Bitcoin’s fourth halving event challenges miners to innovate or face diminishing returns.
Bitcoin’s fourth halving event is expected to occur on April 22, at block height 840,000. Each block containing executed transactions is tagged with a block height when it is mined, which records how many blocks have been generated before it.
In this way, the block height creates a chronological digital ledger, giving Bitcoin decentralized transparency and security features to prevent double spending. This also makes it possible to implement the halving logic that occurs every 210,000 blocks on the Bitcoin network.
Bitcoin halving exists as an algorithmic currency. Unlike arbitrary central bank policies, halving can control the inflow of new Bitcoins (inflation) by reducing miners' BTC rewards in half.
The first genesis block in 2009 provided miners with 50 bitcoins. After the fourth halving, miners will receive 3.125 bitcoins for each block they mine.
The huge difference between these rewards translates into Bitcoin’s inflation rate. From over 1,000% initially to 1.7% today, Bitcoin’s inflation rate will halve again. And as fewer Bitcoins are available in the supply, the value of each Bitcoin will increase accordingly.
However, the Bitcoin halving is only one of many factors that affect the price of BTC. One of the most serious halving effects is related to Bitcoin mining profitability. If BTC rewards become so low, will it force struggling mining companies to sell Bitcoin? If so, wouldn’t the selling pressure also suppress the price of BTC?
Understanding the halving and its impact on miners
To really understand the importance of something, try to imagine what would happen without it. In the case of the Bitcoin halving, if the halving mechanism did not exist, all 21 million Bitcoins would be available at once when the Bitcoin network was launched.
In contrast, without the halving mechanism, Bitcoin's scarcity would be significantly reduced, especially considering its concept as an unproven new digital asset. However, after three halvings, Bitcoin's scarcity has successfully countered the devaluation of fiat currencies, especially when central banks manipulate money supply. In other words, halving accelerates Bitcoin's supply and demand dynamics, thereby driving Bitcoin's adoption.
As Bitcoin adoption increases, the Bitcoin mining network becomes more secure. This is because more Bitcoin miners join, thereby increasing the Bitcoin mining difficulty, which is automatically adjusted every two weeks. Bitcoin halvings usually bring multiple benefits before and after the halving as supply and demand dynamics reshuffle.
Similarly, the real purpose of Bitcoin mining difficulty is to regulate the rate at which new transaction blocks are added to the network after every 2016 blocks (about 10 minutes). Without this mechanism, the security of the Bitcoin mainnet will be reduced because miners may lose the enthusiasm to participate due to lack of incentive.
As Bitcoin mining difficulty increases, their profitability will automatically correct. If too many miners unplug, the difficulty will decrease, making mining more profitable regardless of the reduced reward. If more miners participate in the network, mining difficulty will rise, which will reduce the benefits (computing power measured in hash rate) from protecting the network.
However, the price of Bitcoin rises over time due to the scarcity of supply, and this upward trend in price balances the above effects. When the BTC mining reward is halved, miners' profitability will be hit. If the mining difficulty does not decrease, miners must improve cost efficiency by upgrading and reinvesting in operations. Therefore, the cycles these miners go through are called accumulation periods and throwing in the towel periods.
| As Bitcoin prices peaked, miners began selling to upgrade operations.
Ultimately, Bitcoin miners need to plan ahead carefully. They need to avoid overextending themselves in terms of expansion and debt, while relying on rising Bitcoin prices to help them weather the impact of the halving.
Challenges facing Bitcoin miners after 2024 halving
As of March 26, the total hash rate of the Bitcoin network has reached 614.6 million TH/s, or 614.6 EH/s. Bitcoin miners earn $0.10 per TH/s. At this price, Bitmain's latest model Antminer S21, which can reach a hash rate of 188 TH/s and consumes 3,500 watts of power, costs about $4,500.
Some machines are even more powerful and expensive, such as the Antminer S21 Hyd 335T. Faced with the cost of these machines, miners must consider the cost of electricity, cooling, maintenance, debt interest payments, and the cost of the facility itself. Those companies that fail to achieve this balance will go bankrupt, as Core Scientific experienced in 2022.
Bitcoin mining has long been unprofitable for individuals using regular PCs and laptops. They must invest in specialized ASIC machines to cope with the rising Bitcoin mining difficulty and subsequent increase in energy costs. The U.S. government, which relies on central banks and currency devaluation, is well aware of this fact.
In late January, the U.S. Energy Information Administration (EIA) began exploring ways to cripple miners’ operations. By requesting mandatory survey data on their energy consumption, the EIA will forward its findings to the Department of Energy (DoE) to develop restrictive policies.
Thanks to the swift legal action taken by the Texas Blockchain Council (TBC) and Riot, they have successfully prevented an action that could have a negative impact on Bitcoin mining. Specifically, this action could refer to measures to restrict or regulate Bitcoin mining, and this action was suspended or terminated after the relevant legal documents were filed on March 2.
