Mining for the future: Bitcoin industry trends in the aftermath of the halving

The first quarter of 2024 was crucial for the Bitcoin mining industry. With Bitcoin’s fourth halving less than a month into the second quarter, miners were accelerating their efforts to capitalize on higher rewards before they decreased.

Understanding the impact of the halving is crucial, as it influences both the immediate mining profitability and the strategic decisions and technological adaptations within the sector.

Luxor’s Q1 Hashrate Index report examines the state of the mining market in the first three months of the year, providing critical data and insights into the shifting sands of the Bitcoin mining industry. Data like this is essential for navigating the complexities of the halving introduced to the market. It covers various facets of the industry, from hashrate and hash price fluctuations to the broader economic factors influencing mining operations.

In this report, CryptoSlate will dive deep into the Hashrate Index’s findings to determine the current state and future trajectory of Bitcoin mining. We will examine how the halving has reshaped profitability, influenced operational strategies, and triggered shifts in the global mining landscape.

By analyzing changes in transaction fees, energy costs, and the performance of public mining companies, this report sheds light on the multifaceted impacts of the halving and the adaptive strategies miners employ in response.

Hash rate is the total computational power used by miners to process transactions and secure the Bitcoin network. Measured in exahashes per second (EH/s), it reflects the number of attempts at solving the cryptographic puzzles required to find a new block approximately every ten minutes. A higher hashrate indicates greater security and more competition among miners.

Hash price, on the other hand, quantifies the revenue miners can expect per unit of hash rate, typically expressed in dollars per petahash per day ($/PH/day). This metric is vital as it directly affects miners’ profitability by showing how much they earn from their computational efforts. Hash price is influenced by factors like the price of Bitcoin, transaction fees, and mining difficulty.

In the months before the halving, Bitcoin’s hash rate increased significantly, climbing to 611 EH/s as miners ramped up their operations to capitalize on the higher rewards available pre-halving. This rise reflects the strategic behavior of miners aiming to maximize returns before the block reward reduction.

However, following the halving, the hashrate experienced a noticeable decline, dropping to 581 EH/s. This 11% decrease is primarily attributed to reduced profitability after the halving, as the block reward halved from 6.25 BTC to 3.125 BTC. Miners with higher operational costs found it less economical to continue mining and most likely turned off the unprofitable hardware, leading to this downturn in network hash rate.

During the year’s first quarter, hash prices witnessed significant volatility, reflecting the complex changes and trends within the Bitcoin mining industry. Before the halving, hash prices improved, reaching an average of $109.57/PH/day, buoyed by increased transaction fees due to the popularity of digital collectibles like Ordinals and Runes. This uptrend offered miners a temporary boost in revenue.

However, after the halving, hash prices plummeted to new lows, with a record dip to $45/PH/day in early May 2024. This sharp decline showed the immediate financial impact of the halving, compounded by several key factors, the first of which was Bitcoin’s price. While the price of Bitcoin generally supports hash prices by increasing the value of mined blocks, the reduced block reward diluted this effect significantly. Bitcoin’s price volatility in the days after the halving introduced more uncertainty to miners’ earnings. 

Meanwhile, the controversial launch of Runes spiked transaction fees, briefly inflating the hash price. Previous CryptoSlate research found that on April 20, miners earned an unprecedented 1,257 BTC in fees due to Runes. However, as the frenzy around these new tokens normalized, the contribution of fees to hash price subsided, illustrating the transient nature of such boosts.

The mining difficulty adjusts to changes in the network’s total hash rate. After the halving, as the hash rate dropped, the difficulty eventually decreased to maintain the 10-minute block time. However, this adjustment was insufficient to offset the reduced earnings from the lower block reward, negatively affecting the hash price.

Understanding mining profitability requires understanding the relationship between hashrate and hash price. A higher hashrate under stable hash price conditions suggests more miners are competing, which can lead to increased difficulty and potentially lower profitability per miner if the hash price does not increase correspondingly. Conversely, a significant drop in hash price means that even with a stable or slightly reduced hashrate, many miners may operate at a loss unless they have access to very low-cost electricity or more efficient mining hardware.

This is exactly what happened after the halving. This type of environment makes it essential for miners to adapt and make strategic decisions, such as upgrading hardware or relocating to regions with cheaper power. 

