The Bitcoin Halving Squeeze: Will Bitcoin Mining Remain Profitable?
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The Bitcoin Halving Squeeze: Will Bitcoin Mining Remain Profitable?

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1 month ago

The halving is here, and it's about to put the profitability of Bitcoin mining operations to the ultimate test. Who will survive the great halving squeeze?

The Bitcoin Halving Squeeze: Will Bitcoin Mining Remain Profitable?

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The countdown is on - in just a few days, the crypto world will experience one of the most important events: the Bitcoin halving. Miners around the globe are bracing for impact as their reward for solving complex computations gets slashed in half overnight.

This halving isn't just some boring technical event. It's a genuine shock to the system that will help the economics of an entire industry.

Some miners won't be able to absorb the blow of having their income cut by 50% and will get driven out of the game entirely, while the braced survivors will look to seize the opportunity to grow their slice of the ever-more-profitable crypto pie.

Do you know why and how does it happen? Let’s dive a little deeper!

How transactions are verified is the core element in the design of any blockchain. It directly ties to the security of the chain. Bitcoin relies on Proof-of-Work (PoW), a consensus mechanism where the participants on the network compete to successfully verify new data on the chain.

It works like this: a network of miners, entities with significant computing power, are constantly competing in a mathematical battle royale. They run millions of calculations, trying to be the first to solve an extremely complex crypto-puzzle tied to the next block of transactions.

These miners relentlessly crunch the numbers, their powerful machines operating at high speeds. Eventually, one miner finds the solution first and wins the right to add that new block to Bitcoin's unchangeable blockchain.

Their reward? Freshly minted Bitcoins. The immense computing power required to regularly solve these crypto puzzles is what fortifies Bitcoin's security.

Any attacker would need to control more combined computing resources than the entire mining network just to stand a chance - an investment so massively costly that it effectively deters most attacks.

Source: Euromoney (link)

To keep the supply of Bitcoin in check over time, the rewards paid out to miners are halved every 210,000 blocks in an event known as the Halving. However, this event also has certain implications for the profitability of Bitcoin miners.

The Great Bitcoin Halving

Bitcoin's protocol has an emission schedule that governs the flow of new coins into circulation. And every 4 years or so, like clockwork, it triggers the Halving - where those mining rewards get slashed by 50%.

It's a core mechanism that applies deflationary pressure on Bitcoin's supply. By systematically constricting the issuance of new coins over time, it stokes demand as increasing scarcity kicks in, as we've witnessed in previous cycles.

The first Halving took place way back in 2012, with the second in 2016. The most recent one hit in May 2020 amid the chaos of the COVID pandemic. Now the fourth Halving is projected to strike between April 20-22, 2024.

The upcoming Halving event will cut mining rewards from 6.25 BTC to 3.125 BTC per block, halving the new Bitcoin supply being injected into the ecosystem.

Source: CoinDesk (link)

On the demand front, Halving events generally lead to higher demand due to the increased scarcity of coins. Additionally, Halving events have generally preceded significant increases in Bitcoin prices.

Mining Empires: Who Controls Bitcoin's Hash Rate?

As Bitcoin and crypto grew bigger, Bitcoin mining transformed from something people could do on their home computers into a huge specialized industry. Only industrial-scale equipment and facilities can effectively compete now.

Big corporations dominate the Bitcoin mining scene these days, especially in the USA which is home to some of the largest public mining companies like Marathon Digital, Riot Platforms, and Hut 8. However, the USA accounts for only 38% of the network’s hash rate, while a significant 21% resides in China.

Mining pools also play a role in the network by consolidating computational power within a group of individuals or small companies to stay competitive against larger and more advanced miners. That said, rewards are still paid out as a proportion of power contributed, meaning that for individuals to profit, a significant level of investment is still required in specialized hardware.

Bitcoin ASIC Price Index (Source: The Block)

The Rising Costs and Challenges of Bitcoin Mining

Bitcoin mining has become more expensive over the past decade due to higher electricity costs and increased energy usage. However, the prices of the specialized ASIC mining rigs have dropped over 70% from their peaks in 2022, making it cheaper for big miners to boost their hash rate significantly.

Another factor to consider is the rising hash rate, which in turn drives up the difficulty set by the network. Difficulty is a measure that determines how long it takes miners to solve each block's hash. This difficulty setting is used to maintain the target block time of 10 minutes for Bitcoin. As such, with increases in hash rate, the difficulty has also been rising, making it harder for smaller mining companies to compete with larger incumbents.

Bitcoin Network Hash Rate (Source: YCharts)

Bitcoin Average Difficulty (Source: YCharts)

Potential Impact of Bitcoin Halving on Miners

As the Halving happens, if Bitcoin's price stays flat, miners will immediately see their mining revenues drop because of the reduced rewards.

The less efficient miners and those with limited resources are likely to struggle and may not be able to withstand this short-term income decrease. Some of these smaller miners may end up getting acquired by larger miners or merging with other small players, just to try and survive.

But the big miners who planned ahead and invested in upgrading their equipment will benefit after the Halving by taking advantage of the difficulties hitting their weaker competitors. For example, Marathon Digital, a leading mining company, acquired several new mining facilities early in 2024 to prepare for the Halving.

Other potential strategies for miners to remain profitable post-halving could include switching to mine other cryptocurrencies that use Proof-of-Work and may be less competitive. Smaller miners could also band together and merge their computing power into mining pools to better compete against the major players. Using renewable energy sources and operating in locations with cheaper costs or cooler temperatures may also help some Bitcoin miners maintain profitability.

Survival of the Biggest

Over time, the Bitcoin mining industry will likely find a new equilibrium between Bitcoin's price and miner profitability. The weaker, inefficient miners will likely go out of business or get absorbed by the larger mining operations. And the remaining miners will become more and more efficient. If mining profitability drops so low that even the biggest mining giants can't turn a profit, the difficulty level will gradually adjust downward based on the network's reduced total computing power. This will continue until a new equilibrium emerges where mining is profitable enough to properly secure the network.

Conclusion

In summary, this upcoming Bitcoin Halving will probably cause miners' revenues to drop significantly in the short term, squeezing their profit margins. The weaker, underprepared miners likely won't survive. But the miners that are well-positioned will keep operating, and may even use this as an opportunity to grow bigger by acquiring struggling mining companies or facilities.

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