The Bitcoin halving is an automated process within the Bitcoin protocol that reduces the amount of BTC that can be mined per block by 50% every 210,000 blocks, approximately every four years. In just a few days, the reward for mining a block will decrease from 6.25 BTC to 3.125 BTC. This halving event makes Bitcoin even scarcer and serves as a deflationary measure, reinforcing its role as a store of value.
Bitcoin investors are likely to be pleased with the anticipated price increase following the halving, but miners will need to adapt or face extinction as they compete for fewer BTC rewards. Ultimately, miners are the most impacted by the halving.
BTC miners must continuously optimize their operations as they engage in a long-term game that depends on the market price of the Bitcoin they receive for mining blocks, which is influenced by their mining efficiency. With block rewards remaining stagnant, miners must be prepared to survive in a volatile market.
The upcoming 2024 halving has the potential to significantly transform the mining landscape. Bitcoin miners will be compelled to seek out more affordable energy sources and strategically optimize their mining equipment. This may entail significant changes in how the Bitcoin mining industry operates, which is relevant to all Bitcoin holders.
Bitcoin miners must upgrade their rigs to stay competitive. These miners understand the rules of the game, and one of the great advantages of the Bitcoin protocol is that its future behavior is predetermined by code. Just as investors anticipate the liquidity shock caused by the halving, miners know that their business model will be tested every four years.
In an interview with Cointelegraph, Alejandro De La Torre, the founder and CEO of mining pool Demand, expressed his excitement about the halving. However, this market upheaval will ultimately lead to the disappearance of some miners.
The profitability of miners is highly correlated with the price of Bitcoin. If the price does not increase enough to offset the reduction in block rewards, older miner models that are three to five years old will no longer be cost-effective, according to Ben Gagnon, the chief mining officer at Bitcoin mining company Bitfarms.
When asked about the preparedness of the Bitcoin mining industry for the upcoming halving, De La Torre, who is also the former vice president of mining pool Poolin, highlighted the continuous growth of the global Bitcoin hash rate as an indication that miners are already upgrading their equipment in anticipation of the halving.
The Bitcoin hash rate refers to the computational power that validates and secures Bitcoin transactions. It indicates the level of mining activity within the Bitcoin network. The hash rate of Bitcoin has been consistently reaching new records, with the next milestone potentially being 700 exahashes per second (EH/s).
Optimization is a fundamental principle of Bitcoin mining. Miners who remain static and fail to adapt will not survive in the long run. Anibal Garrido, a Bitcoin mining expert and crypto assets adviser, emphasized that most successful miners are already using new and efficient machinery. Those who are unprepared are destined to fail.
Bitcoin miners may choose to migrate to other countries in search of more affordable energy sources and better mining conditions. The United States currently holds the majority of mining power, with nearly 38% of the global hashing power, according to Chain Bulletin. De La Torre believes that the United States will be greatly affected by the halving due to its high hash rate. Inefficient miners may be forced to shut down their operations temporarily or permanently if they are unable to upgrade their infrastructure.
The distribution of mining power worldwide depends primarily on the cost of energy required to run mining rigs. The cost of mining 1 BTC can vary significantly depending on the country. For example, Italy is not an attractive country for mining Bitcoin due to its high electricity costs.
The halving presents an excellent opportunity for countries or regions with low purchasing power, as large quantities of old-generation mining rigs may flood the market. De La Torre mentioned that countries like Paraguay and Venezuela, with their low electricity prices, could benefit from the migration of miners. Tether’s $500 million investment in Bitcoin mining operations in Paraguay further demonstrates the potential of these regions.
Garrido emphasized that energy costs are a crucial metric for miners, but a secure and favorable regulatory environment is also important. Despite its high energy costs compared to other countries, the United States remains a popular location for mining due to its regulatory environment.
Miners have the option to mine a different cryptocurrency instead of selling or relocating their operations. However, all the interviewed miners agreed that this option is highly unlikely. Bitcoin mining equipment can only be used to mine cryptocurrencies that utilize the SHA-256 hashing algorithm. Bitcoin Cash (BCH) and Bitcoin SV (BSV) are the only SHA256 coins available for mining, but they have insignificant market caps compared to Bitcoin and lack liquidity.
The centralization of Bitcoin mining is a concern for the cryptocurrency community, as decentralization is one of its core values. In the early years of Bitcoin, anyone with a personal computer could mine the cryptocurrency. However, as Bitcoin gained popularity, mining groups emerged, potentially threatening the decentralization of the industry.
With each halving, mining Bitcoin becomes more challenging, requiring larger mining rigs and increasing the difficulty of mining. As a result, smaller miners exit the market, while larger, financially stronger firms account for a larger share of the Bitcoin hash rate. This process could potentially lead to the centralization of the Bitcoin mining industry.
De La Torre believes that large players with financial resources will be able to expand their mining operations further, as the secondary market will be flooded with cheap rigs from struggling companies. However, Gagnon disagreed, stating that strong economic forces prevent centralization. He explained that even if the two largest miners were to merge, they still wouldn’t gain more than 10% of the network hash rate. According to Gagnon, concerns about centralization are diminishing with each halving.
The price of Bitcoin plays a significant role in decentralization. If the price surges, new actors will be motivated to enter the mining industry, promoting further decentralization. Garrido stated that the centralization of the Bitcoin mining sector is highly unlikely, as the open-source nature of Bitcoin allows all miners to monitor the network’s level of centralization. If a mining pool poses a threat to decentralization, the community can disconnect their mining rigs from that pool.
Garrido emphasized that miners would never allow any mining pool to exceed 50% of the total mining sector, as this would enable a 51% attack and double-spending.
The halving represents a liquidity shock for miners and the market, but Bitcoin’s programmed nature ensures predictable behavior, allowing prudent miners to survive. The halving can be viewed as a process of eliminating inefficient miners, ultimately improving Bitcoin’s mining infrastructure.