Rewritten Article:
Written by: Ben Strack
Translated by: Shanouba, Golden Finance
As the Bitcoin halving approaches, miners are concerned about the potential need to shut down inefficient mining equipment due to the reduction in block rewards.
In less than a week, the block reward on the Bitcoin network will be halved from 6.25 BTC per block to 3.125 BTC. This anticipated decrease has raised concerns about improving cost efficiency, which may make small-scale mining operations unprofitable. These concerns are not new and have been seen before previous halving events. To cope with these changes, some mining companies have taken steps to strengthen their financial position, deploy more efficient equipment, and diversify their sources of income to better withstand the upcoming changes.
However, some observers believe that these concerns are widely exaggerated. Historically, large mining companies have proven that they can adjust and thrive in the cyclical market fluctuations typically associated with halving events.
They predict that the upcoming cycle will yield similar results, with initial disruptions giving way to a phase of price discovery driven by the increasing scarcity of Bitcoin. This could lead to an increase in the price of Bitcoin, which would help offset the impact of the reduction in block rewards. In turn, this could alleviate some financial pressures on miners and potentially restore profitability to their operations.
Industry giants like Marathon Digital and Riot Platforms seem to have a significant advantage in at least one category: their balance sheets hold over $1 billion in cash and Bitcoin, respectively.
Chase White, a senior analyst at Compass Point Research & Trading, previously stated that private miners who lack easy access to public market capital are more likely to be forced to cease operations after the reduction in mining rewards per block.
While it is expected that “everyone will encounter difficulties,” White added that miners with minimal or no debt, low energy costs, and the most efficient mining equipment are likely to survive unscathed. Not all mining companies meet these criteria.
So, the question remains: which companies will be able to weather the halving cycle unscathed or even emerge stronger?
Miners’ past financial struggles
According to multiple sources, it is difficult to find major mining companies that were severely affected by the last halving event four years ago. Kayla Joyce, an associate attorney at Holland & Knight, stated that the halving event in 2024 is different from the ones in 2016 and 2020. She predicts that this could lead to a wave of consolidation and defaults in the now mature industry.
However, she did not disclose which companies she believes are at the greatest risk.
“The halving event in 2020 seemed to have a smaller impact because the Bitcoin mining industry was smaller before the cryptocurrency bull market in 2021,” Joyce told Blockworks. “Investors only started pouring money into the industry in 2021.”
The struggles in the entire mining sector were not primarily caused by the halving event in 2020 but rather stemmed from the cryptocurrency winter in 2022. This downturn occurred after mining companies had accumulated significant debt in pursuit of aggressive growth plans.
Crypto mining data center operator Compute North filed for bankruptcy in September 2022 after raising $385 million in debt financing. The company’s bankruptcy filing stated that it owed at least $500 million to over 200 creditors.
Core Scientific subsequently filed for bankruptcy in December 2022. The company stated that despite positive cash flow, it was not enough to repay equipment financing loans.
The Texas-based company emerged from bankruptcy in January by reducing its net debt to $571 million through the conversion of equipment financing and convertible note holder debt into equity.
The CEO of Core Scientific told Blockworks last month that the company will be more “pragmatic” in its infrastructure growth strategy and will “seize opportunities” in machine purchases.
While Argo Blockchain did not go bankrupt during the bear market in 2022, the London-based company stated at the end of last year that it was struggling to avoid running out of cash to sustain longer-term operations.
As of March 31, Argo mined 103 bitcoins last month, holding digital assets worth the equivalent of 26 bitcoins ($1.82 million). The company also completed the sale of its Mirabel facility in Quebec last month for $6.1 million.
It used the proceeds from the sale to repay the remaining $1.4 million mortgage loan on the Mirabel facility and partially repay its outstanding debt to Galaxy Digital. Argo still owes Galaxy Digital $12.8 million, down from the initial $35 million debt balance.
Argo Blockchain CEO Thomas Chippas said in a statement that the company reduced its debt by $12.4 million in the first quarter.
He added, “As the halving approaches, we will continue to focus on streamlining operations and running as efficiently as possible.”
Examining hash costs and miners’ fate
Looking at the hash price and hash costs of publicly traded mining companies, it is evident that some companies are in a more advantageous position than others during the halving.
The hash price takes into account Bitcoin price, network difficulty, block subsidies, and transaction fees. It measures the potential income miners can generate from a specific amount of hash rate. It is positively correlated with changes in the price of Bitcoin and negatively correlated with changes in Bitcoin mining difficulty.
While hash costs are similar to hash price, they provide a different perspective by measuring miners’ costs.
As the halving approaches, reducing hash costs (through deploying updated machines for increased efficiency or ensuring lower energy prices) has been a key focus for companies in the industry.
According to hash rate index data, the hash price for Bitcoin was around $106 per petahash per second (PH/s) on Monday. This figure takes into account the intraday changes in price and transaction fees.
Wolfie Zhu, the director of research at TheMinerMag, pointed out that the power cost will be halved after the halving, resulting in slightly higher earnings of just over $50 per PH/s per second. In this scenario, most mining companies will still mine at a gross profit, albeit much less than before.
Some publicly traded miners with higher hash costs do not have a significant amount of debt on their balance sheets. Debt-equity ratio is higher for companies like Greenidge, Terawulf, and Stronghold Digital, which are at the lower end of the overall scale of hash rate costs. Therefore, it appears that most public miners will survive the halving after experiencing the highly leveraged bear market in 2022.
Despite the challenges, companies remain confident
According to data from TheMinerMag, Bit Digital and Bitfarms had higher total hash costs than their competitors in the fourth quarter, at approximately 74.2 PH/s and 70.3 PH/s, respectively.
Sam Tabar, the CEO of Bit Digital, told Blockworks in an email that the company plans to double its mining machine scale by the end of this year and equip itself with more efficient machines. It may also consider acquiring some hosting infrastructure to lower production costs. In addition, the company launched a business line focused on supporting artificial intelligence workflows in October.
The Canadian miner agreed to purchase nearly 36,000 Bitmain machines in November as part of its so-called “transformative fleet upgrade.” This process will help the company increase its hash rate by more than two times and improve energy efficiency by around 40%.
Joe Flynn, an analyst at Compass Point Research and Trading, wrote in a research note on April 9 that Stronghold Digital Mining is “in a more challenging position relative to other miners during the Bitcoin halving.” Part of the reason is its limited debt and limited opportunities to enter the capital market. Stronghold’s infrastructure and power supply are valuable as the company will need these resources to plug in the mining machines it has already ordered. He added that selling some of the infrastructure might boost Stronghold’s stock price, which has fallen about 48% year-to-date as of Friday morning. We ultimately believe its assets are valuable and could be acquired through [mergers and acquisitions] as there is the ability to strip out [general and administrative expenses] and lower the high management fees as a small publicly traded company.
Greg Beard, the CEO of Stronghold, told Blockworks that if industry peers see Stronghold as an attractive acquisition target, such a deal would be “something to consider.” Generally, companies that are misunderstood by the public market and have actual attributes and value that can be valued by other public companies…often experience this.
“I think one of the challenges that many miners face is if the structure of their power contracts is challenging, they are forced to buy power at a negative margin,” Beard said.
While Stronghold could be a potential target for acquisition after the halving, Applied Digital has already become a seller before the halving, agreeing last month to sell its Garden City facility in Texas to Marathon for $97.3 million.
