|
Halving gives Bitcoin one of its most important features - deflation. At the beginning of the Bitcoin network, 50 BTC were awarded for each block mined, which took about 10 minutes, but then this reward was halved every four years. The upcoming halving is the third halving of the Bitcoin network and will reduce the Bitcoin issuance rate to 6.5 BTC every 10 minutes.
The halving is a highly anticipated event among industry insiders, with many bullish on prices following the reduction in issuance. With production cut in half, many expect demand to remain the same or increase, meaning prices will increase according to the laws of supply and demand.
Bitcoin halving in May will drive weak miners out of the game However, prices don’t always go as expected, and Bitcoin’s price may remain the same or even drop after the halving. There are many factors that affect prices, including speculative behavior by traders. For example, it is well known that margin trading in futures is a driving force behind the sharp fluctuations in Bitcoin prices during volatility. The market crash on March 12-13 led to the liquidation of many leveraged positions.
Miners also affect the price While speculation is undoubtedly a driver of Bitcoin's volatility, miners are also an important factor because they actually need to liquidate the mined Bitcoin to maintain their operations. Miners account for the majority of funds flowing into exchanges, in addition to other exchanges. Traders usually buy and sell Bitcoin, while miners only sell and do not buy.
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 action that comes with it. The last major crash led to the largest drop in mining difficulty since 2011 and further fueled selling pressure from miners, with many forced to shut down due to reduced profitability.
Bitcoin price has not risen If the price rises significantly, there is no need to worry, because although miners receive fewer Bitcoins, each Bitcoin will be more expensive. This leads to a big question: if the price remains the same, or even worse, falls, how will miners react, and how will the entire network react? While the price change will mean the end for many miners, each business has a different break-even point and, more importantly, a different strategy.
If Bitcoin maintains its current price ($6,800 as of this writing) and the halving occurs, 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’s miners, who still rely on older equipment such as the Antminer S9.
Those running Antminer S9s and electricity costs between $0.03 and $0.05 per kilowatt-hour would need Bitcoin prices to remain between $7,600 and $13,000 after the halving to be profitable — and that’s assuming the difficulty doesn’t change much. Factoring in additional hosting fees and higher electricity costs in countries outside of China, the break-even point would require a higher price.
Therefore, Bitcoin’s halving could force the vast majority of Antminer S9s or any older miners off the network. According to Blockware Solutions, Antminer S9s account for about 30% of the Bitcoin network’s hash rate, with the vast majority of miners using kilowatt-hour prices of $0.03 and above.
This means that if the old generation of miners shut down, the difficulty will drop significantly, which in turn will greatly benefit those who remain as they will share a larger share of the new BTC pie. According to Matt D'Souza, CEO of crypto mining solutions company Blockware Solutions, the difficulty drop could even exceed the market crash on March 12-13. He believes:
“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 slim. If Bitcoin 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 number of miners shutting down could be 27%–35% of the network.”
What about miners with newer generation equipment? Given that the recent Antminer S17 mines 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 of $0.03–0.05.
This means that even if prices remain constant, newer generation miners with higher electricity costs may continue to operate while older generation equipment shuts down because the difficulty has dropped more. In a recent Chainalysis webinar, CoinShares head of research Chris Bendiksen pointed out this pattern, which occurred during the most recent crash in March, and suggested that it may be a “test run” for the halving.
Hedging: Futures and Options If prices remain at current levels or even decline, then new generation equipment can continue to exist even in areas where electricity is relatively expensive. The above businesses have a greater incentive to stay current with the latest equipment releases. This suggests that such businesses may have higher access to capital and, therefore, their business strategies are different.
Selling Bitcoin on the spot market is the most direct way for miners to keep their operations running and make a profit. But there are different strategies, involving different levels of risk, reward, and initial capital. This is the case with derivatives trading, which allows miners to hedge against Bitcoin's price fluctuations.
Miners can use futures or options contracts to insure themselves against short-term volatility by shorting BTC through futures contracts or buying options contracts to sell BTC in the future at a determined strike price.
Although this strategy requires capital, miners have several options available to them, from private investments to P2P loans and even popular crypto credit apps like Nexo or BlockFi — which recently announced they would offer credit to miners for the first time.
If derivatives hedging doesn’t work, miners can take other steps to protect themselves. For example, many mining companies are known to offer hosting services for their own mining operations. This allows them to make full use of available space and make money through hosting and charging electricity fees.
Mobile mining has also gained traction recently, and while it’s not a great solution for those already operating, they offer a cost-effective way for small-scale miners to start making money even after the halving. Another step miners with older equipment can take is to stick to a schedule where they buy a certain number of miners each month to take advantage of opportunities when manufacturers lower their prices. D’souza noted the importance of buying equipment at the right time:
“Deploying mining equipment at the right time is critical - Blockware Solutions advises its clients on when to ditch old mining equipment and buy new. We had our clients sell their old generation and buy the next generation in May-June 2019 so that they were fully prepared.”
Miners can also upgrade to newer generation equipment to reduce their exposure to post-halving price action, sell their existing equipment to miners with cheap or free electricity. Some miners are also inherently protected, such as those with subsidized electricity or even power plants that use excess electricity to power their mining machines.
Finally, another option is to stop mining Bitcoin altogether and move to another blockchain. However, Bitcoin miners are known to be die-hard hobbyists and are not as flexible as GPU miners, for example. So, for some, moving sides may not be an option.
Bitcoin’s Show Must Go On Miners can utilize a variety of tools within the cryptocurrency space to protect themselves against the unknowns that the upcoming halving will bring. Of course, those who have a higher appetite for risk and are bullish on Bitcoin can stick with their current strategy and continue mining, hoping that the price will rise like it did with previous halvings.
However, it is unlikely that Bitcoin will enter a “death spiral” as some have suggested. The reduced 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.
Source: Cointelegraph
|
