Bitpush Bitcoin Third Halving Mining Research Report | TokenInsight -

Abstract: 1. Bitcoin halving overview 1.1 Bitcoin's third reward halving "After the halving, the annual supply growth rate of Bitcoin is about 1.7%; the blockchain mining ecosystem is severely affected by it. At 3:23 am on May 12, Bitcoin officially completed the block reward halving at block height 630,000. The first halved block was reported by AntPool, with a block reward of 6.25BTC and a transaction fee of about 0.91BTC. ...

1. Bitcoin halving overview

1.1 Bitcoin’s third reward halving

“After the halving, the annual supply growth rate of Bitcoin is about 1.7%; the blockchain mining ecosystem is severely affected by it.

At 3:23 am on May 12, Bitcoin officially completed the halving of block rewards at block height 630,000. The first halved block was reported by AntPool, with a block reward of 6.25 BTC and a transaction fee of approximately 0.91 BTC.

Given the surge in Bitcoin prices during the first two halving cycles, the market is optimistic about the third halving. However, judging from the current halving data, Bitcoin prices have not shown the expected sharp rise.

1.1.1 Summary of Bitcoin halving cycle (as of May 18)

Source: TokenInsight

As a type of asset allocation, the annual supply growth rate of Bitcoin after the third halving is about 1.7%, which is lower than the 4.8% of gold in 20191 and the 4.44% of the narrow money (M1) growth rate in the United States in 20192. For the third halving cycle of Bitcoin, the game of existing funds in the market is fierce, and the support of Bitcoin prices requires the participation of subsequent new investors.

The impact of halving on the blockchain mining ecosystem far exceeds that of other industrial chains in the market: mining costs have risen sharply; miners' fee income has accelerated; some inefficient mining machines have been eliminated in batches; the upstream and downstream of the mining industry, such as mining farms, mining pools, and mining machine manufacturers, will accelerate the reshuffle. 2020 will be a key year for the iterative transformation of the mining industry.

1. Gold supply in 2019: https://www.gold.org/cn/goldhub/research/gold-demand-trends/gold-demand-trends-full-year-2019

2. Annual changes in US M1: https://fred.stlouisfed.org/series/MANMM101USA657S

2. Overview of blockchain mining development

2.1 Bitcoin Mining Market

“China’s monthly average hash rate may decline, and the United States will seize market share

Data from the Bitcoin Electricity Consumption Index (CBECI) released by the Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge shows that as of May 7, 2020, the global annual electricity consumption is 20,863 terawatt-hours (TWh), and the annual electricity consumption of Bitcoin mining is estimated to be 69.03TWh, accounting for 0.33%.

2.1.1 Bitcoin Mining Power Consumption Index

Source: Cambridge Center for Alternative Finance, TokenInsight

CCAF pointed out that although CBECI is more accurate than most network data, its accuracy is still limited. Since it is impossible to determine the exact energy consumption of the Bitcoin network, CBECI provides a range of possibilities, including the minimum annual power consumption and estimated annual power consumption.

The minimum annual power consumption assumes that miners use the most efficient mining machines currently available for mining, while the estimated annual power consumption assumes that miners use both new and old mining machines at the same time, rather than a single type of mining machine for mining.

TokenInsight found that after the market crash on March 12, 2020, the minimum annual power consumption index of Bitcoin mining industry declined, and the estimated annual power consumption was even more obvious. At the same time, after the halving, the estimated annual power consumption also showed a downward trend.

We believe that Bitcoin's estimated power consumption can reflect the mood of miners to a certain extent. The factors that affect Bitcoin mining are mainly Bitcoin prices and mining rewards. When the market is not optimistic, miners' attitudes will also be negative.

In addition, due to the impact of halving, miners' expectations for the market outlook will decline. Therefore, miners will gradually choose to shut down, resulting in a slow decline in the power consumption of Bitcoin mining.

Judging from the monthly average hash rate of various countries estimated by CCAF, China's share of Bitcoin hash rate continues to be high, remaining above 65% overall.

