As the halving approaches, it is not an easy time for mining companies. According to BTC.com, there are approximately 2 days and 11 hours left until the fourth Bitcoin halving, with 374 blocks remaining. The halving is expected to take place between April 19th and 20th. Once it happens, the number of Bitcoins entering circulation will be reduced from around 900 per day to 450 per day. The block reward for Bitcoin miners will also decrease from 6.25 to 3.125 Bitcoins. This lower reward means that the input-output ratio for mining will sharply decline for miners. Combined with the current geopolitical conflicts and uncertainty in energy costs, the pressure for survival in the mining industry has increased significantly. Bloomberg predicts that the mining industry will face losses of approximately $10 billion after the halving.
Looking at the development of the mining industry, it has always been a centralized and winner-takes-all industry since the emergence of mining pools. The upcoming halving will further push it towards specialization, refinement, and concentration among the top players.
Perhaps due to the uncertainty, the stocks of leading mining companies have already experienced a significant decline before the halving. The stock prices of Marathon Digital Holdings, Riot Platforms, and CleanSpark have been falling for the past three days. The stock price of the largest publicly traded Bitcoin miner, Marathon Digital Holdings, has dropped nearly 25% in the past month, while Riot Platforms has fallen nearly 30%. The Valkyrie Bitcoin Miners ETF’s value has also decreased by approximately 28% this month.
However, based on historical performance, miners should not be too worried. After all, the halving corresponds to an increase in the scarcity of Bitcoin, and the increased income from price rises usually easily covers the increased costs for mining companies. Specifically, after the first halving in November 2012, the price of Bitcoin soared by 9,583% within 367 days, reaching a peak of $1,160. During the halving in 2016, the price rose by 3,041% within 562 days, reaching $19,660. And during the halving in 2020, the price increased by 802% within 1,403 days, reaching its previous all-time high of $73,800.
But unlike the previous three halvings, the situation for this halving is more complex, with global macroeconomic tightening and the influx of massive funds from ETFs making the market more unpredictable. Thanks to the previous bull run, most mining companies have emerged from the bear market of 2018 and have relatively stable balance sheets with low debt levels. However, the influence of miners is gradually decreasing, and Wall Street financial institutions with self-liquidity are becoming the key group that controls the Bitcoin price. As of April 16th, 11 spot ETFs held a total of 840,000 Bitcoins, and this number is growing rapidly.
Due to the differences in the macroeconomic situation, investment banking giant Goldman Sachs has warned clients not to predict future price movements based solely on past halving cycles. Rich Rosenblum, the Co-founder and President of GSR, also stated that the fundamental impact of this halving is the smallest in history. From the data, the change in Bitcoin’s supply is half of what it was four years ago, but the trading volume is ten times higher.
However, according to interviews with five leading mining companies by research and brokerage firm Bernstein, despite the decline in stock prices and the sharp increase in mining costs, mining companies still seem to hold a relatively optimistic attitude.
In a report to clients on Monday, Bernstein wrote that the main reason for the poor stock performance is the strong flow of US spot Bitcoin ETFs, which has absorbed some of the retail liquidity of mining company stocks. Secondly, the market is also concerned about the impact of the halving on mining company revenue.
Fred Thiel, the CEO of Marathon, stated that the market currently views mining stocks as alternatives to Bitcoin. After the ETFs were introduced, a relatively common trading strategy was to go long on spot Bitcoin ETFs and short mining companies, which is why the stock market declined.
Zack Bradford, the CEO of CleanSpark, mentioned that Bitcoin mining stocks will perform better after the halving, and leading companies will gain greater dominance compared to smaller, less efficient miners.
In this context, expanding production capacity has become the preferred choice for most leading mining companies. Marathon has acquired new Bitcoin mines, and CleanSpark expects to double its capacity by the end of this year. Bernstein also mentioned that Riot focuses more on organic expansion and believes that the market doubts its efficiency and normal operating time due to its current low efficiency and normal operating time. However, once it opens new 1GW sites and increases its capacity by more than double the remaining time until 2024, the market sentiment will quickly reverse.
High computing power equipment is also a battleground for mining companies. According to the computing power index, the average hosting fee in the United States is slightly lower than $0.08 per kilowatt-hour. From the revenue side, since the last halving in May 2020, the hash price representing the average income of miners has decreased by 30%. After the halving, the hash price may drop to $0.055, putting significant pressure on revenue. According to data from CoinMetrics, most mining companies are still using relatively inefficient machines. Miners need operating costs of $0.05 per kilowatt-hour or lower to maintain a healthy gross profit margin after the halving.
In this context, many US mining companies may face cash flow challenges after the halving and be forced to undergo large-scale equipment upgrades. The data also supports this, as since February 2023, 13 top mining companies have placed orders for mining machines worth over $1 billion.
In terms of costs, mining companies are also seeking areas with lower electricity costs and are targeting regions such as Africa and Latin America. A typical example is Marathon’s attempt to enter the United Arab Emirates and Paraguay, while Hashlabs provides hosting solutions in Ethiopia. Lower electricity costs mean stronger core competitiveness. For example, Riot’s CEO stated that they achieved very low energy costs in 2023, with energy costs of $0.022 per kilowatt-hour. The breakeven electricity price for the most advanced mining equipment is theoretically $200 per megawatt-hour, but after adding other costs, it is about $100. Riot’s electricity cost in 2023 is $22 per megawatt-hour, which also provides a solid foundation for dealing with the halving.
