We are a short way away from the Bitcoin halving, everyone is speculating on what route the price is going to take and what fate awaits the mining community more specifically what miners are going to do.
This article will aim to specifically address what the halving really means for the mining space. Here, we shall delve into the incentive structure of the Bitcoin mining eco-system, outline what all the implications are of a miner being profitable or not and lastly present a few scenarios of what may occur after the halving.
The reason for mining existing in Bitcoin is for security purposes. The role of the miners is to make sure there are no illicit actors and to confirm transactions that occur on the network.
There are 4 key factors that affect mining and the profitability of a miner:
Hash rate: Is the measure of how much computing power is put into the Bitcoin network.
Difficulty: How difficult is it to find a hash (receive a bitcoin block reward)
Mining Hardware: The actual machine that miners use to mine
Electricity Cost: The electricity cost for the miners that have to run their mining machines
If the hash rate is very high it means that the Bitcoin network is very secure and that a lot of mining power exists (many miners or many strong mining machines) to confirm transactions; this is of course a good thing for the network as it becomes safer. However, the Bitcoin network would like the blocks, on average, to be mined every 10 minutes to have a consistent inflation rate of roughly 4 years, thus the 2nd factor ‘difficulty’ comes into play.
The difficulty regulates how difficult/ arduous it is for miners to find a hash, meaning that the more difficult it is, the more computing power is needed to actually solve the hash. (solving the hash gives the miners the block reward)
This brings us to the 3rd factor, the mining hardware. Just like with retail computers, you have more and less powerful computers. The same dichotomy exists with mining machines, you have more dated machines such as the S9’s and newer machines such as the S17’s that produce 300% more hash power.
Lastly, miners are in the business of mining and receiving the block reward, which currently is that 12.5 BTC, for their computing power. Naturally, these miner’s are driven by profit, the ability to calculate a volume of hash’s that generate enough BTC to fund electricity costs; otherwise the business operation doesn’t work.
Costs include: the mining machines + the cost of running those machines (electricity costs)
The electricity cost is thus a large part of whether a miner is profitable or not — hence can keep their machines running or not at a certain Bitcoin price.
So in short: Miners join the network → block creation rate (hash rate) increases → Mining time decreases → Mining difficulty gets adjusted → block creation gets more difficult and goes down
and the whole cycle repeats and changes are made based on more mining power joining or leaving the network.
The price of BTC
As previously mentioned in order for miners to be profitable, their running costs need to be lower than the BTC price. If it isn’t, they are mining at a loss.
So what does all this have to do with the Halving?
In the halving the miner rewards get slashed in half from 12.5 BTC to 6.25 BTC per block reward. Meaning that the BTC price is even more important to miners.
Lets look at two scenarios, one prior to the halving and one after the halving:
Bitcoin at a price of $7,500 before the Halving
The price of BTC is at $7,500, miners are competing for 12.5 BTC per block meaning that the reward they would get is $93,750. If the miners are using older machines and have a higher than $0.055 electricity rate, their costs outweigh the profits. They are mining at a loss. With this rate, anyone with an electricity cost below $0.055 is still mining profitably. Now if you look at the new S17 machines whoever is mining with those can actually have a high electricity rate of $0.07 and is still mining more profitably than someone using the old S9 machines at $0.050.
Bitcoin at a price of $7,500 after the Halving
On the other hand, post-halving this whole ecosystem looks very different. Only miners that have an extremely low electricity rate below $0.025 can mine profitably with old S9 machines. The newer S17 machines are mining profitably at an electricity price of <$0.060. Meaning that a lot of miners are being squeezed out that have old machines.
They have a few options:
– Get some sort of financial credit or loan to cover their costs and hope for the Bitcoin price to appreciate so they are profitable again.
– Start selling their Bitcoin Treasuries (savings) to keep afloat hoping the Bitcoin price will appreciate. (of course this brings sell pressure)
If we take into consideration that miners don’t mine at a loss, meaning they turn off their machines the hash rate will drop and there is less competition for the 6.25 BTC reward.
Having understood this, Bitcoin Miners have to take four things into consideration: the hash rate and the difficulty or in other words how much other mining power exists and how difficult it is to get a block reward, and also have to think about what machines they are using and what electricity rate they have.
Now comes the interesting competitive part. Considering the block reward is halving and through this the breakeven price point increases (as less rewards are being given out but the price of electricity and running the machines stays the same), how will miners act?
Do they gamble and flood the market by selling all their Bitcoin, or do they hold all their Bitcoin as they realise that every block they mine today is giving them the same rewards as mining two blocks after the halving?
What miners will do will remain of interest, however what we as Bitcoin buyers and holders know, is that inflation is happening regardless and if demand stays the same as it is pre-halving then we will undoubtedly see a price increase at some point in time. Only in the short term could we see huge volatility also to the downside to shake people and miners out of the system.
The halving happens sometime in mid may, let’s see what happens.
Bitcoin Halving Countdown: https://www.bitcoinblockhalf.com/
Want to go even deeper? Think about the following:
– If miners have a very low breakeven price does it make sense for them to collude and push the price down by dumping their Bitcoins on the market in order to short term push out the miners with old expensive machines?
– Once the halving has occurred and only miners with a low breakeven price survive will they hold their Bitcoin in order to reduce the sell pressure and through this create a larger supply shortage?