As of April 2020, the United States is currently the second country with the highest hash rate, accounting for 7.24%; Russia, which ranks third, accounts for 6.9%; Kazakhstan, Malaysia and Iran account for 6.17%, 4.33% and 3.82% of the global market respectively.

2.1.2 Average monthly hash rate by country

Source: Cambridge Center for Alternative Finance, TokenInsight

On the other hand, China's share of hash rate has shown a slow downward trend since September 2019, and has now dropped from 75.63% to 65.08%; while the United States has begun to exert its strength, increasing from 4.06% to 7.24%, an increase of 78.33%.

Surprisingly, Kazakhstan’s current hash rate share is 6.17%, up 334.51% from 1.42% in September 2019.

2.2 Miner Marginal Revenue (%)

“After the halving, the previous generation of mining machines has basically reached the shutdown price, and the new generation of mining machines will be the main ones in the future.

TokenInsight analyzes miners' income by introducing two indicators, namely, Miner's Profit Margin and Miner's Marginal Cost of Creation. The formula for calculating miners' marginal production cost is as follows:

Among them, Block Reward represents the block reward generated by the Bitcoin network every day (expressed in the number of Bitcoins, this value is 1800 before halving and 900 after halving, but it may change according to the situation); Transaction Fees is the daily Bitcoin network transaction fee; Hashrate is the hash rate; Power Efficiency is the power consumption of the computing power; Electricity is the electricity price; Operation Costs is the operating cost. This formula shows the production cost of a mining machine that mines 1 Bitcoin. The marginal benefit of a miner is the proportion of the production cost after deducting the production cost from the Bitcoin price.

Taking the new generation of mining machines such as Antminer S17+ as an example, if the electricity fee is US$0.08 (equivalent to about RMB 0.56), the marginal production cost (15% of operating costs) will be US$5,300 before halving, and will rise to about US$9,300 after halving.

The marginal profit of miners (15% of operating costs) remained at around 40% before the halving. After the halving, the marginal profit of miners dropped to around 3%, which is basically unprofitable.

2.2.1 Bitcoin Marginal Production Cost and Marginal Revenue (Ant S17+; electricity cost $0.08)

Source: TokenInsight

Taking the Ant S9 series mining machine as an example, the marginal revenue and marginal production cost of the previous generation of mining machines are shown in the figure below.

If the electricity fee is 0.035 US dollars (equivalent to about 0.25 RMB), the marginal profit of miners (15% of operating costs), the marginal profit of Ant S9 series mining machines remained at around 45% before the halving, but fell below 0 after the halving, and only remained at around 4% after the market stabilized.

The marginal production cost of miners was US$5,300 before the halving and rose to around US$9,300 after the halving.

2.2.2 Bitcoin Marginal Production Cost and Marginal Revenue (Ant S9; electricity cost $0.035)

Source: TokenInsight

That is to say, if miners use Antminer S17+, they need to control electricity costs below US$0.08 or reduce operating costs to maintain profitability; if they use Antminer S9 for mining, they need to control electricity costs below US$0.035 or reduce costs to maintain profitability.

TokenInsight believes that Bitcoin's marginal revenue falling below 0 does not necessarily mean that miners will suffer losses. Different miners have different mining machine purchase prices, electricity costs, and operation and maintenance costs. Its greater significance to miners is that it serves as an indicator for considering the current blockchain mining market.

For miners, frequent switching on and off will put a lot of pressure on the mining machines and power supply systems, increase the damage rate, and affect profits. On the other hand, it will also cause great losses in extreme market conditions.

When marginal revenue falls below 0, miners and related industries need to estimate the future market and adjust production status accordingly, adopt water cooling technology, reduce the frequency of existing mining machines, reduce operation and maintenance costs, and other measures to reduce production costs. It is also possible to adjust the status of mining machines in a timely manner, choose to shut down or continue mining at a loss but use financial means to hedge and stabilize revenue.

