03/27/2024 0 Comments

1. How Bitcoin Mining Has Changed Since the Last Halving

Every four years, we experience a bonus day in February, the United States elects a president (ideally one supportive of Bitcoin), the Olympics take place, and we witness a significant event called the Bitcoin halving.

In the grand scheme of things, four years may seem relatively short. However, in the realm of Bitcoin mining, where changes in the geographical landscape, hash rate growth, and industry efficiency are big factors, a lot has occurred since the previous halving event.

In 2020, we experienced the last halving during the height of the COVID lockdown, when many of my mining friends celebrated this epic occasion from afar, with hopes of celebrating IRL in four years.

At that time, the price of Bitcoin hovered around $8,700, while the hash rate stood at approximately 120 EH/s. The majority of the hash rate was concentrated in China, and rumors regarding the possibility of a Chinese ban were merely rumors.

Today, we’re nearing the upcoming halving, with Bitcoin price and hash rate reaching unprecedented levels. It’s challenging to envision the landscape for the next halving in 2028.

Since the last halving, the exodus of China miners drastically changed the mining landscape. Miners have sought refuge in jurisdictions offering hospitality or opportunities for energy arbitrage, which became a pivotal metric for success. Several nation states, such as Bhutan, El Salvador, and even Venezuela for a short period, not only embraced miners but also devised strategies to set up mining operations themselves. Not all places that opened their arms to miners ended up being great locations, including Quebec, Canada and Kazakhstan.

Texas emerged as a dominant mining hub, while Latin America and the Middle East saw growing interest and involvement in the mining sector.

Going forward, the surge in hash rate across the Middle East and Africa will continue and, based on announcements from the U.S.-listed companies, there is likely to be an increase of hash rate across North America. Miners will follow the cheapest forms of energy in jurisdictions that are economical and collaborative.

Maybe we will even experience hash rate seasonality again–this round unfolding in ERCOT markets versus rainy seasons in China.

Another major trend over the past cycle was the increase in institutional adoption. The long-awaited approval of Bitcoin ETFs in the U.S. played a significant role in legitimizing Bitcoin as an asset class within mainstream financial markets. The ETFs provided institutional investors with a regulated and accessible avenue to invest in Bitcoin, thereby forcing regulatory authorities and traditional financial institutions to seriously take a look at Bitcoin. While the ETF was having its moment, we can’t forget that public miners were there for institutional investors to invest in as an alternative to holding Bitcoin.

Over the last four years, the proliferation of public miners has been massive.

In 2020, there were only two public miners listed on the NASDAQ. By 2024, it’s hard to keep track of how many public miners there are across multiple exchanges across the world, with the NASDAQ being the dominant boasting at least 25 public miners.

The increase in miners publicly reporting their operations metrics to the markets shed light on issues, such as ASIC costs, hash rate expansion, operational challenges and cost to mine. Additionally, it facilitated an understanding of macro trends like global hash rate distribution, while providing analysts the ability to have a more methodical understanding of the overall cost curve of mining. Keep in mind that the public miners still account for around one-third of the overall network.

Unfortunately, while public companies enabled analysts to provide better coverage, this transparency also introduced greater complexity for analysts operating in the field since there are not standardized metrics. For instance, among a sample of eight public miners, a total of twenty different metrics are disclosed, some where the inputs don’t match.

The absence of standardized basic metrics complicates comparing one miner to another and providing comprehensive coverage. Miners have very different strategies: some host, some own infrastructure and provide services, some have PPA that allow for massive power revenue but lower Bitcoin production, some are working on different forms of compute. How do we bucket everyone as a Bitcoin miner while discounting their strategies?

2. Will Bitcoin’s success bring its doom?

Once every four years, the block reward for Bitcoin miners is cut in half to help the asset maintain its scarcity. The event is called halving. Historically, miners have stayed fully operational and even grown in number over the last three compensation cuts thanks to the rising BTC price.

However, many wonder if the BTC price is high enough for miners to remain operational or if it would face centralization and even existential risks after the fourth halving event.

Speaking with crypto.news, Ryo Coin co-founder Lani Dizon says market dynamics can change, and unforeseen events can have significant impacts.

“Trying to predict the exact impact of a halving on Bitcoin’s price is a challenge. Many factors can influence the market, including overall demand for Bitcoin, investor sentiment, market trends, global economic conditions, regulatory changes, and technological advancements within the blockchain ecosystem, and more.”

Dizon believes while some miners might find the reduced block reward “challenging,” especially if the price doesn’t increase immediately or sufficiently to offset the reduction in rewards, the “Bitcoin network is designed to adjust.” She added:

“However, from a logical perspective, when mining costs are lower than Bitcoin’s market value, more miners will stay in the network. When mining costs increase beyond the miner’s revenue, some miners will leave.”

