Bitcoin Halving Threatens Profitability of Many Miners, Report Says

Bitcoin mining is a lucrative but competitive business that requires high-end equipment, low electricity costs, and constant innovation. However, the profitability of Bitcoin mining is also affected by the periodic halving events, which reduce the block rewards by 50% every four years. The next Bitcoin halving is expected to happen in April 2024, and according to a recent report by Cantor Fitzgerald, it could pose a serious challenge for many publicly traded miners.

How Bitcoin Halving Works

Bitcoin is a decentralized cryptocurrency that operates on a peer-to-peer network of nodes that validate transactions and secure the network. The nodes that perform these tasks are called miners, and they are rewarded with newly minted bitcoins and transaction fees for each block they produce. The amount of new bitcoins per block is determined by a protocol rule that halves every 210,000 blocks, or approximately every four years. This mechanism ensures that the total supply of bitcoins will never exceed 21 million, and creates a deflationary pressure on the currency.

The first Bitcoin halving occurred in November 2012, when the block reward dropped from 50 to 25 bitcoins. The second halving happened in July 2016, when the reward was reduced to 12.5 bitcoins. The third and most recent halving took place in May 2020, when the reward became 6.25 bitcoins. The next halving is projected to occur in April 2024, when the reward will be 3.125 bitcoins.

The Impact of Halving on Mining Profitability

The halving events have a significant impact on the mining profitability, as they reduce the revenue of miners by half, while the operational costs remain the same or increase. The mining profitability depends on several factors, such as the price of bitcoin, the difficulty of mining, the efficiency of mining equipment, the electricity costs, and the competition among miners.

The price of bitcoin is the most volatile and unpredictable factor, as it is influenced by supply and demand, market sentiment, regulatory developments, and other events. The difficulty of mining is a measure of how hard it is to find a valid hash for a block, and it adjusts every 2016 blocks, or approximately every two weeks, to maintain a constant average block time of 10 minutes. The difficulty increases as more miners join the network, and decreases as some miners exit. The efficiency of mining equipment is determined by the hash rate, or the number of hashes per second that a device can perform, and the power consumption, or the amount of electricity that a device consumes. The electricity costs vary depending on the location, the source of energy, and the availability of subsidies or discounts. The competition among miners is driven by the market share, the innovation, and the strategic alliances of different mining companies.

The halving events create a situation where the revenue of miners is cut in half, while the difficulty of mining remains high or increases, and the efficiency of mining equipment becomes obsolete or requires upgrades. This puts a lot of pressure on the miners to reduce their costs, increase their hash rate, and find the most optimal locations for their operations. However, not all miners can achieve these goals, and some may be forced to exit the market or merge with other miners.

The Cantor Fitzgerald Report

Cantor Fitzgerald is a global financial services firm that provides investment banking, brokerage, and asset management services. The firm recently published a report titled “Bitcoin Mining: A Primer for Investors”, which analyzes the current state and the future prospects of the Bitcoin mining industry. The report covers various aspects of Bitcoin mining, such as the technology, the economics, the regulation, the environmental impact, and the investment opportunities.

One of the main findings of the report is that many publicly traded Bitcoin miners may face potential profitability challenges following the next Bitcoin halving event, assuming a steady Bitcoin price of $40,000. The report estimates the cost-per-coin of 13 major mining companies, based on their current and projected hash rate, power consumption, electricity costs, and other cash expenses. The cost-per-coin reflects the total costs that a miner would incur in producing a single bitcoin, and it is used as a proxy for the profitability of mining.

According to the report, only two of the 13 companies would be able to mine profitably post halving, while the rest would incur losses or break even. The two profitable miners are Bitdeer and CleanSpark, which have the lowest cost-per-coin of $17,744 and $36,896, respectively. Bitdeer is a cloud mining platform that allows users to rent mining power from various mining farms around the world, while CleanSpark is a software and energy company that provides microgrid solutions for Bitcoin mining. Both companies benefit from low electricity costs and high efficiency of their mining equipment.

The rest of the companies have a cost-per-coin ranging from $40,320 to $62,276, which exceeds or barely meets the assumed Bitcoin price of $40,000. These companies include Marathon Digital, Riot Platforms, Bitfarms, Hive Blockchain, Bit Digital, DMG Blockchain, Argo Mining, and Hut 8 Mining. These companies are mostly based in North America, and they rely on their own mining facilities or hosting services. Some of these companies have high electricity costs, while others have low hash rate or high cash expenses.

The report concludes that the Bitcoin mining industry is highly competitive and dynamic, and that the miners need to constantly adapt to the changing market conditions and technological innovations. The report also suggests that the investors should consider various factors when evaluating the mining companies, such as their growth potential, their operational efficiency, their environmental impact, and their valuation.