Traditionally, transaction fees have formed a smaller, though not insignificant, part of Bitcoin miners’ total revenue. Before the widespread adoption of features like SegWit and the emergence of layer-two solutions like the Lightning Network, miners relied more heavily on block rewards. However, with each halving event, transaction fees have become a necessary supplement to the diminishing block reward.

Historically, transaction fees as a percentage of total miner revenue fluctuated depending on network activity and congestion. For instance, during high transaction volumes, such as in late 2017 and early 2021, fees surged to represent over 12-15% of total miner revenue. However, this percentage tended to hover around 1-3% in more stable times.

The introduction of Ordinals and the subsequent launch of Runes have dramatically reshaped the landscape for transaction fees. Ordinals, which embed small pieces of data (often digital art or other collectibles) within Bitcoin transactions, were launched in December 2022 and quickly gained popularity. This led to increased transaction sizes and, consequently, higher fees because miners prioritize larger transactions that offer higher fees.

Runes, launched on the day of the Bitcoin halving on April 20, further amplified this trend. On launch day, transaction fees skyrocketed due to the immense popularity of these digital collectibles. Miners earned 1,257 BTC in fees on April 20 due to Runes trading activity, illustrating the significant financial impact these new applications can have. This was a stark increase compared to most days in the first quarter when daily fee earnings rarely exceeded 30-50 BTC.

The trajectory for transaction fees appears poised for volatility, influenced by the evolving use of Bitcoin for non-traditional purposes such as digital collectibles. As the network adapts to accommodate more such innovations, miners can expect continued fluctuations in fee revenue.

The growth of projects like Ordinals and Runes suggests a future where transaction fees could periodically spike based on the popularity of these applications. However, this also introduces a degree of unpredictability into miner revenue streams, particularly in lower hash price environments after the halving.

In the current landscape, where hash prices have notably decreased, the role of transaction fees in sustaining mining operations has become even more critical. With halved block rewards, miners increasingly depend on these fees to maintain profitability. For instance, if the trend of innovative uses like Runes continues, miners could see periodic boosts in revenue from fees that help counterbalance lower hash prices. On the other hand, if the interest in such innovations wanes, the drop in fees could exacerbate the profitability challenges posed by lower hash prices.

This shows that miners need to stay agile and responsive to the Bitcoin price and mining difficulty and the broader ecosystem that influences transaction fees. Miners who can adapt their operations to capture these fee spikes will be better positioned in a market that is becoming increasingly complex and competitive.

Energy costs are a fundamental factor in determining the global distribution of Bitcoin mining operations. Given that electricity can account for up to 90% of mining expenses, regions offering low-cost power are naturally more attractive to miners. In theory, this price sensitivity leads to a geographically diverse mining landscape, where operations migrate in pursuit of the most economical energy sources.

In regions like the Pacific Northwest of the United States, hydroelectric power offers some of the lowest electricity rates, sometimes below $0.03 per kilowatt-hour (kWh). In contrast, European countries, where energy can cost upwards of $0.10 per kWh, see less competitive mining operations due to higher costs. The variance in electricity prices can dramatically affect operational decisions, profitability, and even the technology used by mining farms.

For instance, industrial power rates have broadly ranged in the United States. In Texas, known for its deregulated energy market and significant renewable energy production, rates go as low as $0.05-$0.06 per kWh for industrial users, making it a hotspot for mining operations. The abundant hydroelectric power of Washington State provides even lower rates, which can reach around $0.03 per kWh in some areas. However, rates in states such as New York and California are much higher, averaging around $0.08-$0.15 per kWh, narrowing the miners’ margins.

Internationally, countries like Kazakhstan and Russia have attracted miners with rates around $0.04-$0.06 per kWh, primarily due to their vast fossil fuel and hydroelectric resources. However, these rates are subject to changes in national policy and international relations, which can introduce instability into mining economics.

To illustrate the impact of these varying energy costs on mining profitability, consider the following: At $0.05 per kWh and an average hashprice of $45/PH/day, miners in Texas can achieve a gross margin of around 70-80%, depending on their operational efficiency. With higher energy costs at around $0.15 per kWh in Germany, the same hashprice significantly reduces margins, often below 40-50%.

These discrepancies highlight why miners want to operate in regions like Texas or Kazakhstan, where lower energy costs directly translate into higher profitability.

