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The bitcoin mining hashrate, which represents the computing power within the network, is expected to experience a significant decline in one year when the rewards are halved.
Approximately every four years, the reward for successfully mining a bitcoin block is reduced by half. This event, commonly referred to as the halving, serves to alleviate inflationary concerns surrounding bitcoin. At present, the rewards stand at 6.25 BTC per block ($170,000), but by April 2024, they will be reduced to 3.125 BTC per block ($85,000).
The mining consultancy Blocksbridge's head of research, Wolfie Zhao, reveals that publicly listed miners are currently mining bitcoins at a cost ranging from $10,000 to $15,000 per unit. However, once the halving event occurs, these costs are expected to double, resulting in a new breakeven point for miners between $20,000 and $30,000 per bitcoin.
“If bitcoin isn’t seriously above $30,000, many of them could be mining at a gross loss,” he said.
JPMorgan, the renowned Wall Street behemoth, has projected that the expense associated with bitcoin mining may surge to an astonishing $40,000 following the halving event.
Given the exorbitant expenses involved in mining and the absence of any substantial surge in the bitcoin price, only the most economically efficient miners are expected to endure, while others will likely be compelled to cease their operations.
“Energy cost and equipment efficiency will determine winners and losers post halving,” said Kerri Langlais, chief strategy officer at bitcoin miner TeraWulf (WULF).
Operators that incur higher production costs per bitcoin will face greater challenges in navigating the effects of the halving. As per Zhao's compiled data, Stronghold Digital Mining (SDIG), Cipher Mining (CIFR), and Riot Platforms (RIOT) emerge as the most cost-effective producers, with Stronghold boasting production costs of $8,200 per bitcoin, Cipher at $8,600, and Riot at $10,400 during the first quarter.
Efficiency matters
Considering that margins are likely to shrink, “miners have begun strategizing on capital preservation, fleet efficiency, and diversification,” investment bank Stifel’s analyst Bill Papanastasiou wrote in a note in late May.
In general, the industry has shifted its attention towards enhancing the efficiency of operations and machinery, rather than solely striving to maximize the amount of hashrate deployed, as was the prevailing trend during the bullish market of 2021.
Once the hashrate sees a “large drop off” immediately after the halving, we will see “very slow growth the following months as the efficient machines replace older machines, and machines change hands to lowest cost operators,” said Ethan Vera, chief operating officer at mining services firm Luxor Technologies.
New investments
Moreover, investments in new machines have been “measured,” Papanastasiou said, given the uncertainty over the economics of mining for the upcoming year. The mining business already comes with a high cost of capital relative to other industries, double that of the precious metals sector, according to Luxor Technologies analyst Jaran Mellerud.
The lack of investment might seem counterintuitive considering that hashrate and difficulty-a measure of how easily miners can discover a block of bitcoin- has been consistently increasing in the past few months, despite the crypto bear market. Both metrics, key measures for the miners’ profitability, have been setting new all-time highs throughout 2023.
However, the rising hashrate can reflect economic conditions of several months ago. Because mining facilities and equipment take several months to be developed, the hashrate growth largely reflects investments made in previous periods.
Still, discussions for new developments have seen an uptick in 2023, said B Riley analyst Lucas Pipes in a note to investors. Investment in new buildings is subdued compared to 2021 levels, but relative to the autumn of 2022, when bitcoin prices were in their lows of around $15,000, the situation has improved for the industry.
A rally in the price of bitcoin or a major slump in energy prices could boost miners’ profitability, such that they don’t have to power off after the halving. Bloomberg Intelligence and Matrixport said that the halving has the potential to supercharge the price of bitcoin by as much as 81%.
“Historically, the rise in the price of BTC has outpaced the impact of the halving. Time will tell what happens in this cycle,” said Langlais.
