After the halving, Bitcoin (BTC) miners face pressure as rewards fall and costs rise. Can innovative strategies and market dynamics help them stay profitable?
Bitcoin halving is an event built into the Bitcoin protocol and occurs approximately every four years. This results in a decrease in the reward miners receive for adding new blocks to the blockchain. The last halving, which occurred in April 2024, reduced the block reward from 6.25 BTC to 3.125 BTC.
This event, which is pivotal to the deflationary nature of Bitcoin, impacts the supply of new Bitcoins and reverberates throughout the Bitcoin mining industry and the broader cryptocurrency market, presenting a mix of challenges and opportunities.
This article will address the post-halving world and how the Bitcoin mining sector can adapt.
Pressure on miners: understanding the challenges
Reduced rewards
One of the immediate effects of the halving was to reduce profit margins for miners. By reducing miners' rewards, the halving directly affected their profits since they began receiving fewer coins for their efforts.
At the time of writing, the dollar value of the Bitcoin block reward is around $215,000, with the price of the cryptocurrency at around $68,800 per coin. However, before that, Bitcoin was mostly trading around the $60,000 level, meaning a typical block reward would be worth less than $200,000.
In a conversation with crypto.news, Manthan Dev, co-founder of Ripple-backed cryptocurrency custodian Palisade, mentioned that reduced rewards could lead to smaller, less profitable mining operations being shut down or forced to join others.
In his opinion, such a scenario could lead to greater centralization of the Bitcoin network as a much smaller and larger number of participants would be involved in its operation.
“Everyone is feeling the pressure after the halving… We will see smaller, less efficient mining rigs struggle or collapse. Consolidation will continue, raising concerns about centralization.”
Manthan Dev, Co-Founder, Palisade
Bitcoin Price Dynamics: Impact on the Mining Ecosystem
After the halving, miners needed Bitcoin prices to be high for potential profits to justify the large energy costs associated with mining. In such a case, new miners will be encouraged to join the network, while existing ones may be incentivized to expand their operations and enhance energy efficiency.
On the other hand, falling Bitcoin prices could quickly push miners into losses, a situation that could force less efficient miners to exit the market and reshape the mining sector in the process.
Last Numbers From market analysis firm MacroMicro provides a snapshot of the sometimes unsustainable mining costs. Their data shows that as of June 3, the average cost of mining Bitcoin was around $78,115, versus Bitcoin's price of $68,804.
This means that the average mining costs to Bitcoin price ratio was around 1.14, which may translate into negligible gains for many Bitcoin mining operations.
According to another Quencher It is expected that a portion of the less profitable mining machines will be shut down. Furthermore, some miners are expected to move to areas where they can get cheaper electricity.
For example, February 7 Bloomberg a report He noted that about 21 Bitcoin miners have struck deals with the Ethiopian government to move their operations to the East African country.
Increased competition
After the halving event, competition between miners often intensifies as they compete for a smaller pool of rewards. This means that miners with more efficient operations, access to cheaper energy sources, or economies of scale may enjoy a competitive advantage over their counterparts.
This increased competition may put pressure on less efficient miners to improve their operations or exit the market altogether.
However, Manthan Dave believes that players in the Bitcoin mining space affected by increased competition will not necessarily leave the sector completely. He believes they can refocus their energy on mining and minting other cryptocurrencies.
“Miners who exit the Bitcoin ecosystem for cost reasons are unlikely to exit the cryptocurrency itself.” Dave pointed out. “They will likely reuse their hardware and switch to mining on other chains or redeploy capital into other operations such as staking.”
Network hash rate and mining difficulty adjustment
When profit margins decrease and some mining operations are forced to shut down or modify, it invariably affects the hash rate of the Bitcoin network. The network hash rate is the total computational power allocated to mining and processing Bitcoin transactions.
In general, when the price of Bitcoin rises, the hash rate also increases as mining becomes more profitable, attracting more participants and boosting computational power. Conversely, if the hash rate drops, miners shut down their equipment because they can no longer make profits.
According to Blockchain.com, the current hash rate is 612.99 EH/s, which is still below the all-time seven-day moving high of 629.75 EH/s recorded in April 2024.
However, the CoinShare report we cited earlier predicted that Bitcoin hash rate could reach 700 EH/s by 2025.
The Bitcoin protocol also has a built-in difficulty adjustment mechanism that usually works to either make BTC mining more difficult or easier, depending on the prevailing situation.
This adjustment occurs approximately every two weeks and is based on the time taken to mine pre-2016 blocks. It aims to keep the average block time around 10 minutes at all times.
Possible treatments
Judicial arbitration
Experts believe that forensic arbitrage, the practice of taking advantage of differences in regulations, laws and costs between different countries or regions, could be a viable strategy for miners seeking to improve their operations.
