6 Ways the Halving Will Affect Bitcoin Mining

Contrary to popular belief, this halving is unlikely to cause a huge drop in the network’s hashrate. After Bitcoin’s first three halvings, the hashrate dropped by 25%, 11% and 25%, and it seems that many analysts and miners are expecting (or hoping for?) a similar hashrate reduction this time around.

I agree with Pennyether’s prediction that the upcoming Bitcoin halving is expected to cause a modest decrease in the hashrate, ranging from 5 to 10%. This prediction is also not far from that of Hashrate Index, which stands at 3-7%.

Jaran Mellerud is CEO of Hashlabs Mining. This op-ed is part of CoinDesk’s “Future of Bitcoin” package, published to coincide with the Halving in April 2024.

This cautious forecast stems from the current high profitability of Bitcoin mining, driven by its high price, and the observation that around 70% of Bitcoin’s hashrate has been set since January 2022, operating under mining economics that have been less favorable at times than what is now expected is expected. – halving.

Moreover, the hashrate is expected to quickly bounce back from this slight drop. In the past three halvings, the network recovered its pre-halving hashrate levels within an average of 57 days. This trend highlights an important perspective: halvings should not be viewed as events that lower the hashrate, but rather as brief pauses in the hashrate’s relentless upward trajectory.

The hashrate’s robustness is further strengthened by the constant efforts of miners to update their equipment with the latest and most efficient models. This strategy is expected to not only compensate for any short-term reductions in hashrate, but is also likely to lead to a significant increase in hashrate in the coming months.

Essentially, the upcoming Bitcoin halving is likely to be a brief hiccup in the network’s hashrate trajectory, rather than a significant setback.

Data from CoinMetrics highlights that most of the industry currently operates with relatively inefficient machines such as the Antminer S19J Pro. These miners need an operating cost of $0.05/kWh or lower to maintain healthy gross profit margins after halving.

However, with the average hosting rate in the United States sitting just under $0.08/kWh as indicated by Hashrate Index, many US-based miners may face cash flow challenges after the halving and thus be forced to undertake massive fleet upgrades.

Bitmain’s launch of its new machines, including the S21, T21 and S21 Pro – each boasting efficiencies under 20 J/TH – arrives just in time for the halving. This development prompts many US-based hosting providers to force their customers to switch from S19J Pro to S21 models. Given the high hosting fees in the US, this pressure can be seen as a necessity rather than a choice.

Referring to the chart above, it is clear that the S19J Pro models are unlikely to generate positive cash flow when offered at $0.08 per kWh, as their direct bitcoin production costs stand at $75,000. Thus, miners facing higher operational expenses should switch to more efficient hardware, such as the Antminer S21 or similar models, to maintain profitability.

Although upgrading to the latest machines makes it possible to continue operations even in high-cost environments, it is hardly a viable long-term strategy. The need to constantly update hardware, often before the previous investments are recouped, highlights the unsustainability of such an approach.

My underlying message is clear: if you have to use the latest generation of hardware to stay cash flow positive, your operating costs are too high.

Bitcoin mining is one of the most free and competitive markets worldwide, a market that Adam Smith himself would admire. This inherent competitiveness drives a relentless pursuit of innovation, especially during challenging periods such as the halving events. In response to the pressure exerted by the halving, miners are adopting some of the most inventive strategies to maximize the utility of their existing resources.

One such strategy is underclocking, a process in which the machines’ electricity consumption is reduced to increase energy efficiency and reduce costs. This process, which can be facilitated by third-party firmware such as LuxOS, greatly improves machine efficiency—a critical adjustment in an environment where margins are thin. The movement towards underclocking is likely to gain momentum.

Moreover, the drive for increased profitability extends beyond operational adjustments to include new revenue-generating approaches. A compelling example comes from Hashlabs in Finland, where we are undertaking a project that leverages multiple revenue streams to drive mining profitability.

In Finland, we have diversified our revenue streams to include selling waste heat from our miners to a district heating system, earning fees to contribute to the stabilization of the electricity grid, and strategically selling electricity back to the market during periods of high spot prices. These additional revenue channels significantly strengthen the profitability of our mining operations.

The upcoming halving will act as a catalyst, driving miners worldwide to emulate Hashlabs by exploring and implementing creative strategies to increase their profits.

The fierce competitiveness that defines the current state of the mining industry spurs many, especially public miners, to new horizons. There is a growing move towards AI computing, with companies such as Iren and Hive Digital Technologies leading the way.

