Six major impacts of halving on Bitcoin mining

Bitcoin’s hashrate won’t drop that much

Contrary to popular belief, the halving may not result in a significant drop in the network’s hashrate. After Bitcoin’s first three halvings, hashrate plummeted by 25%, 11%, and 25%, and it appears that many analysts and miners are expecting (or hoping for?) a similar drop this time around.

I agree with Pennyether’s prediction that the upcoming Bitcoin halving is expected to result in a small drop in hashrate, in the range of 5% to 10%. This prediction is also not far off from the 3-7% prediction of the hashrate index.

This cautious forecast stems from the current high profitability of Bitcoin mining, driven by its high price, and the observation that about 70% of Bitcoin hashrate has been introduced since January 2022, operating under mining economics that are sometimes less favorable than what is now expected after the halving.

Furthermore, pre-computational power will rebound quickly from this minor drop. In the past three halvings, the network recovered pre-halving hashrate levels within 57 days on average. This trend highlights an important point: halvings should not be viewed as events that reduce hashrate, but rather as brief pauses in a continuously rising hashrate trajectory.

The robustness of the hashrate is further enhanced by miners’ continuous efforts to update their equipment with the latest and most efficient models. It is expected that this strategy will not only offset the short-term decline in the hashrate, but may also lead to a significant increase in the hashrate in the coming months.

Essentially, the upcoming Bitcoin halving may just be a brief hiccup in the network’s hashrate trajectory rather than a major setback.

High-cost miners will be forced to upgrade equipment

CoinMetrics’ data highlights that most of the industry is currently using relatively inefficient machines, such as the Antminer S19J Pro. These miners will need operating costs of $0.05/kWh or less to maintain healthy gross margins after the halving.

However, according to the hashrate index, the average hosting rate in the United States is slightly less than $0.08/kWh, and many U.S. miners may face cash flow challenges after the halving, forcing them to carry out large-scale equipment upgrades.

Bitmain’s new machines, including the S21, T21, and S21 Pro (each with an efficiency of less than 20 J/TH), were launched just in time for the halving. This development has prompted many US hosting providers to push their customers to switch from the S19J Pro to the S21 model. Given the high hosting costs in the US, this push can be seen as a necessity rather than a choice.

Referring to the above chart, it is clear that the S19J Pro model is unlikely to generate positive cash flow at $0.08 per kWh, given that direct Bitcoin production costs are $75,000. Therefore, miners facing higher operating expenses must turn to more efficient hardware, such as the Antminer S21 or similar models, to maintain profitability.

While upgrading to the latest machines allows operations to continue even in a high-cost environment, it is not a viable long-term strategy. The need to continually update hardware, often before recouping previous investments, highlights the unsustainability of this approach.

My bottom line message is clear: if you need to use the latest generation of hardware to maintain positive cash flow, your operating costs are too high.

Miners will find creative ways to increase profits

Bitcoin mining is one of the freest and most competitive markets in the world, one that Adam Smith himself would have admired. This inherent competitiveness drives a relentless pursuit of innovation, especially during challenging times like halving events. To cope with the pressure of halvings, miners are adopting some of the most creative strategies to maximize existing resources.

One such strategy is underclocking, a process that reduces the amount of power a machine consumes to improve energy efficiency and reduce costs. This process can be facilitated by third-party firmware such as LuxOS, significantly improving machine efficiency—a critical adaptation in an environment where margins are slim.

Furthermore, the quest for improved profitability extends beyond operational adjustments to include novel approaches to revenue generation. A notable example is Hashlabs in Finland, where we are working on a project to improve mining profitability by leveraging multiple revenue streams.

In Finland, we have diversified our revenue streams to include selling miners’ waste heat to the district heating system, earning fees for contributing to grid stability, and strategically selling electricity back into the market during periods of high spot prices. These ancillary revenue channels have significantly increased the profitability of our mining operations.

The upcoming halving will act as a catalyst, prompting miners around the world to follow Hashlabs’ lead and explore and implement creative strategies to increase profits.

Some miners will no longer engage in mining operations and diversify their operations

The fierce competition from the mining industry’s status quo is driving many, especially public miners, to explore new frontiers. There is a growing trend towards AI computing, led by companies like Iren and Hive Digital Technologies.

The diversification trend is expected to accelerate in the challenging months ahead. However, mining dynamics are cyclical. The forecast for a bull run in 2025 foreshadows a reversal of this diversification trend. With the potential rise in the value of Bitcoin, miners may abandon diversification strategies in favor of maximizing mining returns and re-enter the race to extract value from each hash.

