The computing power of the Bitcoin network, also known as the mining hashrate, is said to drop drastically over the next year as Bitcoin (BTC) is set to undergo a process known as ‘halving’.
Every four years, the rewards miners receive for successfully mining a block on the network get cut in half. Halving is a way of controlling the blockchain’s supply economics by reducing inflationary pressure on BTC.
At present, the reward for every block mined is 6.25 BTC ($182,274), and from April 2024 onwards, this rate will be reduced to 3.125 BTC per block ($92,136).
Bitcoin Halving Can Cut Rewards While Increasing Mining Costs
But halving creates an inverse reaction, where when the rewards get cut in half, the cost to mine Bitcoin doubles. This mechanism helps prevent any major upward swing in the asset’s price but negatively affects miners as their profit reduces drastically.
This would cause miners affected by heavy losses to shut down operations and, in turn, lowers the Bitcoin hashrate.
Crypto experts are predicting the hashrate to drop by as much as 30% after the next halving event. While talking on a Twitter Space hosted by crypto media outlet CoinDesk, Lucas Pipes, the managing director of investment banking giant B. Riley Financial estimated a 15% to 30% decline in computing power. Whereas, Colin Harper, an executive at Bitcoin mining firm Luxor Mining, said a 20% drop was more likely.
Bitcoin’s Inability to Remain Above $30k Post-Halving Could Be Fatal to Miners
According to Wolfe Zhao, head of research at Blocksbridge mining consultancy, the current cost of mining for publicly listed miners is $10,000-$15,000 per Bitcoin. But once halving is complete, this cost will double, indicating that the miner’s breakeven point will rise to the $20,000-$30,000 range.
Zhao warned that if BTC does not remain above $30,000 at that point, a vast majority of miners will be creating blocks at a gross loss. Without any significant rally in the asset’s prices, provided the high computing costs, only the most efficient miners will be able to survive the heat as others will be forced to shut down their operations.
Miners Transitioning to Energy-Efficient Rigs to Cut Operational Expenditure
The main operational expenditure for miners is the price of power. Industry experts say the key to surviving halving is to cut down energy costs. This is possible with the latest generation mining rigs, which require way less power to successfully mine a block.
In a study conducted by crypto analytics firm Coin Metrics, it was found that although Bitcoin’s hashrate has been increasing in the past year as more mining machines were coming online, the efficiency of the equipment has doubled every five years. This gives the industry more hope.
Contrary to mainstream talking points that Bitcoin is dangerous for the climate, turns out, that the cryptocurrency can be mined using highly efficient and environmentally friendly methods.
Since miners are aware that their profit margins are guaranteed to shrink, they have initiated strategies to preserve capital, diversify their portfolios, and make their fleets more efficient, stated Bill Papanastasiou, an analyst at investment bank Stifel.
Ethan Vera, the COO of mining firm Luxor Technologies, said that hashrates will see a huge drop-off once the halving occurs. But this will be followed by slow growth in the months after as the industry starts to replace older machines with more efficient mining rigs.
Analysts also found that compared to the bull run of 2021, where miners were simply bringing in as much hashrate online as possible, the industry has turned its attention towards making their machines and operations more efficient.
Kera Langlais, the chief strategy officer at Bitcoin miner TeraWulf put it best into words; “energy cost and equipment efficiency will determine winners and losers post-halving”.
Presently, the Bitcoin miners with the lowest cost of production are Stronghold Digital Mining at $8,200, Cipher Mining at $8,600, and Riot Platforms at $10,400 per Bitcoin in the first quarter of 2023.
At the time of writing, Bitcoin (BTC) is trading at $28,489 – up 1% in the last 24 hours.