In today's world, Bitcoin miners are facing some tough challenges. They are dealing with shrinking revenues and rising operational costs. Yet, they continue to invest in new, specialized hardware. This shows their strong belief in the future of Bitcoin, even during these rough patches.

According to a recent report from Glassnode, Bitcoin's hash rate is nearly at an all-time high—just 1% shy of its peak. This is impressive, especially since revenues have dropped significantly.

Right now, the mining industry is juggling two major issues: increasing mining difficulty and falling transaction fee income. As the hash rate goes up, so does the difficulty of mining. This makes it harder to earn BTC rewards, which drives up production costs.

Miners are feeling the squeeze. Demand for high-fee transactions, like those from Runes tokens and NFT-like Ordinals, has cooled off. This has put pressure on their profits. Still, miners are not backing down. They’re investing in new ASIC hardware to stay competitive, as older machines quickly become obsolete.

One big reason for this trend is the improved energy efficiency of modern ASIC equipment. This helps miners manage their operating costs better. Illia Otychenko, a lead analyst at CEX.IO, shared that the energy efficiency of dedicated Bitcoin mining hardware has more than doubled from 2018 to 2023. This means less energy is used to produce each coin.

This advancement allows miners to tackle rising electricity costs and increasing mining difficulty. Even with these challenges, they can keep their profitability intact.

Bitcoin’s price remains relatively strong, but transaction fee pressure has eased. As a result, miners are relying more on block subsidies to support their operations. Interestingly, many miners are changing their strategies. In the past, they sold most of their mined Bitcoin to cover costs. Now, many are holding onto a portion of their mined supply as reserves.

For example, Marathon Digital announced in July that it would adopt a “full HODL” strategy. They decided not to sell their mined BTC and even bought more from the market.

Jeffrey Hu, head of investment research at HashKey Capital, sees this as a positive sign. He believes it shows confidence in Bitcoin’s long-term value. “Miners retaining a portion of their mined supply suggests they are banking on future price appreciation,” Hu explained. “It’s a sign of confidence and could reduce selling pressure in the market.”

However, Hu also warns that this strategy has risks. If miners need to sell reserves during downturns, it could create more selling pressure.

Ryan Lee, chief analyst at Bitget Research, adds that the rising hash rate is partly due to older mining rigs coming back into use. With Bitcoin's price gains over the past year, these older machines are becoming profitable again.

“Older machines are being brought back into operation as Bitcoin’s price makes previously unprofitable hardware viable,” Lee said. He also noted that recent regulatory support in places like Russia, along with positive signals from figures like former President Donald Trump, have helped reduce market uncertainty.

While these factors help offset some revenue challenges, experts agree that miners need to explore alternative revenue streams for long-term success. At a recent Bitcoin conference, many firms expressed that they are experiencing an “identity crisis.” But this could ultimately benefit them in the long run.

Doug Petkanics, co-founder and CEO of Livepeer, suggested that Bitcoin miners are well-positioned to diversify into AI computing. This field requires vast amounts of compute power. “The demand for AI compute power is growing exponentially,” Petkanics said. “With their existing energy and cooling infrastructure, miners could tap into this market by adding GPUs and providing a new revenue stream.”

Diversification could be crucial for survival in the competitive mining landscape. Companies like Core Scientific and Bitdeer are already providing computing power for AI needs to help shore up their Bitcoin business.

Otychenko predicts further consolidation in the industry. Capital-rich miners are likely to outlast smaller operations. For instance, CleanSpark’s acquisition of GRIID for $155 million in June boosted its hosting capacity as part of its growth strategy. Similarly, Bitfarms recently acquired Stronghold Digital Mining, while Riot Platforms purchased a 19% stake in Bitfarms to influence its direction.

Marathon Digital is also looking for future acquisition opportunities to secure low-cost energy and scalable infrastructure. “We may see further mergers and acquisitions as larger miners absorb struggling competitors to expand their market share,” Otychenko noted.

However, for those unable to adapt, rising operational costs may prove unsustainable. Hu also points to the possibility of new financing products designed to protect miners from market volatility. There are also innovative ways for mining pools to generate additional revenue, like merged mining for new layer-2 solutions on Bitcoin.

“The mining industry might also grow in regions like the Middle East, where natural resources and a rapidly growing crypto business present new opportunities,” Hu added.

Even with diversification, miners’ profitability still heavily relies on block rewards, which currently account for over 90% of their revenue. Otychenko explained, “Transaction fees only become significant during fee spikes, as we saw with Runes and Ordinals, but such events are temporary. Block rewards are still the main revenue driver.”

Lee echoed this sentiment, warning that miners will eventually need to lean more on transaction fees as block rewards diminish with each halving cycle. He predicts Bitcoin’s price could surge during the next bull cycle, potentially reaching $150,000. This could attract more retail participation in mining, as smaller players enter the market by purchasing older, more affordable machines.

“While larger miners may shift toward asset management,” Lee said, “retail miners could generate consistent cash flow if Bitcoin’s price continues to rise.”