Where will Bitcoin mining go after the halving?

Source: LongHash

In early May, the Bitcoin network will usher in a new round of block mining rewards halving. LongHash conducted an exclusive interview with the heads of the world’s two largest Bitcoin mining pools, F2Pool and Poolin, to discuss how the Bitcoin mining field may develop after the halving.

The block reward halving occurs approximately every four years, and the reward received by miners will be reduced by 50%. As a public blockchain network, the Bitcoin network is composed of a chain of blocks, and each block is verified, or "mined", by miners using computing power and electricity.

Since each block contains data about transactions conducted on the Bitcoin network, mining can be simply understood as the process of verifying and confirming the data on the chain. Without this process, the network would be paralyzed.

The rewards miners receive for validating blocks of transactions are used to pay for the costs of mining. Mining machines are making rapid progress in terms of technical specifications and energy efficiency every year, but Bitcoin mining still consumes considerable electricity, and this comes at a cost. The specialized mining machines used by most miners, called ASICs, are not cheap in terms of price or maintenance.

Miners of all sizes could face immediate cash flow problems as a result of the halving of mining rewards, putting their businesses in trouble. After all, a halving of the reward means a halving of their revenue, although the profitability of Bitcoin mining is also affected by other variables such as Bitcoin price and mining difficulty.

As the halving occurs, the industry may experience turbulence. When miners lose a significant portion of their income overnight, it may become financially unsustainable for some small miners to continue operating.

If Bitcoin price remains between $6,000 and $7,000, more miners may exit

In the past 11 years, the price of Bitcoin has risen sharply about 10 months after each halving event. In this way, the increase in Bitcoin price has offset the decrease in miners' income.

For example, if the price of Bitcoin before the halving is $7,000, and a miner receives 100 BTC in a single month, then his monthly income is equivalent to $700,000. If this income is cut by 50% after the halving, but the price of Bitcoin doubles to $14,000 in the next year, then by the end of the year, the impact of the halving can be balanced. For the same amount of work, the miner used to earn 100 BTC, but now only earns 50, but the total value of these 50 BTC is $700,000, so the miner's income has not been seriously affected.

However, historical data shows that Bitcoin prices usually do not rise immediately after halving. After the halving events in 2012 and 2016, BTC prices ushered in a proper long-term rally about 10 months later. This means that miners may have to endure a long storm of low income before any improvement.

Mao Shixing, co-founder of F2Pool, the largest Bitcoin mining pool in the industry (at the time of writing), said that if the price of Bitcoin remains in the $6,000 to $7,000 range after the halving, more mining machines will inevitably shut down:

“If the Bitcoin price stays in the current range of $6,000 to $7,000, more mining machines will inevitably shut down after the halving. The March 12 crash has already caused some mining machines to shut down. But we can still try to improve their efficiency and reduce costs.”

The closure of mining machines and mining farms caused by the halving may cause problems for both large and small miners, which may cause a short-term drop in hash rate.

The term hash rate refers to the amount of computing power used to secure the Bitcoin network and process transactions on the network. Although a halving may cause a temporary drop in hash rate, it is likely to recover over time, as happened after the first two halvings.

Alejandro De La Torre, vice president of Poolin, the world’s second-largest Bitcoin mining pool, told LongHash that a short-term drop in hash rate is inevitable, but in the long run it could bring stability to the Bitcoin mining sector.

There are now more ways to set up and finance mining operations than in the past, and miners have a clear roadmap for how to run their farms over the next four years — when the next halving occurs.

De la Torre explains:

“I am sure that in the short term the hash rate will drop. However, I believe that the halving is a great time for new players to enter the Bitcoin mining space. New miners can now anticipate the new reward scheme over the next four years and looking back, we have seen the price of Bitcoin increase after each halving. Not to mention, there are many new ways to finance the operation of mining farms/rigs that were not available two years ago.”

He also pointed out that the Bitcoin mining sector has made huge progress since the most recent halving, which took place on July 9, 2016. There are more big players, better mining machines, and more intense competition in the industry, all of which could drive the global expansion of Bitcoin mining.

“In addition, many new operating system tools and management tools that did not exist a few years ago have also increased the convenience and profitability of mining. I expect the bitcoin mining industry to continue to expand globally,” he said.

Miners of all sizes will be affected

The upcoming Bitcoin block reward halving is somewhat different from the previous two halvings because major geopolitical crises and macroeconomic factors are putting tremendous pressure on Bitcoin prices.

In 2012 and 2016, there was no severe global economic slowdown, nor was there a sudden bear market that caused all major asset classes to plummet in a short period of time.

If the price of Bitcoin remains below the break-even price for miners after the halving — which some researchers estimate to be $13,000 — only mining farms with ample cash reserves will be able to stay in business in the short term.

“It’s not just small miners who are challenged,” De La Torre said. “Any type of mine, big or small, if their electricity costs are low enough and they have the latest mining machines, then they will eventually make the transition safely, even if their profitability will be affected in the short term. If miners have high electricity costs and old mining machines, then they will definitely run into trouble and will have to shut down. That’s the reality.”

In order to survive the halving storm, or at least wait until the price of Bitcoin breaks through the break-even point for miners, Mao stressed that Bitcoin miners must be more strategic.

Miners need to find ways to reduce costs as soon as possible

One way for miners to reduce mining costs is to negotiate with electricity suppliers to reduce electricity costs. However, given that most large-scale mining farms may have signed non-negotiable long-term agreements with power companies, the alternative would be to adopt new mining machines with lower energy consumption.

Mao said that in China, where many mines are concentrated, large miners are in an advantageous position and can try to negotiate electricity prices.

"As the halving approaches, Bitcoin miners are destined to face the problem of lower mining revenue and higher electricity costs. At the same time, the payback period for miners will become longer. Under this year's market conditions, what we must do is to optimize electricity costs, because the lower the electricity price, the less impact the miners will suffer. In China, large miners actually have bargaining power, and they are in a more advantageous position because power companies do not want to lose their business. But the mining field is no longer the same as before," Mao Shixing mentioned.

However, small miners have an advantage over large miners after the halving, as their operating costs have also become cheaper over the past two years.

Mao Shixing said that the emergence of professional hosting service providers and mining farm construction companies has enabled small miners to outsource the services of many third-party companies, greatly reducing operating costs.

“After years of development, a more professional division of labor has been formed in the mining field, including professional hosting teams and mining farm builders, providing hosting services and electricity fees to small miners,” he told us.

“Although they do not have the obvious advantages of large miners, this has greatly reduced the electricity costs of small miners. In this case, if small miners can adopt the hosting services provided by professional mining farms, use new low-energy mining machines, and control their electricity costs per kilowatt-hour to less than $0.03, they may still make money after the halving.”

Bitcoin mining difficulty refers to the computing power required to mine a Bitcoin block, which usually decreases during the halving period. A further decrease in mining difficulty will relieve some of the pressure on miners after the halving because mining will become less energy-intensive.

Mao noted that if miners can make good strategies and successfully get lower electricity prices to operate their mines while the mining difficulty remains low, they will not be particularly affected until the end of the flood season - usually at the end of August, when China's electricity prices usually rise.

Mao Shixing also added that

“Everyone’s profit margin will generally be lower, but miners will have enough time to adjust, so there is no need to worry. This part of computing power will support the security of the Bitcoin network. Of course, if the price of Bitcoin continues to rise, it will give miners more confidence to enter the mining market.”

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