From: zerohedge
As we get closer to the next Bitcoin halving, there has been a lot of fretting about what impact it may have on the Bitcoin mining industry, with numerous actors voicing their fears that smaller players might be forced out of business. The worry is that this would lead to greater centralization of the mining industry, leaving more power in the hands of just a few companies, which would undermine the decentralized credentials of the Bitcoin network.
Such fears are totally unjustified, as Bitcoin has been here before. Once again, these portents of doom will quickly be forgotten.
Traditionally, the supply shock caused by the halving, which occurs roughly once every four years, has sparked a major increase in the value of Bitcoin. Each of Bitcoin’s prior bull runs has occurred within a few months of the halving, which sees the rewards granted to miners for processing new blocks slashed in half. Most experts believe this trend will repeat itself.
But the prospect of Bitcoin reaching previously unseen heights hasn’t stopped the naysayers from worrying, as the bull run that traditionally follows the halving doesn’t happen instantly. The problem for Bitcoin miners is that the bull run is necessary for them to remain profitable. With the halving, their revenues will reduce by 50%, making life difficult until the bull run takes off.
The next halving is expected to occur in April, and Bitcoin is already showing considerable momentum. But many experts have warned that there could be a selloff and a significant drop in Bitcoin’s price as investors look to take profits and the FOMO dissipates. If that were to happen, and Bitcoin’s price was to fall back to below the $50,000 range, the imminent drop in revenue would put a lot of pressure on miners. Still, it’s unlikely that many would actually be forced out of business.
The crypto-focused media has already reported on some of the contingency plans put into effect by leading Bitcoin mining firms. For instance, a company called Marathon Holdings recently announced it’s investing $179 million to build two new and more energy-efficient facilities. It believes this investment will ultimately reduce its operational costs by 30%.
Others have been spending money on more efficient hardware to achieve better efficiency, and some are offloading their older mining rigs, filling their coffers so they can take advantage of an expected drop in the price of newer ASICs that will come when mining profitability decreases.
Such steps underscore the growing sophistication of the Bitcoin mining industry, said Richard Jackson, the policy and government affairs advisor for the Oklahoma Bitcoin Association. He explained that Bitcoin mining today has become a multi-million dollar industry and its biggest players run highly efficient operations designed to maximize profitability. “Business resiliency is a function of capital expenditure management, operational expenditure management, treasury management, and solid operational competency,” he said. “The ability to negotiate, hedge and arbitrage power costs and variances is one element of this. Whether a miner can deploy, operate and maintain hardware efficiently also factors in.”
In other words, Bitcoin miners are professional organizations running very slick operations, and they all know what is coming. Mark Zalan, chief executive officer of GoMining, which operates nine Bitcoin mining facilities globally, said his company has been planning for the halving for the past 18 months. “We expect that most people within the industry are following the same game plan,” he explained. “There is no magic bullet to address this except to run the operation as cost-efficiently as possible.”
Short Term Pain Is Coming
Miners may be in for a rough few months. While Bitcoin is currently exploring new all-time highs, earlier halvings show us that we can expect an imminent pullback as the market adjusts.
So there may be some short-term anguish for miners. Cautious investors may well sell off their stakes in mining firms, as they’ll look a lot less attractive post halving — after all, who wants to invest in a company that’s about to lose half of its revenue? Lower guidance by publicly traded firms almost always correlates to a drop in their share price.
Miners will therefore take additional steps to trim their costs, switching off their older, less power-efficient hardware in an effort to remain profitable. This will cause the hashrate to decrease, meaning mining becomes less difficult, as miners wait for profitability to improve.
Assuming that history repeats, we probably won’t see the halving’s positive impact on Bitcoin’s price for several months yet. This may result in some less efficient operations falling by the wayside, Zalan believes.
“Those companies that have been investing in keeping their operations optimized and profitable will fare well, but those who have neglected are likely to have a more difficult time,” he said. “Companies with a high cost base, of which electricity and hardware are key drivers, may find that they’re unable to continue.”
Satoshi’s Vision Will Prevail
There are some new factors at play that may help Bitcoin to stave off a major decline, though. The rise of Ordinals, which is a protocol that makes it possible to create NFTs and other digital tokens on Bitcoin’s base blockchain without the need for a Layer-2, may help to buoy the asset’s price. Ordinals have the effect of increasing the competition for block space. In other words, they increase the network’s usage, which results in higher transaction fees that are paid to the miners.
