For Bitcoin enthusiasts, the quadrennial software update known as the “halving” has long been considered one of the keys to preserving Bitcoin's value.
This time, it will cause billions of dollars in revenue losses on the heels of the biggest cost hikes for the very companies that ensure the smooth functioning of digital currencies.
Around April 20th, due to the halving, the amount of Bitcoin that “miners” can earn each day by validating transactions will decrease from the current 900 bits to 450 bits. Based on Bitcoin's current price, the industry as a whole could face around $10 billion in lost revenue per year. Miners such as Marathon Digital Holdings and CleanSpark, which use ultra-fast computers to compete for fixed Bitcoin rewards by solving mathematical puzzles, are investing in new equipment to cushion the drop in revenue and are undermining smaller rivals. We are looking to acquire a company. .
“This is a final push for miners to squeeze out as much revenue as possible before they take a big hit to production,” said Matthew Kimmel, a digital asset analyst at CoinShares. “With revenue declining across the board overnight, each miner’s strategic response and how they adapt could determine who moves on and who gets left behind.”
Indeed, Bitcoin has reached new highs after the last halving, helping to cushion the regular decline in mining rewards and increases in business costs. This month's event comes after the digital currency has more than quadrupled since November 2022. Still, the industry's margin of success continues to narrow. Miners must continually spend more money in a never-ending technological arms race in order to receive smaller and smaller rewards. And while the energy-intensive verification process has always made mining more expensive, companies now face further competition for power from a fast-growing and well-funded artificial intelligence industry. .
The soaring price of Bitcoin helped offset electricity costs and fueled the growth of cryptocurrency mining. Since the first dedicated machines were introduced in 2013, the combined market capitalization of 14 U.S.-listed miners has grown to about $20 billion, according to an April 1 report from JPMorgan Chase & Co.
U.S.-listed miners are the face of the industry, but they account for only about 20% of the sector's computing power, according to cryptocurrency researcher TheMinerMag. Private miners, who make up the remainder, may be more vulnerable after the halving as they typically have to rely on debt financing and venture capital to finance their needs, while publicly traded companies may be more vulnerable to stock sales. You can raise funds through.
Amid the buzz surrounding the event, some traders are expecting mining stocks to fall. Total short interest, the dollar equivalent of stocks borrowed and sold by bearish traders, was about $2 billion as of April 11, according to estimates by S3 Partners LLC. The short interest represents almost 15% of the group's outstanding shares, three times the U.S. average of 4.75%, said Ihor Dusaniowski, managing director of predictive analytics at S3.
The update, the fourth since 2012, was pre-programmed by anonymous Bitcoin creator Satoshi Nakamoto to maintain a hard cap of 21 million tokens to prevent Bitcoin from becoming an inflationary currency.
The situation is different from four years ago, when Bitcoin traded for less than $9,000 and most of the mining activity was in China. Since then, much of its activity has moved to the United States, promoting power competition.
“The power of the United States is extraordinarily constrained,” said Adam Sullivan, CEO of Austin, Texas-based Core Scientific, the largest publicly traded Bitcoin mining company. “Miners are now competing with some of the world's biggest tech companies who are also trying to find space for data centers that are high consumers of energy.”
Huge amounts of capital are flowing into the nascent AI industry, making it difficult for miners to secure favorable electricity rates from power companies. Amazon.com plans to spend about $150 billion on data centers, and Blackstone is building a $25 billion center empire. Google and Microsoft are also investing heavily.
power grab
David Foley, co-managing partner of the Bitcoin Opportunity Fund, which invests in both public and private miners, said: “We're willing to pay three to four times more than that.” It's happening all over the world, he said.
Tech giants also have an advantage in acquiring electricity from power companies, given their stable revenue streams, but crypto mining profits fluctuate as the price of Bitcoin rises and falls. Taras Kulik, CEO of Sunny Digital, which provides cryptocurrency mining services, said he believes power companies are more reliable buyers given the technology companies' strong balance sheets.
Such competition could make it more difficult to renew low-cost power contracts when existing contracts expire. Greg Beard, CEO of public Bitcoin miner Stronghold Digital Mining, said large-scale Bitcoin miners tend to lock in energy prices, usually for several years.
computer power
Miners compete for a fixed amount of rewards, with the first person to successfully process a block of transactions on the Bitcoin blockchain take-all. The reward will drop from the current 6.25 Bitcoins to 3.125 Bitcoins at the time of the halving.
The more computational power a miner has, the more likely he is to earn rewards. But it's becoming increasingly difficult. According to a biweekly update from cryptocurrency mining website btc.com, mining difficulty, a measure of the computational power required to mine Bitcoin, has increased nearly six times since the halving in 2020. This is a result of the increasing number of miners and fixed rewards.
Companies are updating technology with more efficient machines to generate additional computing power, and public Bitcoin miners are issuing new shares to raise billions of dollars to fund purchases.
This option is not available to private mining companies, which account for about 80% of the industry's computing power in the United States. During the last bull market in 2021, these companies relied primarily on bond issuance to cover their costs. At the time, it was estimated that public and private miners owed up to $4 billion in loans backed by mining equipment. However, the 2022 crypto market crash has caused many lenders to go bankrupt, making it even harder to get deals.
“It’s a tough situation out there,” said Yong Cho, CEO of Blockhouse Digital, an asset management firm that specializes in collateralized lending and yield-generating strategies in the crypto market. “The miners have been looking for a lender for months but have not found one.”
In addition to debt financing, some private miners are also raising money through venture capital funding rounds, said Foley of the Bitcoin Opportunity Fund.
CoinShares' Kimmel said companies with negative cash flow that cannot borrow will have to decide whether to finance their operations through private equity or cash stored upfront on their balance sheets.
“Or they could end up exiting the market if they lack confidence in future mining revenues,” he said.
