Bitcoin halving supply shock set to shake up mining sector

The Bitcoin protocol includes an automatic process called the halving, which reduces the number of Bitcoins awarded for mining a block by half approximately every four years or 210,000 blocks. Soon, this reward will decrease from 6.25 BTC to 3.125 BTC.

The reduction in the supply of Bitcoin caused by the “halving” event makes each coin more valuable and scarcely available, enhancing its role as a reliable store of value with an inherent deflationary trait.

Bitcoín investors stand to benefit from a potential price increase following the halving event. However, miners face the brunt of this process and must adjust in order to survive, as they now receive fewer Bitcoin rewards for their efforts. In essence, the halving has the greatest impact on miners.

Miners of Bitcoin (BTC) need to consistently improve their operations to remain profitable, as the value of each mined Bitcoin is influenced by the fluctuating market price. Since block rewards no longer increase in size, miners must adapt and thrive in an unpredictable market environment.

The 2024 halving has the potential to transform the mining landscape.

Bitcoin miners might need to look for less costly energy alternatives and finely tune their mining hardware in response to increasing energy expenses. Such adjustments could significantly impact the Bitcoin mining sector, affecting all Bitcoin owners.

Bitcoin miners will need to upgrade their rigs

Bitcoin miners are well-versed in the system’s regulations. A key benefit of the Bitcoin system is that its future actions are predetermined by its coding.

Miners, just like investors, are aware that every four years, their business model undergoes a test during the halving event.

In a conversation with CryptoMoon, the head of mining pool Demand (founded and led by Alejandro De La Torre), showed clear enthusiasm for the upcoming halving event.

“The halving always shakes things up. It is a great opportunity for new players to come into the industry.”

However, a market shake-up will eventually mean that some miners will disappear.

The profitability of Bitcoin miners is closely connected to the cryptocurrency’s price. If the price doesn’t rise sufficiently to cover the decrease in block rewards, then older miner models from three to five years ago may no longer be profitable, according to Bitfarms’ chief mining officer, Ben Gagnon. (CryptoMoon)

De La Torre, a former mining pool Poolin vice president, pointed out that the persistent increase in the worldwide Bitcoin hash rate could indicate that miners are already upgrading their equipment in preparation for the approaching halving event.

In simpler terms, the Bitcoin hash rate represents the total processing power required to confirm and safeguard Bitcoin transactions across the network. This figure shows the level of mining involvement in the Bitcoin blockchain. The hash rate of Bitcoin has been setting new records consistently, with 700 exahashes per second (EH/s) being the potential next achievement.

Bitcoin halving supply shock set to shake up mining sector

In the world of Bitcoin mining, optimization is essential for success. Miners who fail to adapt and use advanced equipment risk falling behind and eventually losing profitability. As Anibal Garrido, a Bitcoin mining expert and crypto advisor, stated in an interview with CryptoMoon, “The most successful miners have already adopted new and efficient technologies. Those who aren’t prepared are at risk of going bankrupt.”

Bitcoin miners may migrate to other countries

Approximately 38% of the worldwide Bitcoin mining capacity is controlled by the US, based on data from Chain Bulletin.

Bitcoin halving supply shock set to shake up mining sector

De La Torre is of the opinion that the United States will experience the greatest impact from the halving due to its substantial hash rate. Consequently, less efficient miners may be compelled to temporarily or permanently halt their mining operations if they’re able to make necessary upgrades.

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In different parts of the world, the ability to mine cryptocurrency like Bitcoin primarily hinges on the energy expenses required to operate mining equipment. The cost of extracting one Bitcoin can vary greatly depending on a miner’s location.

Mining one Bitcoin in Italy comes with a price tag similar to that of a brand-new Lamborghini Huracan. Thus, it may not be an enticing destination for Bitcoin miners due to its high mining costs.

Bitcoin halving supply shock set to shake up mining sector

Countries or regions with limited buying ability could benefit significantly from the massive influx of outdated mining rigs entering the market due to the upcoming Bitcoin halving event, according to De La Torre.

