What is the ‘Halving’?

The Bitcoin Halving stands as a pivotal moment in the evolution of the leading cryptocurrency. Occurring repeatedly after 210,000 blocks, or roughly every four years, the reward for mining new Bitcoin blocks is cut in half according to the blockchain protocol  The reduction in the number of new bitcoins entering circulation therefore increases the asset's scarcity.

At bitcoin’s  inception, each block awarded 50 new bitcoins. Successive halvings have meticulously decreased this reward, from 50  to 25 bitcoins in November 2012, then to 12.5 bitcoins in July 2016, and further down to 6.25 bitcoins in May 2020. The upcoming halving, slated for April 19, 2024, will diminish the reward once more to 3.125 bitcoins per block.

Currently, approximately 19.65 million bitcoins, accounting for 93.6% of the total eventual Bitcoin supply, have been mined and are already in circulation. This leaves a small fraction, estimated at around 1.35 million bitcoins (6.4%), to be mined through future rewards over the next 116 years. As demand and adoption of Bitcoin continue to rise, this dwindling supply combined with future halving events, shapes the dynamics of the cryptocurrency market.

How are the Bitcoin Miners preparing for this event

  1. Low Cost Energy

Sourcing the cheapest energy in Bitcoin mining becomes crucial as the halving approaches due to its direct impact on operational costs and profitability. With the halving of block rewards, Bitcoin miners must optimize expenses to maintain margins. Cheaper energy translates to lower direct costs, allowing miners to sustain operations efficiently amidst diminishing rewards. Reduced energy costs, in a competitive landscape, enable miners to stay competitive and potentially expand their operations, enhancing their resilience to market fluctuations. In terms of energy costs, many of the North American miners are able to access low power prices, achieving rates of 4 to 5 cents per kWh.

A number of miners have been able to secure lower energy rates. Cipher Mining (CIFR) achieved 2.7 cents kWh and TeraWulf (WULF), with a 5 year fixed contract at Nautilus’ nuclear power site in the state of New York, at an impressive cost of 2 cents per kWh.

A number of Texas based miners, including IREN (IREN), Bitdeer Technologies (BTDR) and Riot Platforms (RIOT) have been able to utilize their energy strategies to deliver power sales and demand response credits, effectively reducing their cost of power.  Jason Les, CEO Riot Platforms, recently explained that the strategies they have utilized at the Rockdale facility have enabled their energy costs for self mining to be closer to 2.2 cents kWh.

Bitfarms (BITF), Bit Digital, Bitdeer technology (BTDR), Hive Digital (HIVE), and Marathon Digital (MARA) have chosen to set up facilities with access to cheaper sources of power further afield in different countries and continents, such as Argentina, Bhutan, Iceland, Norway, Paraguay, Sweden and the UAE.   A number of miners are now considering the opportunities to set up mining operations in Africa with close proximity to hydropower, where cheap underutilized energy is available.

2. Purchasing the latest mining equipment

As this next halving event approaches, miners are intensifying their preparations to adapt to the impending changes in the cryptocurrency landscape. One key aspect of their preparation involves upgrading their mining hardware and infrastructure to enhance efficiency and maintain profitability in the face of reduced block rewards. This move to purchase more efficient machines will keep the costs of mining lower, a real advantage when the block reward is reduced by 50%.

There has been significant investment in purchases of the latest Bitmain and MicoBT machine models by a number of the largest Bitcoin mining companies in North America - including Bitfarms, Bit Digital (BTBT) Core Scientific (CORZ) Hive Digital, IREN, Marathon Digital and TeraWulf.

Another miner to really highlight this investment in more efficient machines is Riot Platforms, who recently announced a number of large machine orders for the latest-generation miners from MicroBT.  The company is expecting to receive 31,500 advanced M60S units over the next 6 months at their Rockdale facility to bolster the hash rate capacity to 15.2 EH/s by Q3 2024 and replace 17,000 older units. A second further order for 66,560 units valued at $290.5 million, featuring an average efficiency rating of 18.5 J/TH, will be delivered to their new facility at Corsicana, where they will all be installed using immersion cooling technology.

Even some of the smaller miners have been boosting their hash rate with the latest mining machines.  DMG Blockchain (DMGI) is currently committed to deploying all 4,550 units of ordered Bitmain T21 miners by June 2024.  The company is choosing to operate in standard energy mode, which should provide a projected yield 0.86 EH/s with 19 J/TH efficiency, thereby facilitating a smoother transition to containerized mining for consistent hashrate production.

3. Diversifying Revenue Streams

A number of miners have utilized hosting services as a way of bringing in steady cash flow during the recent bear cycle.  However, over the last 12 months, many of the public miners, including Hive Digital, Hut 8 Corp (HUT), IREN, SATO Technology (SATO), Soluna Holdings (SLNH) and TeraWulf have announced plans to move into High Performance Computing (HPC) due to the increased demand for Artificial Intelligence (AI) services.  This move to source revenues that are not correlated to the price of Bitcoin, is especially timely as the halving approaches.

Bit Digital announced in October  2023 that they were launching Bit Digital AI, a new business line that would provide specialized infrastructure to support generative artificial intelligence (“AI”) workstreams, were the first Bitcoin miner to announce a significant client.  The initial contract reported $35 million of annualized revenues, but this number was soon increased to $50 million per year, and with the new NVIDIA HGX H100 GPUs arriving and being installed at their leased facility in Iceland, services commenced during January 2024.

The company has since publicly announced that the contract is about to increase by 100% taking the annualized revenues to $100 million. Although margins have yet to be fully disclosed by the company, CEO Sam Tabar, said recently that the profitability of their HPC contract is currently greater than their mining profitability at the current Bitcoin price and would even remain more profitable if the Bitcoin price were to achieve $100,000, this year.

Gearing Up for the Next Halving  (Part 2 of 2)

In part 2, of this article, I will highlight a number of other areas that the Bitcoin miners are currently planning in readiness for the halving, including, cost management, hedging and building a cash runway to provide support post halving.

I also cover the impact of the Bitcoin price on mining profitability, and the implications for some less efficient miners post halving.