Only the miners with the best tools and the lowest energy costs will make it through the event that happens every four years.
Once rewards are cut in half in a year, the hashrate, which measures how much computing power is on the network, is expected to drop by a lot.
About once every four years, the reward for mining a Bitcoin block correctly is cut in half. This event, called “the halving,” makes Bitcoin less likely to increase in price. At the moment, the prize is 6.25 BTC per block, which is worth $170,000. In April 2024, it will go down to 3.125 BTC per block, which is worth $85,000.
Wolfie Zhao, head of research at the mining consulting firm Blocksbridge, said publicly traded miners spend between $10,000 and $15,000 per bitcoin on mining right now. After the halving, these prices will double, bringing the breakeven point for miners to $20,000 to $30,000.
“If bitcoin isn’t seriously above $30,000, many of them could be mining at a gross loss,” he said.
JPMorgan, a big company on Wall Street, said that after the half, it could cost as much as $40,000 to mine Bitcoin.
With the cost of mining being so high and the price of Bitcoin not going up much, only the most cost-effective miners will be able to stay in business. Others will have to shut down.
Kerri Langlais, chief strategy officer at bitcoin miner TeraWulf (WULF), said, “Energy cost and equipment efficiency will determine winners and losers post-halving.”
The split will make it harder for operators whose costs per bitcoin are higher to stay in business. Zhao has put together data that shows that Stronghold Digital Mining (SDIG), Cipher Mining (CIFR), and Riot Platforms (RIOT) have the lowest costs of production. In the first quarter, Stronghold cost $8,200, Cipher cost $8,600, and Riot cost $10,400 per bitcoin.
Efficiency matters
Since margins are going to get smaller, “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.
During the bull market of 2021, the focus of the industry was on getting as much hashrate online as possible. Now, the focus is on making operations and machines as efficient as possible.
Once the hashrate drops “a lot” right 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,” according to Ethan Vera, chief operating officer at mining services company Luxor Technologies.
New investments
Papanastasiou also said that investments in new machines have been “measured,” since the economics of mining for the coming year are still unclear. Jaran Mellerud, an analyst at Luxor Technologies, that the cost of capital in the mining business is already twice as high as it is in the precious metals sector.
Even though the crypto bear market has been going on for a few months, hashrate and difficulty (a measure of how easy it is for miners to find a block of bitcoin) have steadily increased over the past few months. Both numbers, which are important ways to measure how profitable the miners are, have been setting new all-time highs all through 2023.
But the rising hashrate can be a sign of how the economy was a few months ago. Because mining facilities and tools take a long time to develop, most of the growth in hashrate comes from investments made in the past.
Still, B Riley analyst Lucas Pipes told investors in a note that talks about new projects have picked up in 2023. Investing in new buildings isn’t as high as it was in 2021, but compared to the fall of 2022, when the price of Bitcoin was around $15,000, things are better for the business.
If the price of Bitcoin goes up or energy prices go down a lot, miners could make more money and not have to shut down after the half. Bloomberg Intelligence and Matrixport say that the splitting could make the price of Bitcoin go up by up to 81%.
Langlais said, “Historically, the rise in the price of BTC has outpaced the impact of the halving. Time will tell what happens in this cycle”.
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