcoin was around $25,000. But it's only around $30,000.

So why are so many miners joining the competition if it reduces revenues for everyone? The basic answer is because it doesn't all miners equally. There are three main reasons for this right now. First, at the height of the bitcoin bubble in the fall of 2021, Bitcoin miners invested heavily in purchasing new mining computers. Most of these computers were only recently delivered and installed, and the build out of these industrial miners will not be complete until this summer. Second, as of last October, there were between 250,000 and 500,000 bitcoin miners not being used because of low bitcoin prices and high-power prices. A Huge Glut of Bitcoin Mining Rigs Is Sitting Unused in Boxes (coindesk.com) Third, power prices around the country are falling. 

Together these factors incentivize other miners to increase the number of guessing computers they are operating. But those incentives are less applicable to the Usk facility. The most important factor is the regional disparity in power prices. The following chart of electricity spot prices across the US shows that electricity in the Pacific Northwest is currently 3-5 times more expensive than in the rest of the country. As electricity is by far the greatest input cost into bitcoin mining, this makes the Usk facility less competitive than miners elsewhere in the country. Second, most other miners are simply turning on computers they have already paid for. The Usk facility is already not competitive compared to other industrial miners and this trend will decrease their revenue potential even further. For a more detailed examination of their revenue potential, read POC Cryptonomics - PROTECT PEND OREILLE

We assess that Beijing's Bitmain and Allrise Capital will increase their pressure on our PUD to subsidize their power rates at the expense of our PUD's citizen owners.