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The Bitcoin Halving: Impact and strategies for Bitcoin miners 

As the halving (or halvening) approaches, there’s a growing excitement about its potential influence on Bitcoin’s price. This is understandable, given its direct impact on Bitcoin’s supply dynamics, not to mention the buzz from media sharing observations of historical price surges after every halving event. 

Perhaps there are grounds to believe the halving could trigger a new bullish rally, but we should take this approach as a speculative bet. Instead, we want to focus on the impact on miners, as they play an indispensable role in maintaining and securing the Bitcoin network.

But first, what is the Bitcoin halving? 

The halving, which occurs every four years, is an event where the fixed rewards for Bitcoin mining are cut in half. This mechanism is a central element in Bitcoin’s economic model, controlling and slowing the rate at which new Bitcoins enter the market. It ensures a steady, disinflationary trend, thereby creating scarcity and giving Bitcoin its store of value properties.  

Through Bitcoin’s proof-of-work (PoW) mechanism, miners are responsible for producing new blocks and are rewarded with new coins for their use of heavy computational resources. Since Bitcoin’s launch, there have been three halving events: 

  • 2012 halving: Mining rewards were reduced from 50 to 25 BTC 
  • 2016 halving: Mining rewards were reduced from 25 to 12.5 BTC 
  • 2020 halving: Mining rewards were reduced from 12.5 to 6.25 BTC 

The upcoming halving is expected to take place in late April and will reduce block rewards from 6.25 to 3.125 BTC.

Challenges for Bitcoin miners 

Miners already face challenges as their profits are highly dependent on Bitcoin’s price. This makes it difficult for miners to budget capital expenditures or create revenue models. They have no control over factors like price, hashrate (indirectly through mining difficulty), electricity, equipment costs, and the block rewards made up of newly mined Bitcoins and transaction fees. They are also subject to regulatory pressure, like the US proposing a 30 percent “miners’ tax” for their excess energy use and the strain they place on already burdened power grids. 

Point being – and unless their energy expenses are exceptionally low – there are high risks when announcing expansion plans, taking out loans, buying new equipment, or setting up additional data centres, all of which can take several months, if not longer, to fully implement. With the next halving cutting block rewards once again, many miners will have no choice but to be well prepared with flexible strategies to stay afloat.  

The risks of price dependency were clear when Core Scientific, a large US miner, went bankrupt after Bitcoin’s price plummeted to USD 16,000. Fortunately, the publicly listed company was able to resume operations this January, but only thanks to a strong market recovery last year. For similar reasons, Compute North, a leading data centre provider for miner Marathon Digital Holdings also went bankrupt, revealing a USD 80 million debt exposure to Marathon. 

Miners with thinner profit margins are particularly vulnerable to price volatility, with the halving only exacerbating these risks. These includes big names like TeraWulf, Hut 8 Mining, Argo Blockchain and Marathon Digital, which according to research from Cantor Fitzgerald, might struggle financially if they fail to improve their operational cost structures and Bitcoin’s price would trade around the USD 40,000 level. 

To stay afloat, miners will need to find innovative ways to keep their operational and energy expenses at a minimum. They may need to relocate to countries with cheaper energy, cut costs and choose wisely when to grow or scale back their operations. Furthermore, as Bitcoin grows in popularity and usage, so too does the competition and the cost of mining Bitcoin.

Impact on hashrate 

The cost of mining Bitcoin is in part determined by the network’s hashrate, which represents the total computing power dedicating to maintaining the network. In 2023, rising Bitcoin prices increased mining profitability, doubling the hashrate as new miners entered the market and existing miners expanded their computing capacity. A high hashrate makes the network safer, but it also increases the mining difficulty and reduces the “revenue per unit of hashrate” due to the intense competition for block rewards – this, unless Bitcoin’s price rises significantly higher than the growth in hashrate. 

Currently, Bitcoin’s hashrate is at a record high, driven by increased adoption, expectations of higher prices and miners attempting to secure a larger slice of rewards before the halving cuts them in half.  

When the halving happens, many miners already coping with thinner profit margins may be forced to close their rigs. This would lead to a drop in Bitcoin’s hashrate; however, Bitcoin’s difficulty adjustment mechanism compensates for such fluctuations. 

But the real concern isn’t about temporary hashrate dips – be they 5, 10, or even 30 percent, as some JPMorgan analysts suggests. Bitcoin’s ecosystem is no stranger to recovery after bouncing back from China’s mining ban in 2021 and Texas’ power outage earlier this year.

Source: CoinMetrics

The real challenge for miners now is finding ways to sustain revenue in a Darwinian market environment, as competition intensifies, hashrate increases, and energy costs making up to or even exceeding 70 percent of their expenses.  

