Crypto fans are hoping that a once-every-four-years event, in this case – Bitcoin halving, that modifies the fundamental code of the largest cryptocurrency in the world, will prolong the recent market upswing. But the achievement could also spell the end for some Bitcoin miners.
The quadrennial occurrence, rather menacingly known as “the Halving” or “Halvening,” is typically followed by exponential increases in the price of Bitcoin. According to reports , the token increased by roughly 8,450%, 290%, and 560% each of the previous three manifestations in 2012, 2016, and 2020.
Under the alias Satoshi Nakamoto, a computer programmer or group of programmers created Bitcoin in 2009. As the name implies, halvings reduce by half the amount of Bitcoin that each miner can receive for utilizing specialized, high-power-exploiting computers to verify transactions on the blockchain of the digital asset. The next halving, scheduled for April 2024, will reduce miners’ incentives from the current 6.25 Bitcoin per block, or $188,876, to 3.125 Bitcoin per block, or $94,438.
Crypto enthusiasts believe that the limited supply will assist in keeping Bitcoin’s price stable over time, or at least until 21 million tokens, the maximum amount that can ever be mined, are produced in the year 2140.
Due to price spikes following each reward halving and improvements in mining rig efficiency brought about by technological developments, miners have so far been able to make up for the cash lost when payouts are reduced.
However, the mining economy seems worse than before the next halving.
As a result of their less effective mining operations and higher expenditures, Jaran Mellerud, a crypto-mining expert at Hashrate Index, forecasted that “nearly half of the miners will suffer.”
He made reference to the break-even electricity price for the most popular mining machine, which is predicted to go from 12 cents/kWh to six cents/kWh following a halving. According to Mellerud, about 40% of miners still have higher operational expenses per kWh. He stated that smaller miners and those that outsource the operation of their mining rigs will find it difficult to survive, as will those whose running costs are higher than 8 cents per kilowatt-hour.
Wolfie Zhao, head of research at TheMinerMag, a research division of mining consultancy BlocksBridge, continued, “If you factor in everything, the total cost for some miners is well above Bitcoin’s current price.” Many miners with less productive operations will see a decline in net income.
Although the price of Bitcoin has increased by more than 80% this year to over $30,000, it is still less than half of the record high of almost $69,000 set in late 2021. The cost of production for miners has increased along with the cost of electricity, and for many of them, their debt loads are now unmanageable.
According to Ethan Vera, chief operations officer at cryptocurrency mining services provider Luxor Technologies, the worldwide mining sector has a debt of $4.5 billion to $6 billion, down from $8 billion in 2022.
This debt consists of senior debt, loans secured by mining equipment, and loans backed by Bitcoin. At the end of the first quarter, outstanding debts for 12 large publicly traded mining businesses, including Marathon Digital Holdings and Riot Platforms, were roughly $2 billion, down from $2.3 billion the previous quarter, according to statistics provided by Hashrate Index.
After China’s communist government banned domestic mining in the latter half of 2021, miners from that country moved to North America, contributing to the borrowing boom.
The financial market was one item the miners lacked, according to Zhao. “Debt financing is much more readily available in the US.”
Profit margins have also shrunk as a result of increased competition among Bitcoin miners. According to data from btc.com , mining difficulty, a measure of the computational power required to generate Bitcoin, reached a record high in June.
Bitcoin will need to increase to $50,000–$60,000 next year, according to Kevin Zhang, senior vice president of mining strategy at cryptocurrency mining company Foundry, which industry giant Digital Currency Group owns, for miners to maintain the same profit margins after the halving.
And while miners had a little break early this year when electricity prices dropped and Bitcoin’s price recovered following a protracted crypto winter, power costs are now rising once more. Texas, a significant crypto hub, is currently going through an early heat wave.
Before the halving, Bitcoin miners are taking a number of precautions to safeguard themselves, including locking in power pricing, increasing war chests, and reducing investment.
When it comes to the actual halving, Zhang explained that miners are getting ready by attempting to be more intelligent with their power bills and securing the pricing from their power providers in advance.
In order to protect its Bitcoin treasury before the halving, Hut 8 Mining Corp. signed into a $50 million credit facility last month with a division of Coinbase Global Inc. Additionally, Texas-based Bitcoin miner Lotta Yotta is shoring up six months’ worth of cash flow while reducing investments in order to get ready for the occasion, according to Tiffany Wang, the company’s CEO.
Regarding new investment in Bitcoin mining facilities, Wang texted, “During halving year, it is high risk.” “To keep the business running, it is preferable to save some money in the account.”
According to JPMorgan Chase & Co. strategists led by Nikolaos Panigirtzoglou, the halving is anticipated to ultimately double Bitcoin’s production cost to around $40,000 in a June 1 note. According to data gathered by TheMinerMag, the cost of mining one Bitcoin in the first quarter varied between around $7,200 and $18,900 among a cohort of 14 publicly-traded miners.
According to Zhao, the expenditures determined do not take into account other significant costs such debt interest payments, managerial salary, or marketing.
Everyone needs to be ready, Wang emphasized. Sadly, a large number of miners will eventually be forced out of the market.