Miners unhappy with lower fees, debt ceiling talks lower tax by 30%

Key Takeaways

• A proposed 30% tax on cryptocurrency mining may not be implemented due to negotiations over the US debt ceiling.
• This is a positive development for crypto miners who are struggling with rising hash rates and electricity costs.
• During the pandemic bull market, many miners held onto their Bitcoin reserves, which turned out to be a mistake.

Like any business, Bitcoin mining has revenue and costs. Revenue comes from Bitcoin earned through the block subsidy reward and transaction fees, while costs are mainly derived from electricity. In recent years, the Bitcoin price has fallen, hitting miners hard. Although the Bitcoin price has rebounded in 2023, it is still 60% lower than its peak in late 2021. This decrease in revenue has caused many miners to increase their investments across the industry, scaling up their operations and adding new equipment. Hardware prices have spiked due to the surge in demand. Since then, demand has fallen off in line with the Bitcoin price, meaning not only is the revenue down, but many miners are in the red on their hardware investments. This is particularly painful for mining companies who leveraged up through increased debt in order to make these investments, getting hit twice as hard as interest rates have also been hiked.

The other side of the equation has also gone against miners: cost. Russia invading Ukraine triggered an energy crisis, while inflation is rampant globally, even if it has come down since the peak last year. This has sent miners’ biggest expense, electricity, vertical – at the same time that the price of Bitcoin has fallen. Exacerbating this effect is the increase in hash power, which refers to the computing power on the Bitcoin network. This increases as more miners join the network, meaning there is greater competition and greater dollar outlay required of miners to fight for revenue. The hash rate is currently at all-time highs, putting a further squeeze on miners.

The chart below shows how miners’ reserves jumped significantly during the bull market in USD terms, yet in BTC terms, not much was sold. In other words, miners were betting on Bitcoin continuing to rise – a fateful mistake given their ongoing revenue was already so tightly tied to the volatile asset.

Ordinals Protocol Sees Bitcoin Fees Jump

Bitcoin fees jumped up this month with the emergence of the Ordinals protocol, which put Bitcoin block space at a premium. The increased activity as a result of BRC-20 tokens launched within the Ordinals protocol was a welcome result for miners. Since then, however, fees have fallen back down.

• Ohio lawmaker says deal to prevent US debt default eliminates proposed 30% crypto mining tax
• Winklevoss Twins in crisis as Gemini Crypto Exchange faces setbacks
• Bybit approved as crypto custody service provider in Kazakhstan

During negotiations over the US debt ceiling, it appears that the proposed 30% tax on mining will be dropped, which is a positive development for crypto miners. Earlier this month, the US administration proposed a tax on electricity used by crypto miners called the Digital Assets Mining Energy (DAME) excise act. A 10% tax on miners’ electricity usage would be introduced next year, slated to step up to 30% by 2026. This move came amid mainstream concern around the prohibitive energy use of mining and its impact on the environment. It also came as the US continues to clamp down on the crypto industry as a whole, with an aggressive line taken by lawmakers since the start of 2023. Thus, the removal of the mining tax represents a small win for crypto amid what has been a raging storm, both within regulation and elsewhere. However, the road ahead remains perilous for miners. Bitcoin prices are still 60% off their highs, fees have normalised and hash power is at an all-time high.