Foreign in 2022, A combination of the Fed's rate hikes, the Terra Luna disaster and the FTX implosion caused a crypto winter, with Bitcoin losing two-thirds of its value. Many commentators believe that this may have been the start of a new crypto winter, yet surprisingly, Bitcoin has experienced a strong Rebound in 2023 with the price increasing more than 70 percent as of the time of recording this video. One of the chief beneficiaries of this rally is Bitcoin miners. Obviously, if the price of the commodity you're selling Rises the more Revenue you'll generate.

So it's perhaps unsurprising that publicly traded Bitcoin mining companies have seen their share prices Skyrocket As well of the four Bitcoin mining companies listed on major U.S exchanges, they have all experienced gains between 300 and 500 since the beginning of 2023.. Many investors buy Bitcoin mining stocks as they represent a leveraged way to gain exposure to Bitcoin. If your stock brokerage doesn't support crypto trading, however, these stocks may be a lot more risky than many investors think. It's important to note that all the publicly trading Bitcoin are losing money.

In fact, they appear to lose money regardless of the price of Bitcoin. For example, in 2021, the Bitcoin price hit an all-time high of almost 70 thousand dollars. Yet every one of the publicly traded Bitcoin miners managed to lose millions of dollars in this video. We'll take a deep dive into the economics of Bitcoin mining and why most miners will probably never make a profit.

Keep in mind that this video is for educational purposes only and should not be taken as investment advice. We are just exploring how the industry works and the challenges facing Bitcoin miners. Bitcoin Mining is Risky Business A substantially less risky investment is U.S treasury bonds which are backed by the full faith and credit of the U.S government. and thanks to the Federal Reserve's rate hikes, government bonds are now offering yields as high as five and a half percent That's higher than your typical high-yield savings account.

And unlike a traditional savings or high yield savings accounts, the yield you get with treasury bills is a fixed rate, so you always know the rate you'll get when you purchase. But the problem is that buying U.S treasuries can be super complicated, or at least it used to be. You would either have to physically go to your local bank branch or navigate a government website that looks like it was designed in 1996. That's where public comes in.

Public just launched treasury accounts, a shiny new way for you to access the five and a half percent yield of U.S treasuries directly on your phone with the flexibility of a bank account. There are no minimum hold periods or settlement delays, and because they're backed by the government, it's an incredibly safe place to park your cash and public will automatically reinvest your treasury bills on majority so you don't have to do anything to continue growing your yield. You can now manage treasuries alongside stocks ETFs crypto, Fine Art and collectibles all on public. so go to Public.com WSM to start getting a five and a half percent yield on your cash backed by the US government.

Link in the description below. Foreign If you already know how Bitcoin Mining Works Feel free to skip this chapter of the video where we'll give a brief explanation. All Bitcoin transactions globally are put into so-called blocks, with the new block being created about once every 10 minutes. There needs to be some way to validate these blocks to make sure people aren't trying to spend.

Bitcoins they don't own validation is performed by a distributed network of computers. All Around The World In a process called mining Miners compete to solve a cryptographic puzzle which requires a significant amount of computing power to solve. The first. Miner To solve this puzzle receives newly minted Bitcoins as a reward.

The more computing power a miner has, the more likely they are to be the first one to solve the block and hence receive the reward. There's a fixed number of Bitcoin awarded per block and a new block is created at fixed intervals of 10 minutes. Thus, the amount of Bitcoin paid out to all miners in aggregate is fixed. The more Bitcoin miners enter the market, the harder it is for each one to mine.

Bitcoins You can think of it like a lake that produces a fixed number of fish per year. The more fishermen that enter the lake, the less fish will be available for each one. In fact, it's actually even more difficult than that. If you look at a chart of the total amount of Bitcoin in circulation over time, you'll see that in the first few years, the total Supply was growing very fast, but the pace of growth has since slowed down significantly.

This is because every few years Bitcoin undergoes a having event where the number of Bitcoins awarded per block is cut in half. When Bitcoin was first released in 2009, miners were awarded 50 Bitcoins per block. Today, that number has decreased to 6.25 So, the aggregate number of Bitcoins awarded to all miners is decreasing. If we go back to our metaphorical fishing lake, it's like every few years the lake shrinks and the aggregate number of fish decreases.

