In about 40 days, Bitcoin will undergo a once-every-4 years event known as Bitcoin halving. Bitcoin halving is a 50% reduction on the bitcoin network in block subsidy rewards.
This upcoming halving however is proving to be different from those preceding it and is set apart from other halvings for a number of reasons:
It is the most widely followed Bitcoin halving ever due to the increase in players from the last halving back in 2016
Mining industry dynamics – more and diverse players in the space compared to 2016
2019 saw increased mining interest especially from institutions as individual miners started to fall off
Back in 2016 the scenario was largely retailers in the bitcoin mining space. Things however are now very different. Institutionalized miners and companies are now the major players in the mining space as barrier-to-entry is now remarkably high – you need more money and more robust systems due to the high mining risks, which basically leaves only those with enough resources to undertake mining activities.
As an example, unbeknownst to many, mining equipment is largely calculated as a cost per terrahash over the equipment cost. Currently, it costs about $20 – $30 per terrahash. When you add in the electricity cost, the ROI becomes unmanageable for retail players.
As a result of this, the geographical distribution of mining has also changed. While China still maintains a 65% bitcoin hashing power, we are increasing seeing other regions, most notably Venezuela, Kazakhastan, and Iran, coming up with increased hashing power, though still not so significant.
A lot of the hashrate is moving to these jurisdictions due to friendly regulations and cheap electricity.
However there is yet another reason why mainland China remains dominant – proximity to Asic manufacturers. Almost all global manufacturers producing these machines are Chinese companies. As a result, its more economical to mine where the machines are being produced.
Shipping Asic miners, for example, from China to the United States, will incur a 25% tariff, while in China, you only pay the domestic shipping cost. As a result, and for the longest time, North American miners have lagged in hashpower due to machine access.
However, this is changing.
Asic miners generally used to go out of service in 6 months. Newer machines however, like the S19, are having longer 24 – 36 months lifespans. As a result, this cuts out on machine access difficulties and allows more jurisdictions to be competitive in the mining space.
Another development is that Asic manufacturers are also trying to access public markets. For example, these companies are accessing New York listings and targeting other places where international sales are coming from which makes the market a level-playing ground for anyone looking to get into the mining space.
The current coronavirus pandemic is however expected to change the current mining industry in a few ways.
Currently, BitMain dominates when it comes to the distribution of management of hashpower and the status quo is expected to remain the same post-coronavirus and post-halving as it is generally hard to disrupt the ranking for more established players.
In addition, big mining pools like BTC.com that develop user-friendly products to miners and host a lot of offline and online events across China, continue to maintain solid relationships with manufacturers and this is likely not going to change anytime soon.
We are however increasingly seeing big players come into play. The largest North American mining pools are starting to come up, thanks to the new Asics which are are helping them capture market share hashrate both for bitcoin and altcoins.
Historically, the largest change in hashrate distribution happens when new Asics come into the market, and with the new S19s already in distribution, a lot of investors are now looking at picking these North American pools. So far, hundreds of thousands of the new Asics are already operational.
With low profits from bitcoin sales, we have recently seen a huge hash withdrawal with a lot of miners who cannot generate profits falling off. The mining difficulty is expected to decrease by another 15% as well as mining is profit-driven.
The amount of the hashrate depends on the value of the hashrate and the value of the hashrate depends on the amount of the hashrate. As a result, miners will only mine when its favorable. The reality is, market forces determine who makes money and who doesn’t, and in this case, established incumbents have an upper hand.
The broader implications of the pandemic and the halving however are expected to be even more significant. While the huge hashrate drop is not expected to compromise the network security at all, miners who get burned financially and fall off have invested huge real capital and real time in the space. A good number of the meetups and events are funded and supported by miners and having these players leave the bitcoin community overall is expected to have a huge impact on bitcoin in the long run.
Miners in China seem to have matured and are learning to hedge their risks via blockchain loan services that enable them survive when prices are in free fall. While price crushes give them more pressure, some services now allow you to purchase or sell hashrates. By aggregating individual retail players, some companies are now able to continue playing without having an actual farm.
On the other hand, a few miners are taking a long-term view of the hashrates by hedging the underlying commodity, bitcoin, and we can expect to see a lot of these financial instruments especially in the United States, that hedge bitcoin itself, come up and help safeguard miners over the long term.
What other outside factors can we expect to affect the mining market?
Back in 2016, BitMain rolled out a a unique miner immediately after halving which had a huge impact on the post-halving mining market. The delivery of these new machines will be crucial to help survive until the next cycle, and with several hundred thousand S19s having already been delivered, miners who have already secured the new hardware are expected to get a bit of market lead and volatility resistance for the next 24 – 36 months post-halving.
There has also been little talk around the management of hashrates and we are likely going to see more of this operations talk when block rewards decrease in half. With Bitcoin Cash and Bitcoin SV also halving within the same period as bitcoin core, it will be interesting to follow and see which chains will be worth mining and how best miners can sell their hashrates.
NB: The above writeup is a curated excerpt from a much longer interview with industry experts conducted by CoinDesk