The necessity to avoid a Bitcoin halving hangover

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Earlier this year, in April, we had the last Bitcoin (BTC) halving and now some mining companies are suffering from a hangover. If they can get through this and clear their heads, how can they avoid being hungover in the next halving?

Bitcoin halving is an integral part of the cryptocurrency protocol. It controls the supply and inflation rate of the coin and rewards miners for validating transactions. Initially, miners earned 50 BTC per block, halving to 25 in 2012, 12.5 in 2016, and so on. Since April, the block reward has been 3,125 Bitcoin.

The impact of this year’s halving was partly masked by higher transaction fees – some perhaps thought their hangovers didn’t need Panadol! However, as seen with the Bitcoin Ordinals protocol, these transaction fees were bound to wane after the initial flurry of activity, and mining margins have unfortunately been squeezed.

Future halving approaches

As usual, the halving impact was a revenue drain for mining companies, as they received less Bitcoin for the same amount of work – a devastating shock to the industry, wiping out pure-play businesses. So how should mining companies approach a future halving? Here are some tips for taking action over the next four years – if you can pull it off.

Profitability challenges. Factors such as market sentiment, global economic conditions, and regulatory developments are all influential in Bitcoin’s post-halving price. However, as has been seen many times before—and for the industry to stabilize—Bitcoin will rise in line to offset the cost of production based on electricity costs. While variable, they are primarily limited by range and can provide a floor for operational uptime.

Cost efficiency becomes paramount. As block rewards decrease, cost efficiency becomes more important. Mining firms optimize their operations by investing in more efficient mining hardware, providing low or flexible electricity contracts, and reducing overhead. These are typical initiatives across many industries, but you have a four-year alarm clock, so no excuses!

Market consolidation. Declining profitability often leads to market consolidation, with less efficient miners being forced out of the market. Mining is particularly concentrated in the US, with mergers and acquisitions becoming a way to scale. As a result of consolidation, the industry is comprised of fewer, larger players, leading to unfounded concerns about centralization and network security. Believe me, contrary to some expectations, the world is operating far outside the US; multiple operations with more economical rates, and equally large operations supporting and securing the network. Try looking!

Balance point adjustments. Mining companies must constantly calculate balance points, taking into account the current Bitcoin price, block reward, electricity costs, and hardware efficiency. After the halving, it becomes more difficult to reach balance unless the price of Bitcoin increases significantly. Lower electricity costs can only keep bailiffs at bay for so long; if the coffers are dry, getting bought out by larger, better-capitalized miners is your only recourse. Take the brave pills.

Long-term viability. The long-term viability of mining operations requires a balance between (i) mining costs and (ii) Bitcoin’s market price. Halving creates a discipline where only the most efficient miners can sustain operations, leading to advances in mining technology and strategies for implementing hash power derivatives. Decide now: Are you going to stay in for the long haul? Or are you going to get out while you can? If…

Don’t fall asleep at the wheel. Pay attention to margin squeezes and when capital is deployed—if you drive over the vibration strips—it might be time to wake up and smell the coffee.

No plan can survive contact with the enemy. Adapt to market conditions and have a variety of tools at your disposal. Adapt operations to survive margin squeezes and have a well-designed plan to deploy equipment in a timely manner.

Diversification. Some companies are diversifying their operations; mining alternative cryptocurrencies with different reward structures or exploring new revenue streams such as mining pool operations or offering cloud mining services. Some are a scam and others are not. Not every operation can make the leap to HPC or the cloud. While crypto mining is arguably the easiest entry into the data center space, HPC will seem like a Mensa puzzle to many and not the lifeline they were hoping for.

Innovation in mining hardware. The race for more efficient mining hardware continues as companies push the limits of processing power and energy consumption. Firms that stay ahead in the race can maintain their profitability even as rewards decline, but execution ability is often weak and most groups sink to the bottom of the ocean before they even set foot in the sea.

Hedging and financial instruments. With the rise of financial products like futures and options, some mining companies are trying to hedge by locking in the price of the Bitcoin they mine or using other financial instruments to protect against volatility. So, it’s not just mining anymore.

Solution

The Bitcoin halving is a double-edged sword for mining companies. It squeezes the profitability of mining operations while ensuring a controlled supply of Bitcoin (while preserving its value proposition as a rare digital asset).

Companies that adapt to these challenges through cost-effectiveness, innovation, and strategic planning are more likely to survive and potentially thrive in the long term. As the next halving approaches, the cryptocurrency mining landscape will undoubtedly evolve, leaving only the most resilient players in the game. Set your alarm…!

Phil Harvey

Phil Harvey is the founder and CEO of Sabre56, a hosting provider and digital asset mining consultancy. As a cryptocurrency mining expert, Phil has been active in the field since 2014. With a background in military operations planning, Harvey has been solving some of the most complex problems facing blockchain companies for years, including growing one of the largest miners in the North American market. Through its end-to-end consultancy, Sabre56 designs, builds, and operates the world’s most technologically advanced, efficient, and cost-effective blockchain data centers, acting as a trusted hosting partner for leading miners globally.