As the halving approaches, mining companies are having a hard time.
According to BTC.com, as of press time, there are 2 days and 11 hours left before the fourth Bitcoin halving, with 374 blocks remaining. According to this time, the fourth Bitcoin halving will take place as scheduled between April 19 and 20. By then, the number of Bitcoins entering circulation will be halved from about 900 per day to 450, and the Bitcoin block reward will drop from 6.25 to 3.125. The lower reward means that the input-output ratio of miners will drop sharply. Coupled with the current outbreak of geopolitical conflicts and the uncertainty of energy costs, the pressure on the survival of the mining industry has also increased sharply. Bloomberg predicts that the entire cryptocurrency mining industry will lose about $10 billion after the halving.
Looking at the development of the mining industry, since the emergence of mining pools, it has been an absolutely centralized and winner-takes-all industry. This halving will push it further towards specialization, refinement and head concentration.
Perhaps it is precisely because of the uncertainty that the stocks of the top listed mining companies have all seen a sharp drop before the halving. The share prices of Marathon Digital Holdings, Riot Platforms and CleanSpark have fallen for three consecutive days. The share price of Marathon Digital Holdings, the largest public Bitcoin miner, has fallen by nearly 25% in the past month, while Riot Platforms has fallen by nearly 30%. The Valkyrie Bitcoin Miner Exchange Traded Fund has lost about 28% of its value this month.
If we follow historical performance, miners should not worry too much. After all, halving also corresponds to an increase in the scarcity of Bitcoin, and the income from price increases can usually easily cover the increased costs of mining companies. Specifically, after the first halving in November 2012, the price of Bitcoin soared 9583% in 367 days to a peak of $1160. When halving in 2016, the price soared 3041% in 562 days to $19660 in 562 days; when halving in 2020, the price soared 802% in 1403 days to the previous high of $73,800.
However, unlike the previous three halvings, the situation of this halving is more complicated. With the global macro tightening and the massive funds brought by ETFs, the market is becoming more turbulent. Thanks to the previous surge, most mining companies have emerged from the 22-year bear market and have a relatively stable balance sheet with a low debt level. However, in contrast, the voice of miners continues to decline, and Wall Street financial institutions with their own liquidity have gradually become the key group to control the price of Bitcoin. As of April 16, the total number of BTC owned by 11 spot ETFs reached 840,000, a rapid increase.
Due to the differences in the macro situation, investment banking giant Goldman Sachs has warned clients not to simply predict future price changes based on past halving cycles. Rich Rosenblum, co-founder and president of GSR, also said that so far, the fundamental impact of this halving is the smallest ever. From the data, the change in Bitcoin supply is half of that four years ago, but the trading volume is ten times that of four years ago.
But from interviews with five leading mining companies by research and brokerage firm Bernstein, mining companies seem to remain relatively optimistic despite the sharp rise in mining costs and the sharp drop in stock prices.
Bernstein wrote in a report to clients on Monday that the main reason for the current poor stock price performance is the strong flow of U.S. spot Bitcoin exchange-traded funds, which has siphoned off some retail liquidity from miners' stocks. Secondly, the market is also concerned about the impact of halving on miners' revenue.
Marathon CEO Fred Thiel said that so far, the market has viewed mining stocks as an alternative to Bitcoin. After the launch of the ETF, a relatively common trading pattern is to long on spot Bitcoin ETFs and short on miners, which corresponds to the reason for the stock market decline.
CleanSpark CEO Zack Bradford mentioned that Bitcoin mining stocks will trade better after the halving, and leading companies will gain greater dominance compared to smaller and less efficient miners.
In this context, increasing production capacity has become the first choice for most leading mining companies. Marathon has acquired a new Bitcoin mine, and CleanSpark also expects to double its production capacity by the end of this year. Bernstein also mentioned that Riot is more focused on organic expansion, believing that the market has questioned its current efficiency and low uptime, but once it opens a new 1GW site and more than doubles its capacity in the rest of 2024, market sentiment will quickly reverse.
The corresponding high-computing power equipment is also a must-have for mining companies. According to the computing power index, the average hosting fee in the United States is slightly lower than $0.08/kWh. From the revenue side, the hash price, which represents the average income of miners from mining blocks, has fallen by 30% since the last halving in May 2020. After the halving, the hash price may fall to $0.055, and the revenue is under severe pressure. According to CoinMetrics, most mining companies are still using relatively inefficient machines, and miners need operating costs of $0.05/kWh or less to maintain a healthy gross profit margin after the halving.
In this context, many US miners may face cash flow challenges after the halving and be forced to carry out large-scale equipment upgrades. The data is also consistent with this. Since February 2023, 13 top mining companies have placed orders for mining machines worth more than US$1 billion.
From the cost side, mining companies are also looking for areas with lower electricity costs, targeting Africa, Latin America and other regions. A typical case is that Marathon is trying to enter the UAE and Paraguay, and Hashlabs provides hosting solutions in Ethiopia. Low electricity costs mean strong core competitiveness. Taking Riot as an example, its CEO said that it achieved very low energy costs in 2023, with energy costs of 2.2 cents per kilowatt-hour. The current break-even electricity price for the most advanced mining equipment is theoretically $200 per megawatt-hour, but after adding other costs, it is about $100. Riot's electricity cost in 2023 is $22 per megawatt-hour, which also lays a solid foundation for its response to halving.
