With Bitcoin’s halving coming in 2020, some investors see a pump on the horizon, and they’re betting on Bitcoin mining to capitalize on that opportunity.
Will that work out? It may be tempting to view mining machines as “money printers,” but they’re not. Major fluctuations in Bitcoin’s price pose a huge risk for miners. And 2020’s halving could pose other problems as well.
Mining and Halving 101
A Bitcoin mining machine is basically a computer that’s been specifically designed to execute Bitcoin’s mining algorithm efficiently. These machines perform the calculations that generate and verify blocks, and are rewarded for their work with new Bitcoin. But part of Bitcoin’s mining system stipulates that the amount of new Bitcoin that mining generates will halve every four years.
Bitcoin was first introduced in 2009. At that time, new Bitcoins were generated at a rate of 50 BTC every 10 minutes. Four years later, the first halving took place on November 28, 2012, and that number dropped to 25 BTC every ten minutes. The second halving occurred on July 9, 2016, and further reduced new Bitcoins to a rate of 12.5 BTC every 10 minutes.
The third halving is expected to occur in May 2020. It may appear that if production falls while demand continues, Bitcoin’s price will rise. This logic has given rise to the popular prediction of a so-called “halving pump” in 2020. As a result, many people joined the mining industry by investing in mining equipment, leading to a continuous growth in Bitcoin’s hash rate.
Is a Pump Really Coming?
But is a “halving pump” a real phenomenon? If you track price movements you can see that all the historical pumps appeared at least 6 months after the Bitcoin halving event, and reached peaks one year later. The highs of the previous halvings were reached in December 2013 and December 2017, respectively. It is thus doubtful whether there is a definite correlation between the price pumps and the halving events.
For example, the bull run in December 2017 was likely triggered by the ICO boom, which brought huge amounts of money into the market. And even if the price jump at the end of 2013 was created by the halving in November 2012, that single case isn’t enough evidence to conclude that the 2020 halving is likely to produce another pump.
It’s clearly enough to convince some people, though. There are still investors pouring huge amounts of money into mining machines, quickly driving up the cost to mine Bitcoins. The coming halving will make the cost of mining even more expensive.
However, there is no reason to believe that increasing mining costs will push up the price of Bitcoin. Price is determined by supply and demand. If the demand is low the price will likely go down, regardless of how much mining costs.
Still, many people appear to be investing in mining Bitcoin due to confidence in the 2020 halving pump. Although we have no idea how much capital is invested, the fast-growing hash rate suggests it is significant.
Bitcoin’s hash rate has risen 80% since June, and it’s likely do to an increase in the use of advanced mining hardware. According to a recent report by the digital asset manager CoinShares, Chinese miners currently control approximately 66% of the world ’s hash rate, the highest regional share recorded since Chinese share exceeded 60% in June. Chris Bendiksen, CoinShares’s head of research, said "the gains may be due to China's greater deployment of more advanced mining gear."
According to CoinShares, the most significant mining hubs in China are Yunnan, Xinjiang, Inner Mongolia, and Sichuan provinces, with Sichuan covering more than half of the global hash rate. Other hubs are found from the United States to Russia and Kazakhstan.
CoinShares expects that as mining chips produced by Chinese companies such as Bitmain become easier to export, Bitcoin's hash rate may be more evenly distributed around the world.
At present, the overall hashrate of the Bitcoin network is about 100 Exahashes per second. If the current growth rate continues, the hash rate will increase at a speed of 10-15 Exahashes per month for the next few months. If that happens, by the halving event next year, the hash rate could be at an all-time-high of 140-150 Exahashes.
Assuming that the Bitcoin price stays at $7,200, this increase in hash rate, combined with the halving of mining rewards, would mean that the returns for mining would sink to a level not seen since Bitcoin was trading at $3,600. The last time when Bitcoin was traded at $3,600, the overall hash rate was just 40-45 Exahashes. Given that, Bitcoin miners might face unprecedented pressure, creating trouble for machine manufacturers.
Trouble for Mining Machine Makers
The markets have not been kind to the makers of mining machines.
On November 21, 2019, Chinese crypto mining machine manufacturer Canaan Creative listed its shares on Nasdaq. It is the first crypto mining firm in China that has successfully listed. Previously, the more influential Bitmain also tried to list in Hong Kong, but failed and fell into what some have called a "civil war."
Canaan Creative, a mining machine producer, listed at $9 per share with 10 million shares supplied and a total of $90 million raised during the IPO. As of December 19, the price has dropped by 48.3% to $4.65, indicating big concerns from investors about the future of the mining business.
And compared with the strife at Bitmain and Whatsminer, Canaan's stock price skydive looks tame. In the Bitmain’s civil war, Jihan Wu wrested control over the company from Micree Zhan, but Zhan has said he will take legal action to fight back. Meanwhile, on 15 December, Whatsminer’s founder Zuoxing Yang was purportedly arrested for alleged embezzlement, possibly due to intellectual property disputes with Bitmain.
Long story short, the world’s top mining machine makers are already in rough shape. If the halving pump fails to materialize, it will not only be a problem for the investors who are betting on it, it could also spell disaster for the crypto mining industry.