Leading Bitcoin mining players have underlined the importance of efficiency to stay profitable and operational after the halving in 2024. Cointelegraph contacted several mining firms to analyze the expected effects of the Bitcoin halving on the industry and the implications for small and large-scale miners.
The Bitcoin protocol is programmed to reduce the amount of BTC rewarded to a miner for adding a block to the blockchain. Mining reward halvings take place every 210,000 blocks, and with a block added to the blockchain every ten minutes, halvings come around every four years.
The fourth halving will reduce the Bitcoin mining reward from 6.25 BTC to 3.125 BTC. The previous halvings happened in 2012, 2016 and 2020.
Cutting mining rewards is an important issue for miners, given its effects on profitability and returns on investment on hardware and overhead running costs.
Bitcoin mining efficiency in focus
The efficiency of Bitcoin mining operations will be of utmost importance during the halving. Jaime Leverton, CEO of Hut8, informed Cointelegraph that this event will force miners to boost their efficiencies in order to keep mining.
Hut8 is actively rolling out purpose-built software to increase the efficiency of its Canadian mining sites. Leverton also mentioned that the firm is hoping to finalize its plan to purchase four power plants in Ontario to power its operations, with a combined capacity of 310MW, including the former 40 MW North Bay mining site, which had to be vacated due to a lengthy legal dispute with Validus Power. Hut8 intends to purchase the said power plants from the company after it entered receivership in September 2023.
“We have always been confident in self-mining and the price of Bitcoin going up and to the right over time, and we are sure that the best-prepared miners will be able to take advantage of the upside after the halving,” Leverton explains.
Hut8 accomplished a high-profile merger with U.S. mining firm USBTC in Nov. 2023, increasing its hash rate from 2.6 EH EH/s to 7.3 EH/s in Nov. 2023.
Taras Kulyk, founder and CEO of Bitcoin mining infrastructure provider SunnySide Digital, stated that the direct correlation between the 50% reduction of block rewards and BTC price and fees is evident.
Kulyk added that the existing network of miners will continue securing the Bitcoin blockchain as long as the economic incentives pay them for their risk to do so. “The halving is already factored in by most of the larger miners. They have been expecting and pricing the halving into their projections for years now,” Kulyk says.
Colin Harper, head of research at Luxor, told Cointelegraph that efficiency is of great importance and that smaller miners may have to turn off their machines:
Harper further noted that smaller miners may suffer a drop in profitability in 2024, given the reduced BTC reward. This leads to a common point raised by many commentators – the need for a Bitcoin price surge to drive profitability during and after the halving.
Bitcoin price is a crucial factor
Adam Sullivan, CEO of Core Scientific, tells Cointelegraph that the impact of the halving will be completely dependent on the Bitcoin price and will directly influence how many miners remain active:
Due to this, Core Scientific has placed an emphasis on keeping machines running to maximize the profitability of its mining fleet. Sullivan also states that the success of miners is determined by their ability to manage the tradeoff between total terahash exposure and hardware efficiency in comparison to the market.
While some miners might be pushed to close their operations, Sullivan believes that the Bitcoin protocol will always ensure the survival of mining:
He adds that the network will adjust as certain miners exit the industry or turn off their equipment, giving a larger portion of the block reward to participants who continue mining.
Leverton agrees with these thoughts, noting that larger miners will expand their operations, sustain the network and have the potential to benefit if the Bitcoin price increases significantly after the halving.
Harper is of the opinion that the mining ecosystem won’t suffer major consequences after the halving and that the protocol design will continue to motivate miner participation:
He also emphasizes the fundamental purpose of the mining difficulty adjustment mechanism as a balancing force to maintain miner incentivization.
“This is why the difficulty adjustment exists; if Bitcoin becomes unprofitable to mine for most miners, then they will turn off their rigs, hash rate will drop, the difficulty will follow suit, and then it becomes more profitable to mine for the miners who are left,” Harper explains.
Kulyk has a more positive outlook, mentioning the introduction of Bitcoin Ordinals in 2023 and their effect on transaction fees and developer activity. Along with the increased scarcity of new Bitcoin, 2024 could see Bitcoin mining remain a profitable and sustainable economic activity.
Forget about a Bitcoin death spiral
The idea of a Bitcoin death spiral, which would involve a decrease in profitability leading to a reduction in hash rate, has been brought up in previous halving cycles. This could potentially lead to longer block times and an inability to process transactions.
In December 2023, Blockstream CEO Adam Back was confident that this would not happen. The cryptographer, who created the proof-of-work algorithm used in Bitcoin’s protocol, commented on past “catastrophe theories” during halvings. He noted that these scenarios have not taken place, and that economic data suggests miners will be in a better position in 2024.
Back also pointed out that mining firms have done extensive calculations to account for the halving, which could result in a hash rate drop and miner capitulation. He added that the least efficient miners, those with 35 to 40 joules per terahash equipment, are twice as bad in terms of efficiency.
The price of Bitcoin surpassing $40,000 in 2023 has more than doubled compared to the increase in hash rate. Back believes that the next halving could take place without a hash rate drop, which would simply reduce miner profitability to levels seen in mid-2023.
The Bitcoin mining sector faced a challenging year in 2023, with rising hash rates in the first half of the year leading to some miners closing down due to low BTC prices. Bigger players with strong financials managed to remain in operation and some even increased their capacity in anticipation of the halving and the potential price surge of Bitcoin in the 18 months after prior cycles.
Experts suggest that 2024 will depend on the price of Bitcoin and the efficiency of mining operations.
Subscribe to our email newsletter to get the latest posts delivered right to your email.
Comments