This shift between diversification and centralized mining reflects the broader ebbs and flows of the market. Miners’ strategies change as the market changes, balancing between seizing immediate opportunities in new industries and preparing for the next upsurge in bitcoin mining profitability.

Bitcoin mining will become more geographically distributed

Currently, the United States accounts for a large portion of global computing power, accounting for 40%, while China and Russia are also major players, contributing 15% and 20% respectively. However, driven by the constant pursuit of cost efficiency, especially cheaper electricity, the industry is gradually moving towards a more globally decentralized model.

As miners prepare for the upcoming halving, many are exploring emerging mining markets in Africa, Latin America, and Asia, where electricity is extremely cheap. For example, Bitfarms has made great progress in Argentina and Paraguay; Bitdeer is expanding its capacity in Bhutan; Marathon is entering the UAE and Paraguay; and Hashlabs offers hosting solutions in Ethiopia.

The upcoming halving event will serve as a catalyst for hashrate migration, forcing miners to venture outside of developed countries to access more economical sources of electricity. This shift toward a more geographically dispersed mining network will have a profoundly positive impact on Bitcoin. By distributing hashrate more evenly around the world, Bitcoin mining will not only be less susceptible to regional regulatory risks and fluctuations in electricity costs, but will also be more closely aligned with the decentralized ethos that underpins Bitcoin itself.

Little impact on Bitcoin price

The upcoming Bitcoin halving is seen as a potential trigger for the next bull run. However, considering that the current annualized issuance rate is already at a meager 1.6% and nearly 94% of Bitcoin is already in circulation, the expected supply shock from the halving may have little impact on the Bitcoin price.

The negative supply shocks from earlier halvings were far-reaching, especially during the first halving, when annualized issuance plummeted from 25% to 12.5%, and during the second halving, when annualized issuance dropped from 8.4% to 4.2%. However, the change from 1.6% to 0.8% in the upcoming halving will be much smaller than the dramatic changes observed in previous cycles.

Don’t get me wrong; I still expect a bull run after the halving. However, growing demand, rather than a slight drop in supply, will be the primary factor driving the price surge.

I like Dylan LeClair’s analogy of the halving as “global advertising,” suggesting that its primary impact on Bitcoin’s price is less a direct result of the supply reduction than the increased media attention and investor enthusiasm it generates. This increased awareness could spur demand, turning the halving into a self-fulfilling prophecy of bullish market sentiment.

This view is also consistent with Daniel Polotsky’s insights questioning the continued relevance of Bitcoin’s four-year cycle. While demand fluctuations will continue, the impact of supply changes is becoming increasingly insignificant.

At this point, Bitcoin's issuance rate has become so low that its supply has minimal impact on its price, which is currently driven primarily by demand. While the narrative surrounding the halving remains a powerful driver and is expected to drive Bitcoin into a new bull run, this effect may weaken in the future. As a result, it is likely that Bitcoin will eventually break away from the four-year halving cycle.

Halving is coming soon!

I have fond memories of the 2020 halving. As the moment of the block reward halving approached, the atmosphere in the Bitcoin community was full of anticipation. This key event triggered an incredible bullish wave in the summer of 2020, setting the stage for a huge bull run in 2021. Although I still doubt that the modest reduction in supply caused by the halving will significantly change the price equilibrium of Bitcoin, it will inspire increased demand and investor enthusiasm, which is something I eagerly anticipate.

From a miner's perspective, the halving brings with it a potential market rebound. It is an opportunity for us to reflect and innovate in our operations. It pushes us to explore new ways to reduce costs, improve efficiency, and ensure we survive and succeed in this competitive space. The halving is not only a test of resilience, but also a catalyst for development within the mining community.

As we look forward to the next halving, it is important to remember the core spirit of Bitcoin. Bitcoin was not created by miners; it was created for miners. Its heart beats for holders. There is no doubt that miners play a vital role in servicing the Bitcoin network and ensuring its robustness. However, the true spirit of Bitcoin lies in its ability to empower holders and provide a decentralized alternative to the traditional financial system. The anticipation and excitement for the halving resonates not only with miners, but also with the entire community of Bitcoin enthusiasts and investors.

So, as this pivotal event approaches, let’s embrace the halving with open arms and a spirit of innovation. It serves as a reminder of Bitcoin’s dynamic landscape, a testament to its resilience, and a beacon of exciting developments ahead. For all holders and miners, let’s get ready for the halving. Let’s do it!