3. Impact of halving on blockchain mining

3.1 Halving the Heat

“Google Trends shows that the enthusiasm for halving has surged, with Africa and Europe being the most enthusiastic.

According to Google Trends data, the current search volume for Bitcoin Halving has reached a peak of 100 within a week of the halving, which is more than 9 times the previous peak (July 3-6, 2016, before the second Bitcoin halving).

3.1.1 Bitcoin Halving Google Trends

Source: Google Trends

On the other hand, as of May 30, Google Trends for the past 30 days showed that Africa and Europe were the regions most enthusiastic about the Bitcoin halving. Among the top five regions with the most searches in the past 30 days, Nigeria had the highest search popularity, followed by Switzerland and Slovenia.

3.1.2 Bitcoin halving search popularity by country/region

Source: Google Trends

TokenInsight believes that Europe has always been relatively open to digital assets. Nigeria, as Africa's largest economy, has severe national currency inflation, loose regulations and a sufficient number of young audiences, which drives the development of digital assets in Africa.

3.2 Bitcoin Price

“Prices have recovered and market sentiment is relatively optimistic after the halving

As can be seen from the figure below, within 2,000 blocks before and after the completion of the Bitcoin halving, its price fluctuated violently, reaching a peak near the block height of 629,950, but then fell sharply. After the official halving, the price of Bitcoin slowly rose, completely recovering the previous decline, and tried to hit the $10,000 mark again.

3.2.1 Bitcoin Price

Source: Byte Tree, TokenInsight

TokenInsight believes that the closer the halving is, the more unstable investor sentiment will be, and the more drastic price fluctuations will be. Investors have high expectations for the halving, and after the market rebounds and stabilizes, investor confidence will be strengthened again, further driving the market.

3.2.2 Bitcoin Perpetual Funding Rate

Source: Byte Tree, TokenInsight

The perpetual funding rate can also reflect the market's positive attitude. Before the Bitcoin halving, the perpetual funding rate ended its two-month negative state and rose to a positive value. Although there have been slight changes due to price fluctuations, it currently remains at around 0.01%.

3.3 Bitcoin Network Difficulty

“After the halving, mining difficulty dropped by 6%, the 16th largest drop in history

On May 20, the difficulty of Bitcoin mining was adjusted for the first time after the halving. This adjustment reduced the difficulty by 6%, which is the 16th largest downward adjustment in the history of Bitcoin mining.

3.3.1 Ranking of the Top 20 Difficulty Drops in the Whole Network

Source: BTC.com, TokenInsight

Before and after the halving, the total network computing power fluctuated around 100EH/s, and after the halving, it reached a minimum of 81.65EH/s.

As of 10:00 on May 21, the total Bitcoin network hashrate was about 94.37 EH/s, and the mining difficulty was 15.14T. It is estimated that there are still 15 days and 3 hours before the adjustment, and the next mining difficulty will continue to decrease by 7.51% to 14.00T.

3.3.2 Bitcoin price and network computing power trends

Source: TokenInsight

3.4 Average Block Time

“After the halving, the average block time dropped by about 20%, and the computing power of the entire network may continue to decline.

In terms of time, the average block time of Bitcoin in 2020 fluctuated around 600 seconds before March; after entering March, the average block time saw a large increase, reaching 800 seconds after the sharp drop in March; with the subsequent increase in Bitcoin prices, the block time returned to the range of about 500 seconds, and after halving it dropped again to around 800 seconds.

3.4.1 Average block time

Source: Glassnode, TokenInsight

Although the price is basically the same as in March, the block time of Bitcoin is obviously greatly affected by the halving. This also proves the change of the computing power of the whole network after the halving.

TokenInsight believes that the total network computing power cannot be directly observed at present, but it can be calculated from the average block time and difficulty. According to the average block time analysis, the total network computing power of Bitcoin has experienced a significant decline after the halving.

The average block time for the 1,000 blocks before the halving (about a week) was 560 seconds, and the average block time for the 1,000 blocks after the halving was 689 seconds, an increase of about 20% year-on-year, indicating that about 20% of the network hash rate has gradually disappeared during this period.

