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Editor | Uncle Mine With the COVID-19 pandemic dominating most of the headlines over the past few weeks, the cryptocurrency space has turned some of its attention to the Bitcoin reward halving. With the Bitcoin halving just four weeks away, and with Bitcoin Cash and Bitcoin SV already having completed their halvings, anticipation for the Bitcoin halving is at an all-time high. Interest in “Bitcoin halving” is growing. Source: Google search trends Halving gives Bitcoin (BTC) one of its most important features - a deflationary state. Initially, 50 bitcoins were rewarded for each block generated, and mining took about 10 minutes, but then the reward was halved every four years. The upcoming third halving will reduce the issuance rate of Bitcoin to 6.5 bitcoins mined every 10 minutes. The halving is a highly anticipated event for industry insiders, and many are optimistic about the price outlook for Bitcoin after the reduction in production. With production cut in half, many expect demand to remain the same or increase, meaning that according to the law of supply and demand, the price of Bitcoin will inevitably rise. However, Bitcoin prices do not always behave as expected, and prices may remain the same or even fall after the halving. There are many factors that affect prices, including speculative behavior by traders. For example, it is well known that margin trading of futures is a driving force behind Bitcoin price fluctuations. This volatility was evident during the March 12-13 crash, which resulted in many leveraged positions being liquidated. The current correlation between Bitcoin and the stock market is another example of Bitcoin prices not following the principle of supply and demand. Miners also affect prices While speculation is undoubtedly a driver of Bitcoin volatility, miners are also a significant factor, accounting for a large portion of BTC's selling pressure because they actually need to sell the Bitcoin they mine to maintain their operations. Among other transactions, Bitcoin flowing into exchanges mainly comes from miners, and while traders usually buy and sell Bitcoin, miners only sell Bitcoin. Given that miners are an important piece of the Bitcoin puzzle, it is important to understand how they are preparing for the upcoming halving and the unknown price performance that will follow. The last halving resulted in the largest drop in mining difficulty since 2011 and further fueled selling pressure on miners, many of whom were forced to shut down operations due to reduced profitability. A report from Blockware Solutions describes the process as “miner capitulation,” which has led to changes in the mining ecosystem that reward more advanced operations — with miners having the potential to hold onto Bitcoin longer and change their minds about when and how much of their newly mined Bitcoin to sell. What will happen to miners if the price of Bitcoin does not rise? If the price of Bitcoin rises significantly, there is no need to worry, as miners will receive fewer Bitcoins but will be able to sell each Bitcoin at a higher price. This creates a big question: if the price remains the same, what will each miner do and how will the overall performance of the network be? What if the price drops? While price changes mean the end for many miners, each business has a different breakeven price and, more importantly, a different strategy. If Bitcoin maintains its current price ($6,800 at the time of writing) and production is cut in half, miners will face a similar situation to when the price crashed on March 12-13. This will be a problem for a significant portion of the network, which still relies on older generation equipment, such as the Antminer S9. Those running Antminer S9s and those using lower electricity costs between $0.03 and $0.05 per kilowatt-hour would need prices to stay between $7,600 and $13,000 to be profitable after the halving — and that’s assuming there’s no big change in mining difficulty. Taking into account additional hosting fees and even higher electricity prices in countries outside of China, the breakeven price would be higher. As a result, the Bitcoin halving could force the vast majority of Antminer S9 or older devices off the network. According to Blockware Solutions, Antminer S9s account for about 30% of the Bitcoin network’s hashrate, with the vast majority of miners using electricity that costs $0.03 per kilowatt-hour and above. Miners would need to keep prices between $7,600 and $13,000 after the halving to be profitable – and that’s assuming the difficulty doesn’t change much. Taking into account additional hosting fees and even higher electricity price practices in countries outside of China, the break-even price would be higher. This means that if the old generation of mining equipment shuts down, the mining difficulty will drop significantly, and the mining industry will be more favorable to those who remain, as they will get a larger share of the new Bitcoin market. According to Matt D'Souza, CEO of crypto mining solutions company Blockware Solutions, the difficulty drop could even exceed the drop in difficulty during the March 12-13 crash. He told Cointelegraph: The reduction in difficulty after the halving is entirely dependent on miner profits, which are affected by the price of Bitcoin. If Bitcoin is below $9,000, then miner profits will be low. If the Bitcoin price remains at $7,200, then many miners will need to shut down. If Bitcoin remains below $9,000 for several weeks after the halving, the miners that shut down could account for 27%–35% of the network. What about miners with newer generation equipment? Given that the recent Antminer S17 is able to mine 300% faster than the S9s while consuming only 50% more electricity, the breakeven price is around $3,000–5,000 at the same electricity price ($0.03–0.05). This means that even if the Bitcoin price remains constant, older generation equipment cannot be used, and the difficulty is reduced again, mining equipment with higher electricity costs can continue to operate. In a recent Chainalysis webinar, Chris Bendiksen, head of research at CoinShares, noticed this pattern during the most recent Bitcoin crash in March. He believes this may be a "test run" for the halving. Bendiksen said: The result is that after the Bitcoin halving, and potentially several months of volatility ahead, mining will be in a much better position with a lower overall cost base. Hedging: Futures and Options If prices remain at current levels or even fall, the new generation of equipment could continue to be used even in areas where electricity is relatively expensive. Because the break-even point of the Antminer S9 is difficult to reach, mining machine manufacturers have a greater incentive to develop the latest equipment. This suggests that such businesses may have more sources of funding and, therefore, their business strategies are different. As new Bitcoins are mined, selling them on the spot market is the most direct way for miners to maintain their operations and make a profit. Different strategies involve different levels of risk, reward, and initial capital. Derivatives trading allows miners to hedge against Bitcoin's price fluctuations. Miners can use futures or options contracts to insure themselves against short-term price fluctuations by shorting Bitcoin through futures contracts or buying options contracts to sell BTC at a determined price (strike price) in the future. While this strategy requires capital, miners have a number of options, from private investment to P2P lending and even lines of credit from popular cryptocurrency apps like Nexo or BlockFi, which recently announced it would offer credit to miners for the first time. Miners still have a few tricks up their sleeves If derivatives hedging is not an option, miners can take other steps to protect themselves. For example, many mining operators are known to offer hosting services at their own mining sites. This allows them to make full use of available space and make money through hosting and charging electricity fees. Mobile mining rigs have also gained traction recently, and while they are not a great solution for miners who already operate their own mining rigs, they offer a cost-effective way for small-scale miners to start making money even after the halving. Another approach that miners with old or new equipment can take is to stick to a schedule they set and purchase a certain number of rigs each month to get cheaper equipment when manufacturers lower their prices. D'souza noted the importance of purchasing equipment at the right time: Purchasing equipment at the right time is critical - Blockware Solutions advises its clients on when to retire older generation equipment and purchase the next generation. We had our clients sell their older generation products and purchase the next generation products in May-June 2019 so that they were fully prepared.
Miners can also upgrade to newer generation equipment to reduce their exposure to price volatility after the halving, selling their existing equipment to miners for cheap or free electricity. Some miners are inherently protected, such as those with subsidized electricity or even power plants that use excess electricity to power mining equipment. Finally, another option is to stop mining Bitcoin altogether and switch to mining another cryptocurrency with the same algorithm. However, Bitcoin miners are notoriously stubborn and they are not as flexible as GPU miners. Therefore, switching may not be an option for some. The Bitcoin Show Will Continue Miners can use a variety of tools within the cryptocurrency space to protect themselves against the upcoming unknowns of the Bitcoin halving. Of course, those with a higher appetite for risk and a bullish view on Bitcoin can stick with their current strategy and continue mining, hoping that the price of Bitcoin will rise as it has after previous halvings. However, it is unlikely that Bitcoin will enter a "death spiral" as some have suggested. The reduction in difficulty and hedging strategies ensure that mining will likely always be profitable at some point in time. The halving will occur, and Bitcoin will continue its journey, one block at a time. Disclaimer: There are risks in the cryptocurrency world and investment should be cautious. This article is purely personal opinion and does not provide any investment advice. |
