Many investors are looking forward to the year ahead. Because the next Bitcoin Halving is expected to happen in April 2024. The event was followed by a strong price explosion of BTC. But some miners are worried.
Every four years, the reward of bitcoin miners for validating new blocks of transactions on the bitcoin network is halved. The halving results in a shortage of the new BTC in circulation. The mechanism is intended to combat inflation of the asset and keep the value of Bitcoin high in the long term until it is estimated that all 21 million Bitcoins ever available will be reached in 2140.
A reliable indicator of rising bitcoin prices is spreading
So far, the concept designed by the unknown Bitcoin inventor Satoshi Nakamoto has worked very well. Not only was the price of Bitcoin able to stabilize its value through the halving, but the price of BTC has increased tremendously after each of these events. Investors could look forward to price increases of hundreds to even thousands of percent after the halving. The chart shown by Blockchaincenter.net shows this.
However, not everyone is happy with half the other rewards. For the miners who validate the new blocks in the Bitcoin network, the event could be a very big burden and it might cost some of them the existence of their business model, because it might not even invest in Bitcoin this way.
Many miners working for the network make their living primarily from the income they receive from rewarding each validated block. Currently, these revenues are still 6.25 Bitcoin per block, having been 12.5 BTC before the 2020 Expansion. With the upcoming Halving 2024, the block reward will be halved again, dropping to exactly 3.125 Bitcoin.
A problem to cut the income of miners
Due to the spread it is much more difficult for miners to maintain income at the previous level. You have only two options to survive the half unscathed. The first option and the most comfortable option is that the price of Bitcoin would rise significantly again after the halving, as before.
Although BTC was still below $10,000 after the third half in 2020, the price rose significantly in the following months and finally reached an all-time high of around $69,000 in November 2021. It is this has multiplied the value and made it attractive for miners to continue their work despite the decrease in block reward.
Miners are always paid in BTC and not dollars. So if the price rises significantly after the halving, as happened in 2021, the income of the miners can remain stable or even increase, even though the amount of BTC received has halved. For example, a mined block brought in nearly $100,000 at a price of $8,000 and a reward of 12.5 BTC before the 2020 halving. However, after the halving, more than $300,000 per block could be earned at a price of around $50,000 with a reward of $6.25.
Minimum BTC rate of $60,000 required for miners
But in order for this economic model to continue working for miners, the price of BTC must rise significantly again after the half of 2024. For example, if the current price of bitcoin is around $30,000, it would have to climb to $60,000 just to offset half of the miners’ reward.
We have only seen the distribution phase of Bitcoin adoption.
The growth in prices each cycle was muted by the introduction of new coins.
Half of 2024 will coincide with fewer coins available for purchase.
This is the first half that has ever happened. 🚨🚨🚨 pic.twitter.com/didnzHfRV3
— Joe Burnett (🔑)³ (@IIICapital) July 6, 2023
However, there are no guarantees that BTC will actually behave as it has in previous post-expansion cycles, although many Bitcoin investors are convinced that it will. The price development of 2021 has already not reached the expectations of some analysts, who announced forecasts of $100,000 and more. Growth rates have slowed significantly since Bitcoin’s early days, which may be due in part to the massive growth BTC has already seen from a few cents to nearly $70,000. The growth potential seems to be lower, so still in the past.
So miners cannot count on being able to work under the same conditions as before in 2024. To make matters worse, miners’ production costs have risen dramatically in recent years.
Power costs eat block rewards
A very important factor here is the increase in electricity prices worldwide. Bitcoin mining requires massive computing capabilities to validate new transactions. This eats up a lot of electricity, which the miners have to pay for.
Crypto mining analyst Jaran Mellerud of Hashrate-Index recently explained Bloombergthat the mining machines will only become profitable when the price of electricity drops from 12 cents per kilowatt hour to six cents after the next half. However, about 40 percent of miners would currently have higher operating costs. Anyone who pays more for their electricity than the stated 6 cents, according to his assessment, could face financial difficulties after the semi-finals.
The electricity costs can only be controlled to a limited extent for the miners. Although they can try to conclude long-term contracts with the electricity suppliers on fixed terms and contract with the most energy-efficient equipment possible, the electricity prices are ultimately decided by others and they are not without help due to price increases.
There are additional costs for miners as well. They have to invest in the hardware of the mining machines, they need locations for their facilities, for which they have to pay rent, and they also have personnel and marketing costs. The bottom line is that the costs for miners are up to significant amounts.
A big mountain of debt for miners
Ethan Vera, chief operations officer of crypto mining services company Luxor Technologies, estimates for Bloomberg that the global mining industry’s debt is between $4.5 billion and $6 billion. Before the price recovery this year, the debt in 2022 is said to be about 8 billion dollars.
If the miners can no longer service their loans because the Bitcoin price is not rising as expected or because electricity is becoming even more expensive, this could lead to significant payment defaults after halving and killing many miners.
Compensating the falling revenue by mining more blocks is also a difficult proposition. On the one hand, the competition among mining companies is very intense and, on the other hand, additional computing power is needed to be able to validate even larger blocks. This should therefore not be a viable way for many miners to secure themselves for the future.
In the worst case scenario, the Bitcoin Halving 2024 could be a disaster for miners if the price does not rise or if other factors such as higher electricity costs put an additional burden on them. The worst case scenario is probably a system crash due to the lack of miner activity in the network. But maybe everything will turn out differently and BTC will reach an all-time high in 2024. Then it would still be worth buying Bitcoin with PayPal, for example.
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