The Bitcoin network is set to see its mining block reward halved in the first half of May. Speaking to LongHash in exclusive interviews, leaders at the world’s two largest Bitcoin mining pools, F2Pool and Poolin, discussed how the Bitcoin mining sector would look like after the halving.
A block reward halving happens approximately every four years, and it drops the reward that miners receive by 50%. As a public blockchain network, Bitcoin is made up of a chain of blocks, and each block is verified, or “mined,” by a miner through the use of computing power and electricity.
Since each block contains data of transactions made on the Bitcoin network, mining can be simply understood as a process that verifies and confirms transactions on the blockchain. Without it, the network would grind to a halt.
The reward miners receive from verifying blocks of transactions is used to cover the costs that go into mining. Mining equipment has improved rapidly year-over-year in terms of technical specifications and energy efficiency, but it still consumes a significant amount of electricity, which comes at a cost. And the specialized mining computers that most miners use, called ASICs, aren’t cheap to purchase and maintain either.
When the mining reward halves, it could cause cash-flow problems in the immediate term for miners both small and large, leading businesses to falter. After all, the halving of reward means a potential halving of their revenue, although the profitability of Bitcoin mining is also affected by other variable factors like Bitcoin’s price, mining difficulty, etc.
Following a halving, the industry could become unstable. As miners lose a significant portion of their revenues overnight, it may become financially unfeasible for many small miners to continue mining Bitcoin.
More capitulation is possible if Bitcoin price stays at $6,000 to $7,000
The Bitcoin price has increased substantially roughly ten months after every halving in the past 11 years. As a result, the drop-off in revenue in BTC terms is made up by the increasing Bitcoin price.
As an example, if a miner made a profit of 100 BTC in a single month before the halving at a price of $7,000, that is equivalent to $700,000 in monthly profit. If the revenue is cut by 50% after the halving, but the BTC price doubles to $14,000 over the next year, it can help balance out the halving — at the end of the year, the miner is now earning just 50 BTC for the same work that previously earned 100 BTC, but that 50 BTC is still worth $700,000, so revenue hasn’t been severely affected.
However, historical data has shown that the Bitcoin price does not tend to see an immediate-term increase following the halving. In the previous halvings of 2012 and 2016, the BTC price didn’t see a proper extended rally until about 10 months after each halving occured. That means that miners may have to weather a long storm of depressed revenues before they’re likely to see any recovery.
If the Bitcoin price remains in the $6,000 to $7,000 range after the halving, Mao Shixing, the co-founder of F2Pool, the largest Bitcoin mining pool in the global industry as of this writing, says that more machines will face an inevitable shutdown:
“If the price of Bitcoin maintains at the current range of $6,000 to $7,000, more machines will inevitably be shut down after the halving. The March 12 crash has already caused a number of machines to shut down. But we may still try to improve their efficiency and reduce their costs.”
A closure of machines and mining centers in the aftermath of the halving would cause problems for both small and large miners, which may lead to a short-term drop in hashrate.
The term hashrate refers to the amount of computing power that is used to secure the Bitcoin network and process transactions on top of it. Although there may be a sharp decline in hashrate subsequent to the halving, over time it may recover, as it has done in the previous two halvings.
Alejandro De La Torre, the vice president of Poolin—the second largest Bitcoin mining pool in the world—told LongHash that a near-term drop in hashrate is unavoidable. But over the long run, it could bring stability to the mining sector.
Compared to the past, there are now more ways to build and fund a mining center, and miners also have a clear roadmap for how to run their mining centers over the next four years (when the next halving will happen).
De La Torre explained:
“There will be a short term decline in hashrate, I am certain of that. However, I believe a halving is a great opportunity for new players to get into mining. New miners are now able to forecast what the new reward scheme will be in the next four years and looking into the past, we see that Bitcoin has increased in price after every halving. Not to mention, there are now many new ways to fund a mining farm/equipment that were not available just two years ago.”
He also noted that the mining industry has evolved significantly since the last halving took place on July 9, 2016. There are more large players in the sector, better mining equipment, and increased competition, all of which are likely to fuel the global expansion of Bitcoin mining.
“Also, many new tools in terms of operating systems and management tools which make mining much easier as well as more profitable are available that just weren't there a couple years back. I foresee the mining industry to continue its global expansion,” he stated.
Both large and small miners will be affected
The upcoming Bitcoin block reward halving is much different from the previous halvings in the sense that there is a major geopolitical risk and a macro economic factor that is applying immense pressure on the price of Bitcoin.
In 2012 and 2016, there was no serious global economic slowdown or a sudden bear market that led all major asset classes to plunge in a short period of time.
If the Bitcoin price remains below the breakeven price of mining, which some researchers estimate to be $13,000 after the halving, then it would only enable mining centers with sufficient cash buffers to continue operating in the short term.
“It's not only small miners that face this challenge,” De La Torre said. “If any type of mining farm, large or small, has low electricity costs and has the newest mining machines up and running, then they will be fine albeit they might take a hit on profitability in the short term. If a miner has high electricity costs and old machines, then they will undoubtedly be in big trouble and will have to shut off. This is the reality.”
To last through the halving, or at least until the Bitcoin price rises above the break even cost of mining, Mao emphasized that Bitcoin miners will have to become more resourceful.
Miners need to find ways to lower costs, quickly
One of the ways miners could lower the cost of mining is through negotiations with electricity providers to decrease electricity bills. However, since most large-scale mining centers enter long-term agreements with electricity companies that may not be negotiable, an alternative approach would be to use new mining equipment that requires less energy to operate.
In China, where many mining centers are based, Mao said that big miners have an advantageous position to attempt to negotiate energy costs.
“With the halving approaching, Bitcoin miners are doomed to be confronted with the problems of mining profits getting lower and the proportion of electricity bills higher. Meanwhile, miners will need more time to reach the break-even point. In view of the current market performance, what we must do is to optimize the electricity cost, as the lower the electricity cost is, the less the miners will be affected. In China, big miners actually have bargaining power as they [hold] a more advantageous position [since electricity companies don’t want to lose their business]. But the mining industry is not the same as before,” Mao said.
However, small miners also have one advantage over large miners after the halving in that over the past two years, it has become much cheaper for small miners to operate.
With professional custody service providers and mining center construction firms, Mao said that small miners are able to outsource many services from third party companies, substantially reducing costs of operation.
“After years of development, [the mining industry] has formed a sophisticated division of labor, including professional custody teams and farm constructors who provide hosting services and electricity fees for small miners,” he said. “Although there is no obvious advantage in comparison with big miners, it has largely reduced the energy costs of small miners. In this case, small miners may still make profits after the halving, if they can adopt the hosting services provided by professional farms, use new energy-efficient machines, and control their electricity costs below $0.03 per KW/h.”
The difficulty of Bitcoin mining, which refers to the amount of computing power required to mine Bitcoin blocks, tends to drop around the halving season. A further drop in mining difficulty would ease some of the pressure applied on miners after a halving occurs, due to mining becoming less electricity intensive.
If miners remain resourceful and successfully negotiate lower electricity rates to run their mining centers while mining difficulty stays low, Mao said that they can operate without a particularly big impact until the rainy season — normally at the end of August — when electricity prices in China typically increase.
Mao added, “Everyone's profit margin is likely to stay relatively low, but it’s OK as miners can have enough time to adjust. Their computing power will be able to 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 into operation.”
This article was updated on Monday, April 20.