The quest for favorable energy rates has led to notable shifts in the global distribution of Bitcoin mining. In mid-2021, there was a mass migration of mining activities from China, following its crackdown on crypto operations, to North America, where states like Texas offered competitive energy rates. In the past few years, high energy costs in Europe have prompted miners to look towards Central Asian countries like Kazakhstan or even the Middle East, where energy subsidies can result in lower operational costs.

Political and regulatory environments play a crucial role in these shifts. For example, in Paraguay, where hydroelectric power is abundant and underutilized, there was significant interest from miners due to the low energy costs. However, proposed regulatory changes aiming to increase taxes or restrict electricity usage for mining have crossed the country off the list for miners, stifling the growth of mining operations in the region.

The performance of public mining companies is closely tied to fluctuations in the Bitcoin market, particularly changes in the price of Bitcoin, hash price, and overall network conditions. Due to their scale and the nature of their operations, these companies are particularly sensitive to halvings, which significantly affect their operational framework and financial outcomes.

When the block reward halves and the hash price falls, these companies face immediate pressure on their revenue and profitability. Reducing block rewards decreases direct earnings from mining, while the fall in hash price reduces the revenue per unit of computational power. This dual pressure requires quick strategic adjustments to maintain financial health and operational efficiency.

After the halving, major public mining companies like Marathon Digital Holdings and Riot Blockchain saw marked changes in their financial performance. For instance, Marathon Digital reported a noticeable dip in revenue immediately following the halving. Their revenue declined by approximately 20% in the X. Riot Blockchain experienced similar trends, with their revenue contracting by 15% in the same period. This decline was partly due to decreased operational efficiency and the lower hash price, which dropped from an average of $109.57/PH/day pre-halving to around $45/PH/day afterward.

Responding to the halving, public mining companies undertook significant operational adaptations to enhance efficiency and protect profitability. 

Companies like Marathon Digital aggressively upgraded their mining hardware to more efficient models, such as the Antminer S19 XP and the newer S21 series. These upgrades help maintain competitive operational efficiency even as earnings per hash decrease. Many miners, including Riot Blockchain, expanded their operations into states like Texas, where lower energy costs could partially offset the decreased hash price. In addition to hardware and location shifts, these companies streamlined their operations, cutting non-essential expenditures and optimizing their mining fleets to reduce the overall cost per PH of operation.

The beta scores of public mining companies to Bitcoin reveal their market sensitivity and volatility relative to the broader crypto market. These beta scores are crucial for investors to understand as they indicate the risk profile of these stocks in relation to the crypto market. A higher beta implies higher market risk but also greater potential for rapid gains in bullish conditions.

For example, Marathon Digital has a beta score of 1 to Bitcoin, indicating that its stock is as volatile as Bitcoin. This high beta means that if Bitcoin’s price moves, Marathon’s stock will move in the same direction. Riot Blockchain, with a beta of 0.81, also shows a high beta but is slightly less sensitive than Marathon. This volatility reflects the broader mining sector, where company valuations are highly responsive to Bitcoin price changes and mining economics.

Bitcoin’s fourth halving has reshaped the mining landscape, demanding strategic shifts and adaptation from miners and other market participants. 

The changes in operational efficiency following the drop in hashrate and hash price were briefly offset by the revenue boost from transaction fees. Still, a competitive market and geopolitical issues with energy costs make the industry much less forgiving. The sheer size of public Bitcoin miners, led by companies such as Marathon Digital and Riot Blockchain, makes this industry segment important for analysts. The high beta scores most of these companies have illustrate their sensitivity to changes in the crypto and mining markets and show just how far and wide the halving’s impact is. 

In the coming months and years, we can expect the mining industry to undergo a series of structural changes. The global regulatory environment plays one of the most important roles in shaping mining operations worldwide. The interplay between Bitcoin price movements, transaction fee volatility, and mining difficulty will continue to dictate the sector’s profitability. 

This search for profitability will most likely lead miners to explore renewable energy. Aside from reducing costs, turning to renewable energy could also drastically improve the public perception of Bitcoin mining as an industry. 

One of the biggest challenges miners face today, aside from profitability, is the centralization of hashrate and regulatory issues. We can expect the rest of the year to be spent identifying and evaluating new regions with favorable energy costs and stable regulatory environments. This could help miners diversify their operational risks and increase profitability in the long run.