Eventually, Bitcoin will reach its maximum supply of 21 million. At this point, there will be no more Bitcoins left for any of the miners, but this is a long way off. Bitcoin is not expected to reach its maximum Supply until the year 2140.. One of the key features about Bitcoin is that it's decentralized.

There are thousands of Bitcoin miners all over the world, with each one operating independently from each other. Theoretically, anyone with a computer and an internet connection can start mining Bitcoin but if you use your personal computer at home, it has so little computing power that your chances of winning a block are almost zero. In fact, the chances of mining a Bitcoin are so low that the cost of the electricity to power your computer will be greater than the expected value of your Bitcoin Rewards Professional: Bitcoin Miners don't use regular computers. They use specially made computers with application specific integrated circuits.

They're specifically designed to be very efficient at mining Bitcoin but they're not good for doing much else. For the rest of the video, we'll just refer to them as mining rigs. These mining rigs require a large amount of electricity, and if you want to mine a lot of Bitcoin you need a lot of rigs because the electricity costs are so significant. Where you place your mining operation makes a huge difference.

For example, you would never start mining Bitcoin in Hawaii Because of geographical remoteness, substantially all of their fuel has to be imported, making their electricity extremely expensive. No matter how efficient your mining rigs are, you won't be able to cover your electricity costs. As you might expect, Bitcoin is primarily mined in countries with low electricity costs such as the US China Russia Kazakhstan and Canada Almost no Bitcoin is mined in places like Europe or Japan where electricity is expensive. As an interesting aside: China banned Bitcoin in 2021, yet many miners still operate illegally and China as the second largest Bitcoin mining country most Bitcoin Mining facilities are strategically located in close proximity to power plants, and they strike deals with a utility company to get bulk discounts.

The more sophisticated mining companies will even set up Dynamic schedules where they only run their rigs at night when electricity is cheaper and turn them off when it's more expensive. Now that we've established what Bitcoin miners do, we can get into why they almost always lose money. Foreign: If the price of Bitcoin is greater than the cost of mining one, you'll make a profit and vice versa. Almost all the publicly traded Bitcoin Mining companies proudly tell investors how low their electricity costs are.

For example, Cipher Mining's electricity cost per Bitcoin mine is as low as six thousand dollars in their most efficient facility. This is well below the cost of a Bitcoin. Yet, despite their electricity costs being so low, they still managed to lose 6 million dollars in that same quarter and the situation is similar for all the other mining companies. This is because the electricity isn't the only cost in mining.

Bitcoin In fact, it's not even the biggest cost. The biggest cost is buying the rigs, obviously. The Upfront Cost of buying a warehouse full of mining rigs is very expensive. But so long as the price of Bitcoin is higher than the electricity costs, eventually you'll recoup this cost right.

Unfortunately, the answer is no. To understand this, we have to put on our accounting hats and talk about depreciation. Depreciation is a somewhat controversial topic as many investors think it does not accurately reflect economic reality. For example, many real estate holding companies have positive cash flow, but negative net income because of the depreciation expenses on their properties.

But in a lot of ways, this is ridiculous because most properties tend to increase in value over time, not decrease. For example, let's say you buy a house for one hundred thousand dollars and from an accounting perspective, it has a 30-year useful life. So every year you recognize a three thousand, three hundred dollar depreciation expense and 30 years later, your house is technically worthless. Yet at the end of the 30 years, the market value of the house is actually doubled and you can sell it for two hundred thousand dollars because of this.

Most Real Estate Investors Disregard depreciation and value properties based on cash flows, not net profit. Now back to Bitcoin: Most Bitcoin mining companies depreciate their mining rigs based on either two or three year estimated useful life. That means they recognize depreciation expenses of 30 to 50 every single year before depreciation. They're profitable, but after depreciation, they have massive losses.

The Bitcoin mining industry is very different from the real estate industry, and as we'll show shortly, depreciation is absolutely a real expense when you buy a Bitcoin mining rig. It can theoretically be operated for a long time much longer than two years, yet it still becomes useless after two years. That's because the companies that make the mining rigs are always innovating and making new rigs which are more efficient. As miners around the world buy these new rigs, the network becomes more and more competitive.