Expanding capacity and integrating investments both require funds, which is one of the reasons why miners have been selling Bitcoin recently. According to CoinMetrics data, as of April 10th, the current Bitcoin balance of miners has dropped to 1.794 million BTC, the lowest level since early 2021. Miners have sold over 27,000 BTC since November last year.
While defensive measures may seem straightforward, not all mining companies can follow suit. In addition to the leading companies that are actively preparing, many small and medium-sized or companies with relatively weak balance sheets can only face the deteriorating industry environment. Stronghold is already considering selling assets, and another mining company, Applied Digital, agreed to sell its Garden City factory in Texas to Marathon for $97.3 million last month.
In this race for market share, Bradford predicts that the mining industry will eventually consolidate into four major companies: CleanSpark, Marathon, Riot Platforms, and Cipher Mining. Thiel also agrees with this view, stating that CleanSpark is the “main competitor” in the acquisition targets for their company.
The positive aspect is that the increasing activity of applications on the blockchain has also allowed miners to gain new transaction fee income sources, putting them in a relatively good financial position to cope with the impact of the halving.
In this cycle, DApp developers, Layer2 scaling infrastructure teams, and Bitcoin NFTs have driven transaction fees to surge, accounting for up to 40% of miners’ income. Currently, Bitcoin transaction fees account for approximately 10% of revenue.
Furthermore, the growing presence of artificial intelligence is another threat and double-edged sword for the mining industry. Mining companies generally state that “in the short term, artificial intelligence helps miners reduce the cost of Bitcoin ASIC chips, but it will also introduce more computing power competition in states with lower electricity costs, such as Texas.”
Asher Genoot, the CEO of HUT8, stated that given the volatility of Bitcoin prices, Bitcoin miners are seeking AI data centers to diversify their income sources. Of course, most miners are still focused on Bitcoin.
As for the price performance of Bitcoin after the halving, different entities have different views.
Some industry insiders believe that the halving has already been priced in. Fred Thiel, the representative of Marathon, believes that Bitcoin halving may already be partly reflected in the market. The approval of ETFs has attracted funds, which may have accelerated the general price increase in the three to six months after the halving.
However, there are also opposing views. Edan Yago, the founder of Sovryn, and Ogle, the founder of Glue, mentioned that this halving is very important and will make Bitcoin even scarcer, leading to a significant price increase.
But purely in terms of price, pessimists dominate the short-term market sentiment after the halving. Arthur Hayes, the former CEO of BitMEX, who is keen on predictions, mentioned in an article last week that the halving will push up prices in the medium term, but overall, Bitcoin and cryptocurrency prices will experience a significant drop before and after the halving.
Markus Thielen, the Research Director of 10x Research, also stated that considering the potential consolidation period of 4-6 months after the halving, mining companies will tend to stock up on Bitcoin in advance to deal with the halving. After the halving, they will sell their inventory, which could lead to mining companies selling approximately $5 billion worth of Bitcoin and causing sustained downward pressure on the market. Coinbase also believes that although the halving event improves the supply-demand technical aspects, it does not necessarily trigger a cryptocurrency bull market.
Before the halving, the price was already under pressure, and it was also affected by geopolitical situations, resulting in a sluggish performance in the cryptocurrency market. On April 13th and 14th, mainstream currencies experienced significant declines, with Bitcoin, which had a strong price, dropping by $7,000 to touch $60,000. Ethereum also fell below $2,900 and has not fully recovered since then. Bitcoin is currently trading at $63,510, while Ethereum is at $3,081.
Bitcoin bears are naturally becoming more active. Rob Chang, the CEO of Gryphon Digital Mining, a Bitcoin mining company in Las Vegas, mentioned that there has been an increase in hedge funds participating in arbitrage trading, profiting from the price difference between the spot and futures markets. “Bitcoin has recently fallen, but the futures premium is still high, and arbitrage is still attractive.”
Although there are different views on the halving, almost all institutions have a very clear judgment on Bitcoin’s long-term price, which is that it will continue to rise. Many in the community believe that the end-of-year bullish price for Bitcoin is between $100,000 and $150,000. Markus Thielen, an analyst at Matrixport, believes that Bitcoin will rise to $84,000 in April. Zhu Su, the Co-founder of Three Arrows Capital, even wrote an article stating that he does not understand the current bearish sentiment.
Overall, whether subjectively willing or not, the supply-demand changes brought about by the halving will have a long-term impact, rather than being a decisive factor for short-term price jumps. In the market, the reduction in supply is making way for liquidity in trading, and the pricing power of scarcity will transfer. Mining companies also cannot avoid shifting away from the center stage, whether it’s shifting to other chains, following the trend, or seeking other sources of income.
But for Bitcoin, this is just entering the next stage. After all, for any financial product, capital is its ultimate destination.
References:
James Hunt:Bitcoin mining CEOs remain five days away from the halving, Bernstein says
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