So, what should Bitcoin miners do? Here’s a few things to consider: 

  • Hardware and software optimisation: Investing in the latest hardware or joining optimised mining pools to maximise computing power can help offset the drop in rewards. 
  • Relocation to lower energy costs: Regions with cheaper energy rates (as long as rates are below USD 0.05kWh) become attractive for relocation to reduce energy expenses. 
  • Excess energy adoption: Using energy sources, like stranded or wasted energy, can further lower costs and offer a way to monetise energy that would otherwise go to waste. 
  • Leveraging reserve capital: For miners operating on thinner margins, using reserve capital can offer a temporary buffer to remain operational.  
  • Explore alternative income streams: Miners could look into mining other PoW networks, leverage miner extractable value (MEV), tokenising mining hashrate, or recover and repurpose excess heat.  

Some proactive examples include Hut 8 Mining Corp securing up to USD 50 million in loans from Coinbase to preserve its treasury, while Lotta Yotta is building up six months of cash reserves and cutting back on investments. CleanSpark plans to double its computing power by purchasing more mining facilities, and Swan Bitcoin intends to increase its power by 44 percent by March. Recently, GRIID went public on the Nasdaq, and Bitdeer is expanding into Bhutan, South Korea for its ample hydropower resources, along with further plans to expand in Norway and the US. Canaan Inc raised USD 50 million through preferred share sales to increase production capacity, anticipating a rush for new equipment running up to the halving. 

While these plans sound ambitious, they should come with a caution for investors. They may lead to a temporary rise in stock prices, but many of these strategies may not fully materialise or show any return of investment until well after the halving event. This is because infrastructure investments take time to build, install and activate data centres filled with computing power equipment.

Miners have been extremely profitable in 2023  

Despite revenue concerns, miners had a very profitable year in 2023, driven by a strong recovery that saw Bitcoin’s price rally to 156 percent. The launch of BlackRock and Fidelity’s Bitcoin spot ETFs and various protocol innovations, like BRC-20 tokens and Ordinal inscriptions, acted as major catalysts for growth. This led to revenue levels reaching their highest in two years, with December revenues alone reaching USD 1.51 billion.

Source: Sygnum Bank, The Block

Interestingly, a closer look reveals occasional disconnects between Bitcoin’s price and mining revenue. This was largely due to the rise of Ordinal inscriptions (BRC-20 tokens) creating additional revenue for miners. These inscriptions, while controversial regarding their network “value”, hint at the exciting potential of Bitcoin’s platform capabilities and Bitcoin MEV – which refers to the additional revenue a miner can extract by prioritising transactions with higher fees into new blocks. 

However, the Bitcoin community remains divided over Ordinal inscriptions, with concerns about network congestion and high fees for users, although, these inscriptions have proven lucrative for many miners.

Source: Sygnum Bank, The Block

In December, fees made up 21.7 percent of the total USD 324.83 million in miner revenue, a percentage not seen since 2017. While not the perfect answer, Ordinal inscriptions certainly show the potential of Bitcoin’s protocol innovations opening new revenue streams through transaction fees – especially as block rewards continue to decline. 

Fanny Philip, Chief Operating Officer at SATO Technologies says, ”The spikes in Ordinals’ inscriptions created pressure on block creation, leading to an increase in transaction fees. These fee hikes offset the rise in network hashrate during these months. This proved beneficial for all miners, including SATO.”

Impact on Bitcoin’s price 

Like any major event in the crypto world, the halving is likely to bring volatility to the market, with many anticipating a substantial rise leading up to – and following – the event. Meanwhile, others predict major selling pressure on Bitcoin’s price as miners seek to cover their expenses and take profits. 

That being said, it is surprising that the debate on miners influencing price still persists, despite the fact that miners represent just a tiny fraction of Bitcoin’s total circulating supply – for perspective, the top 13 publicly listed miners hold only 0.2% (41,403 BTC), while Bitcoin ETFs own 4% (845,987 BTC). When comparing the total daily miner revenue of around 916 BTC with the 417,000 BTC traded daily on exchanges, any selling pressure from miners appears almost negligible. Even when miners sell, these funds often go towards operational and infrastructure upgrades, complementing the mining sector. 

There are also concerns about market concentration, with larger miners expanding their share or smaller-scale miners consolidating through mining pools. While some degree of concentration seems inevitable, it’s worth noting that larger miners have a vested interest in the network’s protection, not to mention the exorbitant costs of acquiring enough hashing power needed for a 51 percent attack – while technically possible, it is highly unlikely.

What can we draw from this?  

The halving will be challenging for many miners, who are relying on a Bitcoin rally to bail them out. Even if the price increases, it needs to outpace the rise in hashrate to offset the revenue cuts from the halving. Bitcoin is unlikely to be affected unless some extreme scenario develops, as the network has always operated fine when there have been drops in mining power.  

What we can expect is a shift in the mining sector, as the market willingly hands over its share to the lowest-cost operators, while transaction fees through Bitcoin’s platform capabilities may emerge as an important revenue stream for miners. 

The halving is a positive reminder of Bitcoin’s safe haven value, but assuming it will alone trigger a bull rally simply overlooks the confluence of market drivers that catalysed Bitcoin’s growth in 2023 – drivers that also threw lifelines to miners and put the largest North American miner Core Scientific back in business.

END

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