For Bitcoin enthusiasts, a four-yearly software update called “Halving” has long been considered one of the keys to increasing value.
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(Bloomberg) — Bitcoin enthusiasts have long viewed a quadrennial software update called “halving” as one of the keys to increasing value.
This time it will also result in billions of dollars in revenue declines for the very companies that keep the digital currency running smoothly, right after a spike in their biggest costs.
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Around April 20, the halving will reduce the amount of Bitcoin “miners” can earn each day for validating transactions from the current 900 to 450. Based on the current price of Bitcoin, this could mean a loss in sales of around $10 billion per year for the entire industry. Marathon Digital Holdings Inc., CleanSpark Inc. and other miners who compete for a fixed Bitcoin reward by solving mathematical puzzles using super-fast computers have invested in new equipment and sought to buy smaller rivals to cushion the decline in sales.
“This is the final push for miners to squeeze out as much revenue as possible before their production takes a big hit,” said Matthew Kimmell, digital assets analyst at CoinShares. “With revenues across the board declining overnight, each miner’s strategic response and adaptation could determine who comes out ahead and who gets left behind.”
Admittedly, Bitcoin has hit new highs following previous halvings, helping to mitigate periodic declines in mining rewards and increases in the cost of doing business. This month’s event comes after the digital currency has more than quadrupled since November 2022. But the chances of success for the industry are getting smaller and smaller. Miners have to spend more and more money in a never-ending technological arms race for smaller rewards. And while the energy-intensive validation process has always made mining expensive, companies now face even greater competition for electricity from the emerging and deep-pocketed artificial intelligence industry.
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The rising price of Bitcoin has helped offset these electricity costs and fuel the growth of crypto mining. According to an April 1 report from JPMorgan Chase & Co., the total market capitalization of 14 U.S.-listed miners has risen to about $20 billion since the first specialized machines were launched in 2013.
While U.S.-listed miners are the flagship of the industry, they only account for about 20% of the sector’s computing power, according to crypto researcher TheMinerMag. Private miners make up the rest, which could be more vulnerable after the halving as they typically have to resort to debt financing or venture capital to meet their needs, while public companies can raise funds through stock sales.
Read more: What is Bitcoin “Halving”? Does it increase the price?: QuickTake
As the buzz surrounding the event intensifies, some traders are betting that mining stocks will fall. Total short interest, the dollar value of stocks borrowed and sold by bearish traders, was about $2 billion as of April 11, according to an estimate from S3 Partners LLC. That short interest represented nearly 15% of the group’s outstanding shares – three times more than the U.S. average of 4.75%, said Ihor Dusaniwsky, managing director of predictive analytics at S3.
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The update, the fourth since 2012, was pre-programmed by anonymous Bitcoin creator Satoshi Nakamoto to maintain the hard cap of 21 million tokens and prevent inflation as a currency.
The situation is different from four years ago, when Bitcoin was trading below $9,000 and the majority of mining activity took place in China. Since then, much of this activity has moved to the US, increasing competition for electricity.
“Power in the U.S. is extraordinarily limited,” said Adam Sullivan, CEO of Austin, Texas-based Core Scientific Inc., one of the largest publicly traded bitcoin mining companies. “Right now, miners are competing with some of the largest tech companies in the world trying to find space for data centers that also use a lot of energy.”
The emerging AI industry is attracting huge amounts of capital, making it harder for miners to secure cheap electricity rates from utilities. Amazon.com Inc. is expected to spend nearly $150 billion on data centers, while Blackstone is building a center empire worth $25 billion. Also Google Inc. and Microsoft Corp. invest heavily.
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Seizure of power
“The artificial intelligence crowd is willing to pay three or four times what Bitcoin miners paid last year,” said David Foley, co-managing director at the Bitcoin Opportunity Fund, which has invested in both public and private miners . This is happening all over the world, he said.
The tech giants also have an advantage in sourcing electricity from utilities due to their consistent revenue stream, while crypto mining revenue fluctuates with the rise and fall of Bitcoin prices. Utilities view tech companies as more reliable buyers because of their strong balance sheets, said Taras Kulyk, CEO of crypto mining service provider SunnyDigital.
This competition could make it more difficult to renew low-cost electricity contracts when existing contracts expire. “Large Bitcoin miners tend to lock in energy prices, typically for a few years,” said Greg Beard, CEO of public Bitcoin miner Stronghold Digital Mining Inc.
Computer performance
Miners compete for a fixed reward amount, with the winner being the first to successfully process a block of transactions on the Bitcoin blockchain. This reward will decrease from 6.25 to 3.125 Bitcoin at the halving.
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The more computing power a miner has, the more likely they are to receive the reward. But it’s getting more and more difficult. Mining difficulty, a measure of computing power in Bitcoin mining, has increased nearly sixfold since the 2020 halving, according to a bi-weekly update from crypto mining website btc.com. This is due to an increasing number of miners and a continued fixed reward.
Companies have updated their technology with more efficient machines to generate additional computing power, and public Bitcoin miners have raised billions of dollars to finance the purchases by offering new shares.
This option is not available to private mining companies, which account for approximately 80% of the industry’s computing power in the United States. During the previous bull market in 2021, these companies relied primarily on issuing debt to cover their costs. At the time, it is estimated that both public and private miners took out up to $4 billion in loans secured by mining equipment. However, with numerous lenders going bankrupt during the crypto market crash in 2022, deals have been more difficult to complete.
“It’s tough out there,” said Young Cho, CEO of Blockhouse Digital, an asset management firm that specializes in collateralized lending and return-generating strategies in crypto markets. “Miners have been looking for lenders for several months and have not been able to find one.”
In addition to debt funding, some private miners are raising money through venture capital funding rounds, said Foley of the Bitcoin Opportunity Fund.
Those with negative cash flows who don’t have access to credit face the decision of financing their operations through private equity or the cash stashed preemptively on their balance sheets, CoinShares’ Kimmell said.
“Alternatively, they risk exiting the market if they have little confidence in future mining revenues,” he said.
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