Jackson said Ordinals demonstrate, at least in principle, the potential for Bitcoin to answer questions around what will happen when the mining subsidy ultimately ends. After this year, there are 29 more halvings scheduled to occur approximately once every four years until the block rewards disappear altogether. The final halving, estimated to take place around 2140, will result in miner’s rewards dropping from one satoshi to nothing, at which point the only rewards they’ll be able to receive are transaction fees.
This was Satoshi Nakamoto’s plan all along, and the rise of Ordinals once again underlines the genius of Bitcoin’s creator. Already, there have been a number of blocks produced where the hefty fees from Ordinals were larger than the actual block reward, although such instances are somewhat rare.
“I’ve seen reports that show Ordinal activity is inversely correlated to the transaction fee rate, which suggests that the fee market is trending towards stabilization with the addition of more blockspace demand,” Jackson said. “To what degree miners could rely on this additional revenue source remains to be seen, but directionally speaking I think it is a net benefit for operational modeling and therefore, predictability.”
Balance Will Be Restored
Going by earlier halvings, we can predict what will happen after April with a reasonable degree of confidence. The halving will be followed by a decrease in Bitcoin’s price, which will result in the difficulty of mining dropping. Some miners may — or may not — go out of business, depending on how well they have prepared for this. But once the difficulty drops enough, the miners will be able to resume profitable mining operations again.
In the meantime, the competition among miners will increase in ferocity. It’s a potentially brutal balancing act that could, perhaps, kill off a number of mining operations, but it’s one that will eventually result in equilibrium being restored.
Depending on how many Bitcoin miners go out of business, the reduction in competition could result in the industry becoming more “centralized”, with mining power concentrated in the hands of fewer players. But Jackson dismisses such fears, pointing out that the smaller Bitcoin miners are, in general, more profitable than the bigger players. And with the biggest firms more likely to have taken proactive measures to account for the halving, that suggests that very few will actually fall by the wayside.
Zalan makes the point that it’s also not in anyone’s best interests for the mining industry to become too centralized. If too much power is concentrated in the hands of a single entity, that would shake confidence in the Bitcoin network — people would be encouraged to sell off their assets out of fear, causing the price to plummet, meaning that a so-called “51% attack” becomes pointless. If miners accumulate too much power, they’re basically shooting themselves in the foot.
According to Zalan, the mining industry is a key stakeholder in driving mass adoption of Bitcoin, which is dependent on confidence in its stability. “This concern has been addressed in the Bitcoin algorithm as well,” he added. “The sheer volume of capital required to accumulate the hardware and electricity resources to facilitate a 51% attack is mind-boggling. This is likely to serve as the best protection against such an eventuality.”
The Halving Won’t Stop Bitcoin
Jackson believes that the more pressing concern for miners is not centralization, nor the halving, but the prospect of government intervention. The government could interfere with Bitcoin and negatively impact the industry in many ways, such as with address or transaction blacklisting, restrictions on self-custody or self-operated nodes, or by increasing the costs for miners through taxation.
The last one is a legitimate fear. Earlier this month, U.S. President Joe Biden once again raised the idea of implementing a hefty 30% crypto mining tax that could come into effect as early as next year if it’s passed into law. Critics of the tax say it would likely put most U.S.-based mining operations out of business, with some even going as far as to suggest the proposal is really just a pretext for the government to snuff out Bitcoin and replace it with a CBDC.
Jackson said the current priority for maintaining the value of Bitcoin should be advocating for the recognition of digital property rights, the right to self-custody and the freedom to mine. “Economic incentives will hold the 51% issue in check, but there’s no hardware upgrade that can make Bitcoin un-illegal,” he pointed out. “Engaging with representatives and policymakers to ensure Bitcoin remains lawful in your jurisdiction is the more important effort right now.”
In any case, the U.S. government alone has insufficient power to stop Bitcoin. The world’s top cryptocurrency has become a global phenomenon, and if U.S. miners were to fall by the wayside, rivals in other countries would almost certainly step in to fill the void.
At the end of the day, Bitcoin has proven time and time again that it’s an unstoppable force, continually evolving, but always getting stronger. The halving is a key dynamic in this, having the effect of making Bitcoin anti-inflationary. Demand for Bitcoin will inevitably increase as the halving makes it become more scarce. Miners might have to adapt, but Bitcoin itself is destined to survive and thrive.
