🌎 Bitcoin Miners Face Profit Squeeze Post-Halving: Challenges Ahead

Post-halving, Bitcoin (BTC) miners face a squeeze as rewards drop and costs soar. Can innovative strategies and market dynamics help them stay profitable?

The Bitcoin halving is an event built into the Bitcoin protocol that occurs approximately every four years. It results in the reduction of the reward miners receive for adding new blocks to the blockchain. The latest halving, which took place in April 2024, slashed the block reward from 6.25 BTC to 3.125 BTC.

This event, central to Bitcoin’s deflationary nature, impacts the supply of new Bitcoins and reverberates throughout the Bitcoin mining industry and the broader crypto market, introducing a mix of challenges and opportunities. This article will examine the post-halving world and how the Bitcoin mining sector can adapt.

Squeeze on Miners: Understanding the Challenges

Reduced Rewards

One of the immediate impacts of the halving was the cutting down of profit margins for miners. By slashing miners’ block rewards, the halving directly impacted their earnings since they started receiving fewer coins for their efforts.

At the time of writing, the dollar value of Bitcoin’s block reward was about $215,000, with the cryptocurrency priced at about $68,800 per coin. However, before that, Bitcoin mostly traded around the $60,000 level, meaning a typical block reward would have been worth less than $200,000.

“Everyone is feeling the squeeze post halving…We will see smaller, less efficient mining setups struggle or collapse. Consolidation will continue, sparking fears about centralization.”

— Manthan Dave, Palisade co-founder

Bitcoin Price Dynamics: Impact on the Mining Ecosystem

Post-halving, miners needed Bitcoin prices to be high for the potential profits to justify the significant energy costs associated with mining. In such a case, new miners would be encouraged to join the network, while existing ones may be motivated to expand their operations and enhance energy efficiency.

On the other hand, dropping Bitcoin prices could quickly push miners into losses, a situation that could force less efficient miners out of the market and reshape the mining sector in the process.

The latest figures from market analysts show that as of June 3, the average Bitcoin mining cost was about $78,115, against a Bitcoin price of $68,804.

It means that the average mining costs to Bitcoin price ratio was about 1.14, which may have translated into slim pickings for many BTC mining operations.

According to a recent survey, a portion of less profitable mining machines are expected to be shut down. Furthermore, some miners are expected to relocate to regions where they can access cheaper electricity.

Increased competition among miners often intensifies as they vie for a smaller pool of rewards. This means miners with more efficient operations, access to cheaper energy sources, or economies of scale may have a competitive advantage over their counterparts.

“Miners that are exiting the Bitcoin ecosystem due to cost reasons are unlikely to exit crypto itself. They are likely to reuse their hardware and switch to mining on other chains or redeploy capital into other operations such as staking.”

— Manthan Dave, Palisade co-founder

Network Hashrate and Mining Difficulty Adjustment

When profit margins drop and force some mining operations to shut down or readjust, it invariably affects Bitcoin’s network hashrate. The network hashrate is the total computational power dedicated to mining and processing Bitcoin transactions.

Generally, when Bitcoin’s price rises, the hashrate also increases as mining becomes more profitable, drawing in more participants and boosting computational power. Conversely, if the hashrate falls, miners shut down their equipment because they can no longer make profits.

The current hashrate is 612.99 EH/s, which is still below the all-time high seven-day moving average of 629.75 EH/s recorded in April 2024. However, predictions indicate that the Bitcoin hashrate could reach 700 EH/s by 2025.

The Bitcoin protocol also has a built-in difficulty adjustment mechanism that usually kicks in to either make it harder or easier to mine BTC, depending on the prevailing situation. This adjustment occurs approximately every two weeks and is based on the time it took to mine the previous 2016 blocks. It aims to maintain an average block time of about 10 minutes at all times.

Possible Remedies

Jurisdictional Arbitrage

Experts believe that jurisdictional arbitrage, which is 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 optimize their operations.

“Jurisdictional arbitrage is a strong lever to pull for new entrants, considering it is already quite difficult and capital intensive to get started. Regulatory clarity in a jurisdiction where electricity costs are low can open up opportunities for new companies to launch mining operations.”

— Manthan Dave, Palisade co-founder

Different regions offer varying levels of regulatory clarity and incentives, which could influence where miners choose to set up their operations. For instance, countries with low electricity costs and favorable regulatory environments should become attractive hubs for mining activities after the halving.

There has been a noticeable influx of mining operations in regions like Texas, Kazakhstan, and Ethiopia, where electricity is relatively cheap and regulatory frameworks are conducive to mining. Conversely, strict regulations and high energy costs in other areas are expected to drive miners to relocate, reshaping the global distribution of mining power.

Diversification and Adaptation

In the face of halving-induced pressures, analysts also expect diversification to become a pivotal strategy for miners. It can take several forms, from expanding into other cryptocurrencies to integrating additional revenue streams, such as offering cloud mining services or leveraging excess heat from mining operations for other industrial purposes.

For instance, some miners have ventured into renewable energy projects, transforming excess energy into Bitcoin. Others are exploring vertical integration, encompassing everything from mining hardware production to setting up dedicated energy facilities.

The bottom line with all these strategies is to not only enhance profitability but also possibly contribute to the resilience of mining operations.

Spot Bitcoin ETFs: A Game-Changer in Market Dynamics

“Spot Bitcoin ETFs are a game-changer; they make it easy for institutions and investors to hold Bitcoin for the long term without the need for managing private keys. This consistent buy pressure will counteract the sell pressure from miners, leading to a more stable and bullish Bitcoin market.”

— Manthan Dave, Palisade co-founder

Market watchers view the introduction of spot Bitcoin ETFs as having the potential to significantly influence the dynamics around Bitcoin. The products offer a new avenue for investment and have attracted institutional investors, who may provide a stabilizing effect on the Bitcoin market.

Furthermore, the increased accessibility and legitimacy brought by ETFs could lead to reduced volatility, a long-standing issue within the crypto market. A more stabilized market could mean better prices and, inevitably, better profit margins for miners.

Analysts have also suggested that ETFs can potentially impact investor sentiment, instilling greater confidence and encouraging more substantial capital flows into Bitcoin. This influx of institutional money can provide the liquidity needed to support market stability, benefiting not just investors but miners as well.

Runes to the Rescue?

Another interesting development for BTC miners post-halving has been the launch of the Runes protocol on the Bitcoin network. The protocol, whose introduction coincided with the fourth Bitcoin halving event, helps create fungible tokens on the Bitcoin network by using its block spaces more efficiently than the BRC-20 protocol.

The increased transaction volume from Runes etchings helped maintain miner revenue for a while, with miners raking in a total of 2,253 BTC in fees in just the first two weeks following the Runes launch.

Data from Dune Analytics showed that more than 80% of transactions on the Bitcoin network were Runes-related, with actual BTC transactions dropping to less than 20% of the total. The increased number of transactions meant increased network fees, which translated to more money for miners. However, the windfall seems to have been short-lived, with subsequent figures indicating that the number of Runes transactions has been consistently dwindling.

Forecasting the Future: Bitcoin’s Trajectory

Predicting Bitcoin’s price trajectory post-halving involves analyzing various market trends and factors. Historically, Bitcoin’s price has experienced significant appreciation following halvings, driven by reduced 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 perspectives on Bitcoin’s future.

Some foresee continued growth fueled by increasing adoption and technological advancements. Others have cautioned against potential pitfalls, such as regulatory crackdowns and market saturation.

Regardless, the long-term outlook for Bitcoin and the mining ecosystem remains optimistic, with experts expecting the price of BTC to get close to the $100,000 mark before 2025.