Good day everybody,
I hope you are all having an excellent day, welcome to CryptoGod-1's blog on all things crypto. Today I will be looking at an interesting topic being branded about, as predictions are made regarding the impact of rising electricity costs and debt levels as we approach the next Bitcoin Halving.
Bitcoin Halving
The upcoming Bitcoin halving will be the fourth halving since the inception of Bitcoin, with the previous three taking place on:
- Nov. 28, 2012, 50 down to 25 bitcoins
- July 9, 2016, 25 down to 12.5 bitcoins
- May 11, 2020, 12.5 down to 6.25 bitcoins
So what is a Bitcoin halving? Well, once every 210,000 blocks are mined, which takes roughly 4 years, the value of the reward for miners is reduced by 50%. As shown above, this has led miners to go from receiving 50 Bitcoins per block mined back in 2011 all the way down to 6.25 Bitcoin per block mined today. The next halving is scheduled to happen around April or May of 2024, when the reward will be reduced down to 3.125 Bitcoin.
As shown in the image above, the halving of Bitcoin miner's reward has often had an impact on the price of the asset. Generally around a year prior to the halving the asset hits a high price before dropping into a slump, and then pushing onto new highs. This has been a common feature for Bitcoin, with the halving taking place during a downturn and bear market for the asset. The last three halving's saw Bitcoin jump nearly 8,450%, 290% and 560% a year later, and the quadrennial event will this time take place as the market faces previously unseen conditions.
The Struggles of 2024
At the current rate, miners are bringing in roughly $188,876 for the 6.25 Bitcoin reward. Once the halving takes place, going off current prices, that reward will be reduced to around $94,438. With the supply becoming scarcer with the upcoming halving, which itself is seen as a mechanism to help maintain Bitcoin's value in the longer term, miners will need a similar rally to previous ones if their rewards are to keep covering their costs.
Mining economics are looking much bleaker ahead of the next halving compared to previous ones, as noted by Jaran Mellerud, crypto-mining analyst at Hashrate Index. He stated:
“Nearly half of the miners will suffer given they have less efficient mining operations with higher costs.”
Mellerud pointed out that the break-even electricity price of the most common mining machine is around 12 cents per Kilowatt Hour, but once the halving takes place this will drop to around 6 cents. According to his data, around 40% of miners still have higher operating costs than that. Those who have operating costs above 8 cents per kilowatt-hour could be facing the prospect of not being able to maintain their operations.
According to Wolfie Zhao, head of research at TheMinerMag, the total cost for certain miners is much more than the current price of Bitcoin. Profits will begin to become loses once the halving takes place, especially for those with less efficient operations. With the global mining industry currently sitting on $4.5 billion to $6 billion of debt, albeit down from $8 billion in 2022, the fact Bitcoin is still sitting at less that half its all time high of around $69,000 in 2021 means a major rally will be required for miners to continue their efforts. Many of those debts are in the form of loans collateralized by mining rigs and Bitcoin-backed loans.
Much of the borrowing happened as part of the major mining outfits moving to North America from China after the nation’s domestic mining ban in late 2021. With the move, there also came a rise in competition among Bitcoin miners, which has squeezed the profits available in the market. The difficulty of mining, which is a measure of computing power to mine Bitcoin, also hit a record high in June 2023 with 374.40 EH/s as an average Hashrate.
Taking this data into account, miners will need Bitcoin to rise in value to around $50,000-$60,000 next year, according to Kevin Zhang, the senior vice president of mining strategy at crypto-mining firm Foundry. This is before considering the impact of rising electricity prices. Miners in the United States did get some relief earlier in 2023 as Bitcoin rebounded and electricity costs fell, but the power prices are rising once again. Many miners are already taking preventative measures, such as locking in power prices, bolstering war chests and cutting back on investments. Whether or not this will be enough to maintain their business remains to be seen.
Relief in 2025?
While the outlook for 2024 may seem glum to many in the mining industry, they will also be looking at the history of previous halvings when considering their mining operations. Halvings were always followed by an increase in the price of Bitcoin, so while it sits at around $30,000 today, that van quickly change in such a volatile industry. Chances are Bitcoin will drop further before the halving takes place, possibly around the $25,000 mark once again. However, while miners will struggle to make profits in this market, within twelve to eighteen months we could be looking at new all time high prices. Will Bitcoin push above $100,000 in the next bull market? While nothing is for certain, going off previous data it seems it is possible if not somewhat expected. Miners will need to dig in, manage themselves through the downturn, and reap the rewards during the spike of the next bullmarket. Conditions are tough now, but they will always improve.
Have a great day.
Peace. CryptoGod-1.
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