Technological progress and efficiency improvement
Bitcoin's proof-of-work mechanism is one of the core elements that make up Bitcoin's value. This mechanism ensures that digital assets can be connected to the real world through actual energy consumption and hardware equipment investment. If not, people may easily create multiple cryptocurrencies at a low cost, which will cause confusion and instability in their market valuations.
But just as energy consumption is an advantage of Bitcoin, it is also a disadvantage from a political standpoint. Take, for example, Elon Musk’s revocation of Tesla’s acceptance of Bitcoin payments in May 2021, which triggered a major crash. Since then, Bitcoin mining has gone green, attracting 54.5% of its energy from sustainable sources.
In addition to using renewable hydroelectric power (such as Kryptovault in Norway), Bitcoin miners can also put excess heat to use. For example, Kryptovault uses this hot air in the wood industry to dry chopped logs. Many small mining operations have adopted this method to heat their homes.
Other miners, like Crusoe Energy Systems, integrate their operations with oil and gas drilling, utilizing excess natural gas rather than flaring it off. From a broader perspective, as the late ERCOT CEO Brad Jones noted, Bitcoin miners have even helped stabilize the power grid around the world.
At the high end of the market, Bitcoin miners are turning to the most intensive and environmentally friendly form of energy: nuclear power. TeraWulf begins construction of the Nautilus Cryptomine facility, the first Bitcoin mining operation powered by nuclear energy. At a cost of 2 cents per kilowatt-hour, TeraWulf is expected to become the most cost-effective miner in the world.
Hydrogen infrastructure is expected to be the next best solution to nuclear energy during the next halving cycle. However, the most common path to achieving cost-effectiveness remains to pool resources in mining pools.
Expectations after the halving
Bitcoin, as a means of combating currency depreciation, also provides a way for miners to survive. They upgrade their equipment through borrowing, buying time, hoping that the rise in Bitcoin prices will help them repay their debts. But the key point is that only those miners who are well prepared, equipped with the latest model rigs and enjoy favorable energy costs can survive in the fierce competition.
After all, it is they who will keep Bitcoin mining difficulty rising. Those who cannot compete will leave the network, making the task easier for competitors since network difficulty is adjusted automatically. According to Luxor’s base case, 3% of Bitcoin miners could leave the network if BTC prices remain between $66,000 and $75,000.
After all, it is these miners who will keep Bitcoin mining at a high difficulty level, so that miners who cannot compete will leave the network. Since the mining difficulty of the Bitcoin network automatically adjusts, the remaining competitors will face a lower mining difficulty, making their work easier. According to Luxor's basic forecast, 3% of Bitcoin miners may leave the network while the Bitcoin price remains in the range of $66,000 to $66,000.
In addition, Luxor expects Bitcoin difficulty to reach 725 EH/s by the end of this year. This would stabilize the hash price after the halving at $53/PH/day, which is consistent with the hash price prediction under the flat scenario.
Currently, the breakeven hash rate is $37.20/PH/day, not taking into account firmware upgrades. Other companies, such as Blockware Solutions, expect hashrate to reach approximately 670 EH/s by the end of the year, based on the 2020 halving event, which would see hashrate increase by 30%.
With this in mind, Bitcoin miners should plan for long-term scalability, such as TerraWulf's investment in nuclear power generation. At the same time, in order to protect against the risks brought by uncertainty, miners can use Bitcoin derivatives as a hedging strategy.
For example, multiple trading platforms currently offer exchange-traded futures (ETFs) as a means for miners to sell mining output in advance, similar to the practice of locking prices in traditional commodity markets. This mechanism enables miners to lock in future Bitcoin sales prices in the present, effectively avoiding the risk of price fluctuations and ensuring stable returns. The high liquidity and low transaction costs of ETFs further enhance the efficiency of miners' capital use and help improve the stability and predictability of the entire cryptocurrency market.
Having a stable recurring revenue stream is crucial for Bitcoin mining companies as it can help ease the pressure of rapidly increasing operating costs. Likewise, Bitcoin mining companies can diversify and offer enhanced cloud mining services.
in conclusion
Taken together, Bitcoin is a marvel of both software engineering and economic theory, demonstrating that monetary policy and incentives can be implemented without direct intervention by a central authority.
Bitcoin miners play a key role in this digitalization process. Although they need to follow the Darwinian principle of "survival of the fittest" and constantly adapt to environmental changes and market fluctuations during the mining process, they actually face relatively few uncertainties and unknown factors.
As Bitcoin has already experienced three halving events in history, miners and market analysts can use past data and trends to make more accurate predictions, thereby better planning future mining activities and fund management.
The only question is, which Bitcoin miners have their financial models aligned with the worst-case bear market scenario?
Currently, a core question for the Bitcoin mining industry is which miners have considered the worst bear market scenario when formulating their financial models? And whether their financial models are consistent with the worst bear market scenario? #比特币减半 #2024生存策略