Yesterday, Fidelity Digital Assets published a report warning Bitcoin miners about the upcoming halving.
Fidelity Digital Assets is the subsidiary of Fidelity that deals with cryptocurrencies, and Fidelity is the manager of the third largest Bitcoin ETF in the world behind Grayscale’s and BlackRock’s.
The document published yesterday is the long report of a research on halving conducted by Daniel Gray.
Summary
The problem of halving for Bitcoin miners
The halving is the halving of the reward for miners.
Bitcoin miners have only two sources of income: the reward and the fees.
The fees will continue to be more or less the same, and will never end. Instead, the reward halves approximately every 4 years, so much so that in the future it will even cancel out.
The problem is that compared to the 6.25 BTC per block that the miner receives as a reward for validating it by finding the correct hash, the fees collected per block are much less. At the moment, they are rarely more than 0.5 BTC.
Although fees should remain the same, starting from the next halving in April the reward will be reduced to 3,125 BTC per block.
Gray explains that miners must carefully plan this event to avoid going bankrupt. In fact, they not only have to maintain the hash rate, energy, and existing properties, but they are also constantly competing with all the other miners who are trying to do the same thing.
It states that miners cannot simply afford to maintain their position, but must constantly push to acquire more hashrate, increase their efficiency, as well as acquire low-cost energy.
The issue of consumption
The main problem for miners is the high electricity consumption, in other words, operating costs.
Mining, as Gray explains, is a competition where the winner is the one with the most hashrate. However, more hashrate also means more consumption, with the same efficiency, and this makes it difficult for miners to remain profitable and competitive.
Gray also adds that for miners the months following the halving are the most difficult, because they will need to draw on their capital reserves to compensate for the decrease in revenue.
However, also remember that past halvings have indeed seen the elimination of weaker miners, but in the end the Bitcoin mining sector has always recovered greatly, with even more miners and more hashrate, thus demonstrating the resilience of the network and the sector.
Uncertainties in the Stock Market: Bitcoin miners are starting to suffer even before the halving
In light of such a scenario, it is not surprising that the benchmark stocks in the Bitcoin mining sector have been suffering lately.
MARA from Marathon Digital Holdings has lost almost 25% since the end of February, and RIOT from Riot Platforms is not doing any better.
It might seem strange, since until February the price trend of their shares had more or less closely followed that of Bitcoin, but now that the halving is approaching, markets are starting to price in uncertainty.
It should be noted, however, that they had risen a lot before.
Using as a reference the trend of the Bitcoin price from the beginning of October to the end of February, in the face of a +130% increase in BTC, the MARA stock recorded an incredible +300%, and RIOT a +95%.
So the title Marathon Digital Holdings had a significantly better rise compared to even that of Bitcoin, so it is more than legitimate to imagine that starting from last week it has corrected a bit.
RIOT, on the other hand, is actually showing lower performance compared to BTC, probably because markets have greater concerns about Riot Platforms than Marathon Digital Holdings.
The hashrate level
The significant increase in the price of Bitcoin, however, could greatly help miners, if it remains at high levels.
Indeed, the increase in hashrate, which always follows a price increase in the medium/long term, occurs much more slowly because it requires the purchase and installation of new machines.
Starting from September 2023, the Bitcoin mining hashrate has almost constantly increased, going from a weekly average of about 380 Eh/s to 570 Eh/s. In practice, it has not even increased by 100%, while the price of BTC has increased by 130%.
This suggests that it could increase even more, but since the halving will occur in about a month and a half, or less, there is not enough time for the hashrate to increase much more.
Moreover, the all-time high peak is from early February, so paradoxically in the last thirty days it has decreased, making it even easier for miners to survive the halving.
All this explains well why the stock prices of crypto mining companies have recently fallen on the stock market, but not collapsed at all.