If the price of Bitcoin remains unchanged and the flood season does not arrive, the computing power of the entire network will continue to decline.

3.5 Miner Income

“The number of on-chain transactions has been rising steadily, and investor sentiment is relatively optimistic.

Judging from the number of on-chain transactions, although the number of Bitcoin on-chain transactions fluctuated greatly before and after the halving, it generally showed a slow upward trend.

Since Bitcoin did not experience the expected decline after the halving, investors who were originally on the sidelines are gradually entering the market after digesting the halving information, and the overall trading sentiment tends to be optimistic.

3.5.1 Number of Bitcoin on-chain transactions

Source: Byte Tree, TokenInsight

Average number of transactions per 50 blocks on the Bitcoin chain

“After the halving, transaction fees increased as expected, but the road for miners to make a living from transaction fees is long and arduous.

Miners' income is still mainly determined by block rewards rather than transaction fees. As the computing power of the Bitcoin network continues to rise, mining rewards are getting smaller and smaller, so transaction fees are also getting higher and higher, which can make up for the loss of income caused by halving to a certain extent.

The figure below shows the trend of transaction fees, average fees per transaction and the proportion of transaction fees on the Bitcoin network before and after the halving.

As can be seen from the figure: before and after the halving, within 50 blocks before and after the halving, the Bitcoin transaction fee has increased significantly. Around the block height of 630,050, the total transaction fee dropped to a low point, but then continued to rise.

When the block height reached the 631,000 range, the transaction fee of the Bitcoin network experienced a short-term peak, and the fee of a single block in the range exceeded the peak of 1.8 BTC.

3.5.2 Bitcoin Total Transaction Fees

Source: Byte Tree, TokenInsight

Average total transaction fees per 50 blocks of Bitcoin

Overall, after the halving, the total transaction fee of Bitcoin has fluctuated upward as TokenInsight had expected. The increase in transaction fees, on the one hand, shows that investors are willing to pay a premium for transactions that are to be processed first, and on the other hand, it also proves that the current market activity is increasing.

3.5.3 Average transaction fee per 50 transactions

Source: Byte Tree, TokenInsight

Average fee per 50 transactions

Judging from the average transaction fee for every 50 transactions, in the 2,000 blocks before and after the halving, the Bitcoin transaction fee increased from an average of 0.00025 BTC to 0.00046 BTC, an increase of 84% year-on-year.

According to TokeInsight statistics, in the first quarter of this year, the proportion of transaction fees in miners' income (block rewards + transaction fees) remained at 1.5%, but in March the proportion suddenly rose to 5.5% and fell back to a lower level in April.

The following figure shows the percentage of transaction fees in the 2,000 blocks before and after the halving: after the halving, miners' mining income decreased, but transaction fee income increased by 200% at the moment of halving. With the stable operation of the Bitcoin network after the halving, the average percentage of transaction fees for miners increased from 4% before the halving to about 15%.

3.5.4 Proportion of transaction fees in miners’ total income

Source: Byte Tree, TokenInsight

As time goes by, transactions on the Bitcoin chain gradually adjust to a balanced state, but are currently fluctuating in the range of 18%-24%.

In general, the total transaction fee of Bitcoin after the halving has fluctuated and increased as TokenInsight expected. However, if we want Bitcoin to develop healthily according to Satoshi Nakamoto's idea, that is, the main income of miners will shift from block rewards to transaction fees, there is still a long way to go.

4. Changes and trends in global mining policies

“North America is gradually supporting digital asset mining, and overseas mines are expected to explode in construction at a faster pace.

Judging from the regulatory policies updated by various governments from 2019 to 2020, support at the government level has begun to emerge, and policies tend to support the healthy development of the industry, including the issuance of licenses and scale supervision.

Political stability, low electricity costs, a well-structured legal framework, relatively mature financial markets, and climatic conditions are the main factors for the development of blockchain mining.