Manthan Dev, co-founder of Palisade, points out that forensic arbitrage could also be an important avenue for new entrants to the Bitcoin mining sector, given the significant difficulty and capital intensity involved in starting such operations.
“Foreign arbitrage is a powerful tool to attract new entrants, considering that it is very difficult and capital-intensive to get started.” Dave pointed out. “Regulatory clarity in a jurisdiction where electricity costs are low could open opportunities for new companies to start mining operations.”
Different regions offer different levels of regulatory clarity and incentives, which can influence where miners choose to base their operations. For example, countries with low electricity costs and favorable regulatory environments should become attractive centers for mining activities after the halving.
Regulatory clarity can also provide a significant advantage, reducing uncertainties and allowing miners to plan long-term investments.
There has been a notable influx of mining operations in areas such as Texas, Kazakhstan and the aforementioned Ethiopia, where electricity is relatively cheap and regulatory frameworks are conducive to mining.
Conversely, industry observers expect that stringent regulations and rising energy costs in other regions will prompt miners to relocate and, in the process, reshape the global distribution of mining energy.
Diversification and adaptation
Facing pressures from the halving, analysts also expect diversification to become a pivotal strategy for miners.
It can take many forms, from expanding into other cryptocurrencies to incorporating additional revenue streams, such as offering cloud mining services or utilizing excess heat generated by mining operations for other industrial purposes.
For example, some miners, such as those in Texas Lanciumthey ventured into renewable energy projects, converting excess energy into Bitcoin.
Others, such as Bitfarms, are exploring vertical integration, which includes everything from producing mining hardware to creating dedicated energy facilities.
The bottom line in all these strategies is to not only enhance profitability but also contribute to the resilience of mining operations.
Spot Bitcoin ETFs: A Game Changer in Market Dynamics
Market watchers also believe that the introduction of spot Bitcoin ETFs has the potential to impact the dynamics surrounding Bitcoin significantly. The products provide a new way to invest and have attracted institutional investors, who may end up providing a stabilizing effect in the Bitcoin market.
“Spot Bitcoin ETFs are a game-changer; they make it easier for institutions and investors to hold Bitcoin over the long term without having to manage private keys. This continued buying pressure will counteract selling pressure from miners, leading to a more stable and bullish Bitcoin market.”
Manthan Dev, Co-Founder, Palisade
Furthermore, the increased accessibility and legitimacy offered by ETFs can lead to reduced volatility, a long-standing problem within the cryptocurrency market. A more stable market can mean better prices and, inevitably, better profit margins for miners.
Analysts have also suggested that ETFs could influence investor sentiment, instilling greater confidence and encouraging more significant capital inflows into Bitcoin. This influx of institutional funds can provide the liquidity needed to support market stability, benefiting not only investors but miners as well.
Sharing his insight on the matter, Manthan Dev noted that in the long run, ETFs will increase confidence in cryptocurrencies and reduce overall market volatility. He stated that we have yet to see the launch of an ETF, which will certainly bring in new capital given Ethereum being more environmentally viable than Bitcoin due to its much lower energy consumption. However, he warned that capital is also likely to be withdrawn from the Bitcoin ETF as investors seek diversification.
Runes to the rescue?
Another interesting case for BTC miners after the halving is the launch of the Runes protocol on the Bitcoin network. The protocol, whose introduction coincided with the Bitcoin halving event, helps create fungible tokens on the Bitcoin network using their block spaces more efficiently than the BRC-20 protocol.
This has come as a boon of sorts for BTC miners. The increased transaction volume from Runes helped sustain miners' revenues for a while, with miners earning a total of 2,253 BTC in fees in just the first two weeks after Runes was released.
Data from Dune Analytics around that time showed that more than 80% of transactions on the Bitcoin network were linked to runes, with actual BTC transactions falling to less than 20% of the total.
An increasing number of transactions means higher network fees, which translates into more money for miners. However, the windfall appears to have been short-lived, as subsequent figures from Dune indicate that the number of rune transactions is continually dwindling.
Predicting the future: Bitcoin's path
Predicting the path of the Bitcoin price after the halving involves analyzing various market trends and factors. Historically, the price of Bitcoin has seen a significant rally following halvings, driven by decreased supply and increased demand.
However, the current landscape presents unique challenges, including macroeconomic factors and evolving regulatory environments. Industry experts have offered a range of viewpoints on the future of Bitcoin.
Some expect I continued Growth is driven by increased adoption and technological advancement. Others warned of potential risks, such as stringent regulatory measures and market saturation.
Regardless, the long-term outlook for Bitcoin and the mining ecosystem remains optimistic, with experts like Manthan Dev predicting that the price of Bitcoin will approach the $100,000 mark before 2025.
“Given what is on the horizon, we will likely see Bitcoin reach $100,000 by the end of this year.” Palisade co-founder predicted.
