The Bitcoin halving is an automated process within the Bitcoin (BTC) 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 more scarce and serves as a deflationary measure, strengthening its position as a store of value. While Bitcoin investors will likely benefit from the expected price increase after the halving, miners will need to adapt or face challenges as they compete for fewer BTC rewards. Ultimately, miners are the most affected by the halving.
BTC miners must continually optimize their operations as they engage in a long-term game that relies on the market price of the Bitcoin they receive for mining blocks, which is influenced by their mining efficiency. With block rewards remaining constant, miners must be prepared to navigate a volatile market.
The upcoming 2024 halving has the potential to bring significant changes to the mining industry. Bitcoin miners will need to seek more affordable energy sources and optimize their mining equipment. This could result in meaningful shifts in how the Bitcoin mining industry functions, which would impact all Bitcoin holders.
Bitcoin miners must upgrade their rigs to stay competitive. They 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.
Alejandro De La Torre, the founder and CEO of mining pool Demand, expressed his excitement about the halving in an interview with Cointelegraph. However, this market shake-up will likely lead to the disappearance of some miners.
The profitability of miners heavily influences the price of Bitcoin. If the price does not increase enough to offset the reduction in block rewards, older mining models that are three to five years old will no longer be cost-effective, according to Ben Gagnon, 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 highlighted the continuous growth of the global Bitcoin hash rate as a potential indicator that miners are already upgrading their equipment.
The Bitcoin hash rate represents the computational power dedicated to validating and securing Bitcoin transactions. It indicates the level of mining activity within the Bitcoin network. The hash rate has been consistently reaching new records, with 700 exahashes per second (EH/s) potentially being the next milestone.
Optimization is a fundamental principle of Bitcoin mining. Miners who fail to adapt and remain stagnant will not survive in the long run. Anibal Garrido, a Bitcoin mining expert and crypto assets adviser, emphasized that most successful miners already use new and efficient machinery, and those who are unprepared are destined to fail.
The migration of Bitcoin miners to other countries is a possibility to consider. Currently, the United States holds the largest share of mining power at nearly 38%, according to Chain Bulletin. De La Torre believes that the United States will be significantly affected by the halving due to its high hash rate. Inefficient miners may need to shut down their operations completely or temporarily if they are unable to update their infrastructure.
The distribution of mining worldwide largely depends on the energy costs associated with running 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, as the cost is roughly equivalent to the price of a new Lamborghini Huracan.
The halving presents an excellent opportunity for countries or regions with low purchasing power, as old-generation mining rigs may flood the market. De La Torre mentioned Paraguay and Venezuela as potential beneficiaries due to their low electricity prices. Tether’s investment of $500 million into Bitcoin mining operations in Paraguay further demonstrates the potential of these regions.
Garrido emphasized that energy costs are crucial for miners, but a secure regulatory environment is also essential. Despite its high energy cost compared to other countries, the United States remains a popular location for mining due to its favorable regulatory environment.
While miners have the option to mine other cryptocurrencies instead of Bitcoin, all the interviewed miners agreed that this is highly unlikely. Bitcoin mining equipment is specifically designed for cryptocurrencies that use the SHA-256 hashing algorithm. Bitcoin Cash (BCH) and Bitcoin SV (BSV) are the only SHA256 coins to mine, but they have significantly smaller market caps and less liquidity compared to Bitcoin.
The potential centralization of the Bitcoin mining industry raises concerns about decentralization, a core value of cryptocurrencies. In the early days of Bitcoin, anyone with a personal computer could mine the cryptocurrency. As Bitcoin gained popularity, more miners entered the market.
As the industry evolved, mining groups emerged, raising concerns about centralization, which would contradict the vision of Bitcoin’s creator, Satoshi Nakamoto. With each halving, mining Bitcoin becomes more difficult, leading to the exit of small miners and the dominance of larger, financially capable firms. This process could potentially centralize 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. Even if the two largest miners were to merge, they would not gain more than 10% of the network hash rate.
The price of Bitcoin plays a crucial role in decentralization. If the price surges, new actors will be attracted to the mining industry, promoting further decentralization. Garrido emphasized that the centralization of the Bitcoin mining sector is highly unlikely. The open-source nature of Bitcoin allows all miners to monitor the level of centralization within the network. If a mining pool poses a threat to decentralization, the community can disconnect its mining rigs from that pool.
Garrido also stressed that miners would not allow any mining pool to surpass 50% of the total mining sector. This would prevent a 51% attack and double-spending, ensuring the integrity of the network.
The halving represents a liquidity shock for miners and the market. The predetermined nature of Bitcoin provides predictability that prudent miners can navigate. The halving can be seen as a purification process, removing non-efficient miners and improving Bitcoin’s mining infrastructure.