Both expanding production capacity and integrating investment require funds, which is one of the reasons why miners have continued to sell Bitcoin in recent days. According to CoinMetrics data, as of April 10, the current miner's Bitcoin balance has dropped to 1.794 million BTC, the lowest level since the beginning of 2021. Since November last year, miners have sold more than 27,000 BTC.
The seemingly straightforward defensive measures are not something that all mining companies can follow. In addition to the leading companies making intensive preparations, more small and medium-sized mining companies or mining companies with relatively bleak balance sheets can only face the deteriorating industrial environment. Stronghold is considering selling assets, while another mining company, Applied Digital, agreed last month to sell its plant in Garden City, Texas, to Marathon for $97.3 million.
In this race, Bradford expects the mining industry to eventually consolidate into four major companies: CleanSpark, Marathon, Riot Platforms and Cipher Mining. Thiel agrees, calling CleanSpark the company's "primary competitor" in the battle for acquisition targets.
On the positive side, the continued increase in application activity on the blockchain has also prompted miners to gain new sources of transaction fee income, putting Bitcoin miners in a relatively good financial position to cope with the impact of the halving.
During this cycle, DAPP developers, Layer2 expansion infrastructure teams, and Bitcoin NFTs have driven transaction fees soaring to as much as 40% of miners’ revenue. Currently, Bitcoin’s transaction fees account for about 10% of revenue.
In addition, the growing use of artificial intelligence is another threat factor and a double-edged sword for the mining industry. Mining companies generally stated: "In the short term, artificial intelligence will help miners reduce the cost of Bitcoin ASIC chips, but it will also introduce more computing power competition in states with lower electricity costs such as Texas."
Asher Genoot, CEO of HUT8, said that given the volatility of Bitcoin prices, Bitcoin miners are looking for artificial intelligence data centers to diversify their income sources. Of course, most miners are still focused on Bitcoin.
Different entities have different views on the price performance of Bitcoin after the halving.
Some industry insiders believe that the halving has already been priced in. Fred Thiel of Marathon, a mining company representative, believes that the Bitcoin halving may have been partially reflected in the market. The approval of the ETF has attracted funds to enter the market, which may have accelerated the general price increase three to six months after the halving, and moved the rising period forward.
Some people have expressed opposition to this. Edan Yago, founder of Sovryn, and Ogle, founder of Glue, both mentioned that this halving is very important and will make Bitcoin more scarce, leading to a significant increase in the price of Bitcoin.
But judging from the price alone, there are many pessimists about the short-term market brought about by the halving. Arthur Hayes, former CEO of Bitmex, who is keen on predictions, mentioned in his article last week that the halving will push up prices in the medium term, but the price of Bitcoin and cryptocurrencies in general will plummet before and after the halving.
Markus Thielen, head of research at 10x Research, also said that given the sideways trend from April to June that may occur after the halving, mining companies will tend to stockpile Bitcoin in advance to cope with it and sell off their inventory after the halving. Therefore, there may be a $5 billion sell-off by miners after the halving, which will bring continued downward pressure to the market. Coinbase also believes that although the halving event improves the technical aspects of supply and demand, it will not necessarily trigger a bull market in cryptocurrencies.
Before the halving, prices were already under pressure, and affected by the geopolitical situation, the crypto market price performance was sluggish. On April 13 and 14, mainstream currencies plunged significantly. The strong BTC once plunged by $7,000 to $60,000, and Ethereum also fell below $2,900. It has not yet fully recovered its lost ground. BTC is now at $63,510, while ETH is at $3,081.
Bitcoin shorts are naturally ready to move. Rob Chang, CEO of Las Vegas Bitcoin miner Gryphon Digital Mining (GRYP), mentioned that there has been an increase in hedge funds participating in arbitrage trading, where shorts use the price difference between the spot and futures markets to make profits. "Bitcoin has fallen recently, but the futures premium is still high, and arbitrage is still attractive."
Although there are different opinions on the halving, almost all institutions have a very clear judgment on the long-term price of Bitcoin, that is, long-term bullish - $100,000-150,000 is still the bullish price at the end of the year in the minds of many communities. Among them, Matrixport analyst Markus Thielen believes that Bitcoin will rise to $84,000 in April, and Zhu Su, co-founder of Three Arrows Capital, even directly wrote that he does not understand the current bearish phenomenon.
Overall, whether we like it or not, the supply and demand changes brought about by halving will have an impact in the longer term, rather than being the decisive factor in the price jump in the short term. In the market, the reduction in supply continues to give way to transaction liquidity, the scarce pricing power will be transferred, and mining companies will inevitably turn from the center of the stage, or rush to other chains, or follow the general trend to seek other income.
But for Bitcoin, this is just entering the next stage. After all, for any financial product, capital is its final destination.
references:
James Hunt: Bitcoin mining CEOs remain 'upbeat' five days away from the halving, Bernstein says
China Times: Bitcoin halving is imminent - the price of the currency fluctuates frequently, and miners sell off