The trend towards diversification is expected to gather momentum in the challenging coming months. Yet the dynamics of the mining industry are cyclical. Predictions for a bull market in 2025 indicate a reversal of this diversification trend. As the value of bitcoin potentially rises, miners may set aside their diversification strategies in favor of maximizing returns from mining, and dive back with renewed vigor into the struggle to extract value from each hash.

This shift between diversification and focused mining reflects the broader ebb and flow of the market. Miners’ strategies evolve with the market, balancing between seizing immediate opportunities in new industries and preparing for the next surge in bitcoin mining profitability.

Currently, the United States owns a significant share of the global hashrate, accounting for 40%, while China and Russia are also key players, contributing 15% and 20% respectively. However, the industry is gradually moving towards a more globally distributed model, driven by the constant search for cost efficiency, especially cheaper electricity.

As miners prepare for the upcoming halving, many are exploring burgeoning mining markets across Africa, Latin America and Asia where electricity is unusually cheap. For example, Bitfarms is making progress in Argentina and Paraguay; Bitdeer expands its capacity in Bhutan; Marathon enters the United Arab Emirates and Paraguay; and Hashlabs offers hosting solutions in Ethiopia.

The impending halving event acts as a catalyst for hashrate migration, forcing miners to venture beyond developed countries to secure more economical electricity sources. This move to a more geographically decentralized mining network is poised to have a profoundly positive impact on Bitcoin. By spreading the hashrate more evenly around the world, Bitcoin mining will not only become less susceptible to local regulatory risks and power cost fluctuations, but also more closely align with the decentralized ethos that underpins Bitcoin itself.

The upcoming Bitcoin halving is eagerly awaited as a potential trigger for the next bull market. Still, considering the current annualized issuance rate at an already paltry 1.6%, and with nearly 94% of all Bitcoin already in circulation, the expected supply shock of this halving is likely to have a minimal impact on the bitcoin – have price

The impact of the negative supply shocks in earlier halvings was large, especially during the first halving when the annualized issue fell from 25% to 12.5%, and the second when it fell from 8.4% to 4.2%. However, in this upcoming halving, the decrease from 1.6% to 0.8% represents a much less significant shift compared to the dramatic changes observed in previous cycles.

Don’t misunderstand my point of view; I still foresee a bull market in the wake of this halving. However, growing demand, and not the meager drop in supply, will be the main factor fueling the price rise.

I like Dylan LeClair’s analogy of the halving as a “global advertisement”, suggesting that its main effect on bitcoin’s price is not so much the immediate result of reduced supply, but rather the increased media attention and investor enthusiasm what it generates. This heightened awareness could stimulate demand, turning the halving into a self-fulfilling prophecy of bullish market sentiment.

This perspective also aligns with insights from Daniel Polotsky who questions the continued relevance of bitcoin’s four-year cycle. While fluctuations in demand will continue, the impact of supply changes is becoming increasingly negligible.

At this point, the issuance rate of Bitcoin has become so low that its supply has a minimal effect on its price, which is now mainly influenced by demand. While the story surrounding the halving is still a strong driver and is expected to propel bitcoin into a new bull market, this influence is likely to diminish in the future. As a result, it is likely that bitcoin will eventually disconnect from the four-year halving cycle.

I have fond memories of the halving in 2020. The atmosphere within the Bitcoin community was electric with anticipation as we approached the moment when the block subsidy would be cut in half. This pivotal event unleashed an incredible wave of bullishness during the summer of 2020, paving the way for the monumental bull market of 2021. Although I remain skeptical that the modest reduction in supply resulting from this halving will significantly tip bitcoin’s price equilibrium change, the prospect of this sparking greater demand and investor enthusiasm is something I eagerly await.

From a miner’s point of view, the halving offers more than just a potential market rally; it is an opportunity to introspect and innovate within our operations. This prompts us to explore new methodologies to reduce costs and improve efficiency, to ensure our survival and success in this highly competitive field. The halving is not only a test of resilience, but a catalyst for evolution within the mining community.

As we look forward to the next halving, it is essential to remember the core ethos of Bitcoin. Bitcoin was not created for the miners; his heart beats for the hodlers. Miners undoubtedly play a crucial role in serving the Bitcoin network and ensuring its robustness. Yet the true spirit of Bitcoin lies in its ability to empower holders, providing a decentralized alternative to traditional financial systems. The anticipation and excitement for the halving resonates not only among miners, but throughout the entire community of Bitcoin enthusiasts and investors.

So, as we approach this momentous event, let’s embrace the halving with open arms and a spirit of innovation. It is a reminder of the dynamic landscape of Bitcoin, a testament to its resilience, and a beacon of the exciting developments yet to come. To all hodlers and miners, let’s get ready for the halving. Bring it on!