“The halving is an opportunity for new regions to emerge as profitable places; keep an eye out for the Middle East, Africa and Latin America.”

A Venezuelan miner named Garrido is convinced that Latin American countries, including Paraguay and Venezuela, could greatly gain from the influx of miners due to their economically attractive features, such as low electricity costs. This was highlighted on November 16, 2023, when Tether invested $500 million into Bitcoin mining in Paraguay, showcasing its promising potential.

Garrido explained that miners place great significance on energy expenses, but a stable and legal regulatory framework is equally vital. The US, with its advantageous regulatory conditions, remains a preferred mining destination despite having relatively higher energy costs than other nations.

BTC miners won’t move to other blockchains

Miners possess the flexibility to choose a new cryptocurrency to mine rather than selling or relocating their existing operations.

All the interviewed miners agreed that this option is highly unlikely.

Gagnon pointed out that Bitcoin mining hardware is capable of extracting only cryptocurrencies based on the SHA-256 hashing algorithm. Consequently, Bitcoin Cash (BCH) and Bitcoin SV (BSV) are the only options for mining in this category. However, their market values pale in comparison to Bitcoin, making them less popular and illiquid.

For Garrido, this option is out of the question for any miner with common sense:

“Digital gold will always be digital gold. No one with common sense will migrate from gold to garbage.”

Will centralization threaten Bitcoin as miners leave?

One of the core values of cryptocurrencies — and specifically of Bitcoin — is decentralization.

During the early stages of Bitcoin, it was possible for individuals using their home computers to mine the cryptocurrency. However, as Bitcoin gained popularity, there was an increasing demand for cryptocurrency miners, making it a more competitive process.

Over time, Bitcoin mining saw the emergence of various mining collectives, raising concerns that they could consolidate control over the Bitcoin mining scene – a development that Satoshi Nakamoto, the currency’s inventor, would have strongly opposed.

Bitcoin halving supply shock set to shake up mining sector

Each time Bitcoin is split in half for new blocks to be mined, the process grows more challenging due to the need for larger mining equipment. Consequently, the level of difficulty in mining Bitcoin increases.

In the end, smaller Bitcoin miners are forced out of the industry, while larger and financially stronger companies, some of which are publicly traded, control a greater proportion of the Bitcoin mining processing power.

Ultimately, this process could risk centralizing the Bitcoin mining industry.

De la Torre is of the opinion that larger mining companies with substantial resources can significantly increase their mining operations due to an oversupply of affordable rigs in the secondary market caused by distressed mining firms. Might the mining industry’s consolidation lead to a more centralized Bitcoin mining landscape?

Gagnon expressed his opposition, arguing that “powerful economic forces in nature make it difficult for centralization to take hold.” He went on to illustrate that if Marathon and Core Scientific, the two largest miners by hash rate, were to combine their forces, they would still control less than 10% of the overall network hash rate. To Gagnon, “centralization appears to be a diminishing issue with each halving event.”

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De La Torre explained that the cost of Bitcoin has an impact on its decentralization. When Bitcoin’s value increases, there is a greater incentive for new miners to join the network, ultimately leading to more decentralization.

Garrido said that the Bitcoin mining sector centralizing is highly improbable:

“The open-source structure and the game theory on which Bitcoin is based do not allow it to centralize, no matter what epoch or halving we are in.”

In simpler terms, Bitcoin’s open-source system allows all miners to monitor the network for signs of centralization and potential power imbalances among actors. If a mining pool becomes too influential and poses a threat to decentralization, the community can collectively disconnect from it.

Garrido highlighted the importance of keeping no mining pool in control of more than half of the entire mining industry. This is crucial because such dominance could enable the pool to carry out a 51% attack, resulting in double spending.

The reduction in rewards (or “halving”) is a jolt to the liquidity of miners and the market. However, Bitcoin’s built-in mechanics ensure consistent actions that cautious miners can weather. This event could be seen as a cleansing process for inefficient miners, ultimately leading to a stronger mining ecosystem for Bitcoin.

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2024-04-16 19:28