Bitcoin Mining computing power is measured in units called exahash. In 2017, there were 2.4 extra hash of Bitcoin mining capacity. Globally today, this number has increased 150 fold to 370. Exahash.

This equates to the aggregate computing power more than doubling every single year on average. If we go back to our analogy of the fishing lake, the number of fishing boats is doubling every year. Thus, the number of fish each boat can catch is cut in half each year. Even if you keep your mining rigs in perfect condition each year, the number of Bitcoins they produce will be cut in half, but the cost of electricity will remain constant.

After two years. The amount of Bitcoin at mines won't be enough to cover the electricity costs and you'll lose money if you continue to operate it. And remember that these rigs have attribute specific integrated circuits, meaning they're basically useless for any other purpose. So once they are rendered obsolete for Bitcoin mining, they are almost worthless.

And historically, the revenue generated from mining Bitcoin has not been enough to cover this cost. To understand just how hard it is to make money. Mining: Bitcoin Let's look at 2021. 2021 should have been the best possible year for Bitcoin miners.

For starters, the price of Bitcoin skyrocketed, reaching an all-time high of almost 70 thousand dollars per coin at the same time. China Banned Bitcoin Mining This caused a massive decrease in Agria deployed hash rate which lasted for a few months. This was a massive windfall for miners outside of China as the competition for each block reduced substantially. Yet despite all of these advantages, all the publicly traded Bitcoin miners still managed to post net losses.

There are two root causes for the unprofitability of Bitcoin mining. Firstly, there are few barriers to entry. The mining rigs themselves are commercially available and anyone can buy them so anyone with capital in a warehouse next to a power plant can set up their own mining operation. As the price of Bitcoin has risen in recent years, this motivated many new miners to enter the market.

While you would expect Bitcoin miners to benefit from the rise in Bitcoin's price, this benefit was completely eaten Away by increased competition. The second problem is investors bid up the share prices of publicly traded Bitcoin miners, allowing them to raise billions of dollars to fund unprofitable growth. Yeah, for traditional Commodities Like oil, the market is self-correcting If oil prices are too low, some oil companies will go bankrupt. This will decrease aggregate supply and the price will eventually increase to a sustainable level.

There are four Bitcoin miners that trade on major U.S exchanges. Over the past five years, not a single one of them has reported an actual net profit with the exception of Hut 8 mining, which reported a 19 million dollar net profit in 2020. But this result was inclusive of a 32 and a half million dollar non-cash benefit from the reversal of previously recognized impairment charges. Had it not been for this accounting technicality, they would have lost money that year.

Given this reality, you might expect that Bitcoin mining companies will be going bankrupt and shutting down, but the opposite is happening. Almost all the Bitcoin miners have plans to continue growing massively. In particular Marathon Digital, Holdings and Riot platforms. Both plans have more than double their deployed hash rate in 2023..

this growth will make the industry even more competitive and make everybody's losses even worse. This is because despite their losses, investors are still willing to buy their shares, giving them multi-billion dollar market caps. This allows them to raise hundreds of millions of dollars per year by issuing new shares. Over the past five years, the three largest Bitcoin mining companies have increased their share count roughly five-fold I didn't include Cipher mining in this chart because they ipo'd too.

Recently, the Bitcoin mining industry has become like a giant black hole, consuming all the capital investors are willing to give it and as much as the miners are losing, now, the situation is set to get much worse in 2024. with the Bitcoin having event, the number of Bitcoins awarded for successfully completing a block will be cut in half from 6.25 Bitcoins to 3.125 Bitcoins All else equal The revenue of Bitcoin miners will be cut in half, causing their cash burn to accelerate further. Having events have historically been viewed as bullish for the price of Bitcoin as it slows down the rate of Supply growth, but the having event is well known by investors and should already be factored into today's trading praise. At the end of the day, the billions of dollars invested in the Bitcoin mining industry is a massive economic inefficiency fueled by crypto height and naive misunderstanding of depreciation on the part of investors.

All right guys, that wraps it up for this video. what do you think about Bitcoin Mining? Let us know in the comment section below. As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.