For Bitcoin enthusiasts, a software update every four years, called a “halving,” has long been considered one of the keys to maintaining its value.
This time, it is also set to trigger a multi-billion dollar decline in revenue for the very companies that keep the digital currency running smoothly, right after their biggest costs skyrocket.
Around April 20, the cut will halve the number of bitcoins “miners” can earn each day for validating transactions to 450 from 900 now. Given the current price of Bitcoin, the industry as a whole could lose about $10 billion in revenue per year. Marathon Digital Holdings Inc., CleanSpark Inc. and other miners, who compete for fixed bitcoin rewards by solving mathematical puzzles with super-fast computers, have invested in new equipment and sought to buy smaller rivals in an attempt to soften falling revenues. .
“This is the last push for miners to get as much revenue as possible before their mining gets hit too hard,” said Matthew Kimmell, digital asset analyst at CoinShares. “As revenues across the board decline overnight, each miner’s strategic response and how they adapt may well determine who comes out ahead and who gets left behind.”
Of course, Bitcoin has reached new highs since previous halvings, helping to mitigate periodic drops in mining rewards and rising costs of doing business. This month’s event comes after the digital currency has more than quadrupled since November 2022. However, the industry’s margin of success continues to improve. Miners will have to constantly spend more money in an endless technological arms race for smaller rewards. And although energy-intensive The verification process has always made mining expensive, and now companies face even more competition for power from the growing and rich artificial intelligence industry.
The rising price of Bitcoin has helped offset these energy costs and fueled the rise of crypto mining. Since the first dedicated machines appeared in 2013, the combined market capitalization of the 14 U.S.-listed miners has grown to about $20 billion, according to an April 1 report from JPMorgan Chase & Co.
Although U.S.-listed miners are the face of the industry, they account for only about 20% of the sector’s computing power, according to a cryptocurrency researcher. TheMinerMag. Private miners make up the rest and could be more vulnerable after the halving as they typically have to raise debt financing or venture capital to fund their needs, while public companies can raise funds through selling shares.
As the hype surrounding the event heats up, some traders are betting that mining stocks will fall. S3 Partners LLC estimates that total short interest, the dollar value of shares borrowed and sold by bearish traders, was about $2 billion as of April 11. That short interest accounted for nearly 15% of the group’s shares outstanding—three times as much as the US average is 4.75%, said Igor Dusaniwskiy, managing director of predictive analytics at S3.
The update, the fourth since 2012, was pre-programmed by Bitcoin’s anonymous creator Satoshi Nakamoto to maintain a hard limit of 21 million tokens to prevent inflation as a currency.
The situation is different from four years ago, when Bitcoin was trading below $9,000 and most of the mining was taking place in China. Much of this activity has since moved to the US, leading to competition for electricity.
“Power in the United States is extremely limited,” said Adam Sullivan, CEO of Core Scientific Inc. in Austin, Texas, one of the largest publicly traded Bitcoin mining companies. “Right now, miners are competing with some of the world’s largest technology companies, which are trying to find space for data centers that are also large energy consumers.”
The nascent artificial intelligence industry is attracting huge amounts of capital, making it harder for miners to secure favorable electricity rates from utility companies. Amazon.com Inc. going to spend almost $150 billion on data centers as Blackstone builds a $25 billion center empire. Google Inc. and Microsoft Corp. are also making significant investments.
Power grab
“AI fans are willing to pay three or four times more for electricity than Bitcoin miners paid last year,” he said. David Foley, co-managing partner of the Bitcoin Opportunity Fund, which has invested in both public and private miners. According to him, this is happening all over the world.
Tech giants also have an advantage in sourcing electricity from utilities given their constant revenue stream, while cryptocurrency mining revenues fluctuate with the rise and fall of Bitcoin prices. Utilities view tech companies as safer buyers given their strong balance sheets, said Taras Kulik, CEO of cryptocurrency mining service provider SunnyDigital.
With such competition, low-cost electricity contracts will be more difficult to renew when existing agreements expire. Large-scale Bitcoin miners tend to lock in energy prices, usually for several years, says Greg Beard, CEO of publicly traded Bitcoin miner Stronghold Digital Mining Inc.
Computer power
Miners compete for a fixed amount of reward, with the winner being the first to successfully process a block of transactions on the Bitcoin blockchain. This reward will drop to 3.125 Bitcoins, halving from the current 6.25.
The more computing power a miner has, the more likely he is to receive a reward. But it’s getting more and more difficult. Mining difficulty, a measure of the computing power to mine Bitcoin, has increased nearly sixfold since halving in 2020, according to the biweekly crypto mining update. Web site btc.com. This is the result of an increase in the number of miners and a fixed reward.
Companies are upgrading their technology, adding more efficient machines to generate additional computing power, and public Bitcoin miners have raised billions of dollars to fund purchases by offering new shares.
This option is not available to private miners, which account for about 80% of the industry’s computing power in the United States. During the previous bull run in 2021, these companies relied heavily on debt issuance to cover their costs. It is estimated that both state and private mining companies borrowed as much as $4 billion around that time in the form of loans secured by mining equipment. But deals have become harder to come by as scores of lenders went bankrupt during the 2022 cryptocurrency market crash.
“It’s hard out there,” he said. Young Cho, CEO of Blockhouse Digital, an asset management company that specializes in secured lending and profit strategies in the cryptocurrency markets. “The miners have been looking for creditors for months and have been unable to find them.”
In addition to debt financing, some private miners are raising money through venture funding rounds, according to Bitcoin Opportunity Fund’s Foley.
Those with negative cash flows and no access to borrowing face the decision to fund operations through private equity or cash pre-positioned on their balance sheet, CoinShares’ Kimmell said.
“Alternatively, if they have low confidence in future mining revenues, they may end up exiting the market,” he said.