Bitcoin Mining Industry: Forecast for 2024

2023 will definitely be a saving grace for Bitcoin miners.

It provides a necessary second chance for an industry weakened by the 2022 downturn, but as 2024 arrives, miners begin to face another huge challenge, the fourth halving. Bitcoin's fourth halving will reduce Bitcoin's block subsidy from 6.25 BTC to 3.125 BTC, meaning miners' earnings will be reduced by 50%.

Figure 1: Bitcoin halving events over the years

Like past halvings, the 2024 Bitcoin halving will undoubtedly leave an indelible mark on the current Bitcoin mining market.

Although the third halving (2020-2024) was not the direct trigger, along with China's Bitcoin mining ban in 2021 and the subsequent large-scale computing power migration, the three created conditions for the formation of a mining market that is completely different from the second halving period (2016-2020).

We believe that the fourth halving will bring about even greater changes and may be accompanied by a redistribution of Bitcoin hashrate to new geographic regions. For 2024 and the following years, we (roughly) predict the following:

Bitcoin hashrate distribution is more global

North America’s dominance in hashrate will diminish. During the second halving, China dominated the Bitcoin network’s hashrate share, peaking at 70-90% of total hashrate. After China’s Bitcoin mining ban, the balance of power shifted to North America, with the United States and Canada together accounting for about 50% of the world’s hashrate share (fluctuating) from summer 2021 to now.

North America’s share of global computing power is expected to have peaked and will gradually decrease after the halving in April 2024 as miners’ profits will be squeezed and they will continue to look for cheaper electricity, leaving South America, Africa and other untapped regions with significant growth opportunities.

Retail managed services industry to take a major hit

In North America (and elsewhere), retail hosting services will be depressed as lower mining margins squeeze both hosters and clients.

The average all-inclusive hosting fee in the United States in 2023 is $0.078/kWh and in Canada it is $0.072/kWh; by the fourth quarter of 2023, the average all-inclusive rates are $0.078/kWh and $0.071/kWh, respectively.

Figure 2: Average hosting costs in each Canadian province (Q4 2022 VS Q4 2023)

Figure 3: Average hosting costs in each U.S. state (Q4 2022 VS Q4 2023)

Given the post-halving mining economics, miners with average or higher hosting costs will most likely not be able to remain profitable, meaning that only those miners with favorable rates will survive in 2024.

2024 will see more mergers and acquisitions

In an environment of compressed computing power prices, there will be more mergers, acquisitions, and asset sales in 2024 and 2025.

In fact, the prelude has already been played in 2022. As the price of computing power plummeted and reached an all-time low in Q4, Compute North, one of the largest Bitcoin hosting service providers, announced bankruptcy and liquidation, while Argo and other mining companies sold their assets.

Figure 4: Overview of asset sales and purchases by major listed mining companies

2023 did not see much asset purchase and acquisition activity due to financial distress, but it did witness the largest merger in Bitcoin mining history - Hut 8 and US Bitcoin. Asset acquisition activity in 2024 is expected to match or exceed 2022 levels.

Inscriptions and other block space utilization activities will continue to increase transaction fee revenue

Inscription activity and alternative uses of block space in 2024 will drive transaction fee levels to levels comparable to or higher than the 2023 average.

The biggest dark horse of 2023 is the entry into the market on the back of new technical standards for Bitcoin-based non-fungible tokens (NFTs) - ordinals and inscriptions. This new method of creating digital artworks and artifacts on Bitcoin makes transaction fees an important source of mining revenue.

In fact, the total amount of Bitcoin transaction fees in 2023 is only the second-lowest in Bitcoin's history; miners earned $797,867,915 in transaction fees in 2023, second only to the record $1,019,725,113 in 2021. Transaction fees accounted for 7.6% of the block reward in 2023, compared to just 1.5% in 2022.

Figure 5: Changes in transaction fee ratio to block reward

Inscription activity generated $188 million in transaction fees between December 2022 and the end of 2023, and miners earned $129.5 million (69% of total fees) in the fourth quarter of 2023. In addition, miners earned 63% of the total transaction fee rewards in 2023 ($501.8 million) in the fourth quarter of 2023.

If Bitcoin continues to rise this year, then inscription activity trading volume is expected to continue to increase in 2024.

Bitcoin Mining Stocks May Lose Their Price Premium

Historically, investors have used bitcoin mining stocks as high-beta plays to trade bitcoin, using them both as bitcoin alternatives and as assets that could generate excess returns when bitcoin rises.

According to the beta chart analysis below, Bitcoin mining stocks show their correlation trend in bull or bear markets. In bear markets, stock price fluctuations are more correlated with the daily fluctuations of the coin price. In bull markets, stocks have strong upside returns relative to Bitcoin due to their strong beta correlation with Bitcoin. Traders can better grasp the return benefits of Bitcoin miners by observing the tighter correlation between Bitcoin miners and the daily fluctuations of Bitcoin spot price. When this trend is upward (> 1.15 beta), Bitcoin miners are moving to a stronger return period.

Figure 6: Comparison of Bitcoin Beta Coefficients of Listed Mining Companies

Given the recent approval of various Bitcoin ETFs, it is expected that Bitcoin mining stocks will lose some of their investment premium as Bitcoin alternatives, as investors can now gain direct income exposure through a variety of Bitcoin ETFs. Investors may still view them as high-beta tools for exposure to Bitcoin prices, but ETFs may trim their price premium.