Compensation concerns

One of the main concerns around the centralization of Bitcoin is the compensation of the miners helping the network stay operational.

As the block reward reduces by 50% in the upcoming halving — falling from 6.25 BTC to 3.125 BTC — Bitcoin’s high price volatility could make it harder for individual miners to be well compensated to operate their nodes in challenging conditions.

Historically, the BTC price reached new all-time highs a year or 18 months after each halving event. Here’s how the Bitcoin price reacted after each halving:

-First halving on Nov. 28, 2012: Bitcoin was trading at $12.35 and surged to $964 a year later.

-Second halving on July 9, 2016: Bitcoin’s price increased from $663 to $2,500 in around one year.

-Third halving on May 11, 2020: BTC was trading at around $8,500 and reached almost $69,000 in just 17 months.

According to Lucian Calin, the data center technician at Argo Blockchain, some over-leveraged miners might not make it through the halving because of high overhead costs or massive debt, but it will all even out in the end. He added:

“It’s like a game of monopoly, the rich keep getting richer, in this case, other miners will buy out smaller miners and take over their activities. Mining will always exist on Bitcoin until the last Bitcoin is mined and even past that to make sure the transactions are confirmed.”

Halving rewards, rising centralization risks

Halving Bitcoin’s block reward could strain small-scale and individual miners because of the high costs involved in mining. Smaller miners might exit the market if they lack sufficient resources. This situation could favor larger mining companies, potentially leading to more centralized network control.

Bitcoin’s centralization could pose a much bigger threat to the global financial system than it seems, with BTC exchange-traded funds (ETFs) registering over $11.2 billion in total net flows.

Centralization could potentially expose the Bitcoin network to the 51% attack and could even lead to a single entity having full control over the blockchain.

This doesn’t seem impossible, given that the Foundry USA Pool controls 27% of the total Bitcoin hashrate. The largest BTC mining pool has an average hash power of 160.43 EH/s followed by AntPool’s 141.46 EH/s — accounting for 23.8% of the total network hash rate.

3. Corporate Bitcoin Mining Is Threat to Future of BTC

The rise of institutional investment and corporations’ involvement in Bitcoin (BTC) mining pose a threat to the decentralized nature of the cryptocurrency. A recent report by Bitfinex, a well-known cryptocurrency exchange, sheds light on how the mining industry has transformed over the years.

The report reveals how Wall Street funding of public Bitcoin mining companies has affected the incentive structure behind mining activities, stating that publicly listed BTC mining companies are now more focused on making profits and meeting investor expectations than upholding the original values of the coin’s community.

Initially, the crypto mining sector was dominated by individuals, as they were rewarded with block rewards and transaction fees. However, the process became increasingly difficult and challenging as an influx of institutional investment and large-scale mining companies with vast resources emerged, giving them a significant advantage over individual and small-scale miners. The report stated:

“The act of mining Bitcoin has evolved from a small group of obscure hobbyists with a uniquely shared interest into a massive industry complete with publicly traded industrial-scale Bitcoin mining operations worldwide.”

The analyst noted that the funds and professionalism provided by public traded funds have further increased the hash power, security, and stability of the Bitcoin network, as a result shifting the initial equal access for all participants. However, this poses the risk of censorship and centralization, which is not good for the Bitcoin network that was initially created to be a decentralized system.

Resource Disparity and the Advantage of Large-Scale Operations

As these corporate mining companies solidify their position, questions arise about the future of independent miners and hobbyists and the distribution of computing power across the network. The resource disparity between corporate and individual miners gives a clear advantage to large-scale operations in terms of efficiency, profitability, securing affordable energy contracts, and investing in emerging technologies.

However, this is also dangerous for the network, as the disparity and profit-driven motives of these corporations could undermine the fair and equal nature of BTC. Therefore, as the process evolves, analysts see it as crucial for the Bitcoin community to protect the principles of decentralization and equal access and find a balance between the benefits of corporate mining and preserving the core values of the network. This way, they are deliberately protecting the future of this groundbreaking technology.

For independent miners to remain viable in the competitive mining landscape, the report suggests that they must innovate and collaborate. Mining pools, which allow smaller miners to combine their computational power and share rewards, can be a powerful tool for maintaining competitiveness. However, the long-term sustainability of hobby mining hinges on continuous advancements in mining technology, energy efficiency, and the adoption of renewable energy sources.

Bitfinex further stressed the importance of having mining operations in different locations to maintain decentralization. Emerging markets with access to renewable energy or untapped resources could offer opportunities and balance the dominance of corporate mining in established markets.

The report emphasized the importance of being watchful and proactive in protecting the decentralized nature of the coin, especially with the increasing institutional investment in mining. The Bitcoin community has to carefully balance the advantages of corporate involvement with preserving the fundamental principles of decentralization and equal access.

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Harvey CHEN

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