Bitcoin halving, which occurs typically every four years, is a key event built into the Bitcoin protocol. It involves a 50% drop in the reward granted to miners for validating transactions, which has a significant impact on the supply dynamics of the main digital currency. In this research, we will dive into the complexities of the approaching halving, analysing past trends, current price trajectories, and predictions to determine its potential impact on Bitcoin miners' survival.
Let's begin by defining Bitcoin halving. Bitcoin halving is a regular procedure where miners' reward per block is reduced by half. Block mining requires high-performance equipment and high energy consumption since it's a complex and time-consuming computation process. To motivate miners, each successfully mined block is rewarded with a certain amount.
When 210,000 blocks are mined, halving occurs, gradually decreasing the number of new coins entering the market. As of today, each mined block is rewarded with 6.25 BTC, but by the next Bitcoin halving date in April 2024, this amount will go down to 3.125 BTC.
Why does that happen? Bitcoin halving is a built-in function of the network that was designed to ensure a constant increase in the value of Bitcoin. This mechanism creates asset scarcity, which in turn increases demand from the market.
This benefits both coin holders and miners because the value of their holdings is constantly increasing in relation to other currencies. The increasing value of Bitcoin is essential for motivating miners, who contribute to the overall performance and health of the network.
There were three previous instances of Bitcoin halving: on November 28, 2012; on July 2, 2016; and on May 11, 2020. Initially, mining a block would be rewarded with 50 BTC, then it was halved three times, going down to 6.25 BTC.
Bitcoin's Halving Effect on Price chart. Source: Crypto.com
On the day of the first halving in 2012, the price of BTC was around $12. Almost exactly one year later, BTC reached a new all-time high of $1,127.45. The next halving coincided with the price decreasing to roughly $650. BTC then reached another all-time high of around $20,000 in December 2017, following a record bull run. The BTC price was around $8,600 during the third halving in 2020, and by November 2021, it had risen to the current all-time high of almost $69,000.
Examining the history of Bitcoin halvings gives useful insights into probable patterns and trends. However, there were only three previous halvings, so it's difficult to be sure about the trends around this event. In previous instances, the price would decrease before and during halving and then reach a new peak within a year.
Currently, we are seeing an increase in price before halving, but it still might drop as we get closer to April. Then we can expect a rapid spike, just like it happened in previous cycles. A new all-time high price would mean exceeding $70,000 per BTC.
What is Bitcoin mining? Bitcoin mining is the process of confirming information in a blockchain block by creating a specific solution that meets certain criteria. When a proper cryptographic solution is found, the miners who discovered it first automatically receive a reward in the form of bitcoin and fees for their contribution.
Over time, the reward for mining Bitcoin decreases. This reward mechanism will continue until there are 21 million BTC in circulation. Once that number is reached, block rewards are likely to stop, and Bitcoin miners will be compensated with fees for their efforts instead.
As mentioned, miners are essential participants in the market because they contribute energy to generate blocks to build and maintain the network. Bitcoin mining is required to keep track of the transactions on which the Bitcoin network was founded.
To maintain consistent profitability, miners will need to evaluate their energy use and electricity prices in order to keep them low enough for adequate compensation. With a physical Bitcoin mining farm, one way to improve the cost-to-profit ratio is by investing in brand-new equipment that is more energy efficient. It’s also advised to look into energy plans that utilise renewable sources like wind, solar, and hydro energy. These options are usually cheaper and can significantly reduce mining costs.
According to Mark Zalan, CEO of GoMining, the energy consumption issue will become defining immediately after the 2024 Bitcoin Halving event expected this April. Considering the extremely high competition in the mining market, we anticipate that the next decrease in mining rewards might raise profitability questions for those lacking in energy efficiency components.
"The BTC mining competition is reaching an all-time high, as evidenced by the total hash rate chart. Amidst the upcoming Bitcoin halving, many miners are grappling with the uncertainty caused by the mining reward being cut in half, which raises the vital question of optimisation," Zalan says.
According to Zalan, the way forward might be found in optimising the energy efficiency of ASIC miners utilised, as well as by finding access to cheaper electricity sources. The latter might include hardware migration to regions with more reasonable electricity fees as well as further implementation of renewable energy sources into the mining process.
"Devices accessing cheaper electricity will have a greater chance to maintain efficient mining, as the difference in prices worldwide can vary by a factor of 10. For instance, according to Statista's data, the average cost of electricity in 2023 was $0.44 per kWh in Britain, $0.17 per kWh in the United States, and $0.08 per kWh in China and the United Arab Emirates. Thus, efficient logistics will play a critical role, especially immediately after the halving event.
Electricity prices worldwide in June 2023. Source: Statista.com
Another factor directly related to energy efficiency is the inherent attributes of ASIC miners. Devices with lower energy efficiency will lose the competition to the latest, most efficient models. Consequently, many market players are already working on updating their hardware in advance," GoMining CEO states.
The Bitcoin mining business is at a turning point as the clock is ticking down to the 2024 halving. Miners should be ready to take advantage of the opportunities that lie ahead and overcome the challenges that come with this time. With value increases after each decrease in block rewards, the historical context of previous halving events offers a positive backdrop. But with price trends changing, energy consumption worries growing, and the sector dynamics potentially shifting, the current environment requires smart planning from mining operations.
The Bitcoin mining industry has a chance to reinvent itself in the face of the obstacles presented by the halving and promote a more robust and environmentally responsible ecosystem. Future developments in mining technology could be largely facilitated by strategic investments in addition to cooperative efforts to address energy consumption issues and entry barriers.
Disclaimer:
Khaleej Times does not recommend any investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the website's content as such. The views expressed by Jon Stojan are his own and may not reflect the newspaper's policy.
Do conduct your own due diligence and consult your financial advisor before making any investment decisions.