China: On November 6, 2019, virtual currency mining was removed from the eliminated industry market by the National Development and Reform Commission. On April 21, 2020, Sichuan announced the first batch of "Hydropower Consumption Demonstration Enterprises", and among the 99 companies that entered, several mining farms were listed.

United States: The Missoula County Commission in Montana has added green regulations for digital asset miners. The regulations require that mines can only be located in light and heavy industrial areas. After review and approval, the mining rights of the mines can be extended to April 3, 2021.

Canada: Continues to take measures to support the development of digital asset mining business in the country. Hydro-Quebec agreed to reserve one-fifth of its electricity energy (about 300 megawatts) for miners.

Georgia: In June 2019, the government of Abkhazia, an autonomous republic within Georgia, relaxed requirements for domestic digital asset mining activities and drafted a regulatory law that only requires mining to hold a license.

Iran: In July 2019, the Central Bank of Iran recognized the digital asset mining industry and promised to implement a legal licensing process.

Belarus: Belarus plans to fully support the development of digital assets and the digital economy. President Lukashenko said that he proposed to establish a large data center near the local nuclear power plant for digital asset mining.

Ukraine: The Ukrainian Ministry of Digital Transformation plans to legalize digital asset mining in the country within two to three years. The relevant regulatory authorities also stated that mining does not require government supervision or intervention, and consensus rules are sufficient to regulate on-chain activities.

Uzbekistan: On January 16, 2020, Uzbekistan announced the establishment of a "National Mining Pool".

Overall, North America has gradually begun to support the digital asset mining industry, guiding funds and institutions with professional operations and risk control capabilities to enter the market.

At the same time, China's regulatory attitude towards blockchain mining is also changing. Especially due to the arrival of the flood season, Sichuan and other places have shown more support for blockchain mining. However, due to the sensitivity of digital assets, there is still uncertainty about future policies.

TokenInsight believes that overseas mining farms will be built at a faster pace in the next two years. The main reasons are:

1. The regulation of digital assets is more stable;

2. A more systematic legal and regulatory framework;

3. Traditional investors’ investment demand for digital assets is gradually increasing;

4. Use Bitcoin mining to alleviate the demand for electricity and solve the problem of weak electricity prices during periods of weak electricity demand.

5. Conclusion

“Say goodbye to extensive management, 2020 will be a key year for the iterative transformation of the mining industry

CoinShares released a report titled "Bitcoin Mining Network" which pointed out that China currently accounts for 65% of the world's mining scale, with Sichuan alone accounting for 54% of the world's mining scale. The remaining 35% is distributed in North America, such as Washington, New York, British Columbia, Alberta, Quebec, and Europe, such as Iceland and Norway.

The TokenInsight Research team believes that although China has an absolute advantage in the Bitcoin network, with the improvement and development of digital asset mining and the support of relevant policies, more and more large-scale traditional financial capital and secondary market financial service providers will enter the industry at home and abroad. 2020 will be a key year for the accelerated reshuffle of blockchain mining, and the early extensive management methods will be replaced by professional, financialized, and refined management strategies.

"The reshuffle of the mining industry is accelerating, and the industrial chain will give rise to more sub-sectors.

In the medium and long term, the opportunities for the development of digital asset mining are greater than the challenges, and the release of market forces will boost the development of the mining industry. However, after the halving, in the next one to two years, the reshuffle of the upstream and downstream mining industries will accelerate:

The mine will continue to improve automation and refined management to enhance its overall professional operational capabilities.

If a relatively complete layout and risk management are not done before the halving, small-scale mining pools will face a greater crisis and the competition among leading mining pools will become more intense.

Mining machine manufacturers will invest a lot of energy in the production and development of 5nm and other process products. In addition, influenced by Canaan Creative's successful IPO in the United States, more and more mining machine manufacturers will be listed in the future.

Financialization is also a key step in the iteration of the mining industry. In the future, computing power will be assetized and financialized, lowering the threshold for the industry.

In the future, the industrial chain surrounding digital asset mining will give rise to more sub-sectors and the scope of services will be further expanded.