Bitcoin miners are set to face significant challenges and a potential “stress test” during the next halving event, according to a recent report by JP Morgan. The upcoming halving, expected to take place in April/May 2024, will reduce miners’ rewards by half, which could have profound implications for the cost of production and profitability within the mining industry.
The Impact of the Halving Event
The halving event is a regular occurrence in the Bitcoin network, happening approximately every four years. It reduces the issuance rewards from 6.25 to 3.125 BTC, directly impacting miners’ revenue and effectively increasing Bitcoin’s production cost. While the halving is typically viewed as having a positive effect on Bitcoin’s price, historically acting as a price floor, it poses a considerable challenge for miners.
JP Morgan analysts highlight the rising production costs as a key concern for Bitcoin miners. The hash rate, which represents the computational power used for mining, has been reaching new record highs. However, volatile electricity costs and intense competition among miners have contributed to an increase in production expenses. With the upcoming halving, the reduced rewards will further squeeze miners’ revenue, making it even more challenging to cover the costs of mining operations.
Vulnerability of Higher-Cost Producers
JP Morgan’s report indicates that the vulnerability of higher-cost producers will be amplified post-halving. The analysis reveals that a mere one-cent increase in the cost per kilowatt-hour can translate into a $4,300 rise in the cost of Bitcoin production. After the halving event, this sensitivity is expected to double to $8,600, leaving higher-cost producers in a precarious position. Miners with access to lower-priced power sources are likely to have a competitive advantage during this critical period.
While the challenges are substantial, some positive developments offer support to struggling miners. JP Morgan notes that institutional interest in Bitcoin mining has provided a lifeline for miners. Companies like Galaxy Digital and Grayscale Investments have made investments in mining rigs, helping to sustain the industry. Additionally, Tether, the world’s largest stablecoin issuer, plans to invest in a Bitcoin mining site in El Salvador, further boosting the sector.
Rising Prices and Transaction Fees
To offset the lower block reward, the price of Bitcoin and transaction fees will need to rise significantly. JP Morgan acknowledges that the decline in hype surrounding cryptocurrencies, including the recent decline in the hype around Ordinals, poses an additional challenge for miners’ revenues. While the number of daily Ordinals inscriptions reached an all-time high, Bitcoin fees did not sustain the same levels. The report suggests that a sustained rise in Bitcoin’s price above its production cost or a substantial increase in transaction fees will be necessary for the hash rate to continue rising at the same pace after the halving event.