Halving, a survival test for bitcoin miners

The next bitcoin halving will take place around April 19. This event could disrupt the economic model of small bitcoin miners, while strengthening that of the giants of the sector.

The reward granted for operating the bitcoin cryptocurrency will soon be halved, and for players in the sector, who will see part of their income cut, this scheduled event is a test of survival. Around mid-April, like every four years or so, a technical phenomenon called “halving” will halve the reward granted to bitcoin miners, those who provide their computing power in order to contribute to the proper functioning of the digital currency.

Halving, which contributes to the objective of limiting the quantity of bitcoins in circulation, “tends to undermine the weakest mining operations”, for which “it no longer becomes profitable to mine bitcoin”, exposes to the AFP Simon Peters, analyst at Etoro: “the operation then stops or is bought by a larger rival.”

Bitcoin miners – whether specialized companies that operate huge centers bringing together thousands of computers, or individuals who can work in cooperative “pools” – compete to solve a defined computing puzzle through the network. The machine that solves it first obtains the right to validate a “block” of data, containing the last transactions carried out, and receives bitcoins as a reward.

“Vicious circle”

Fixed for the last four years at 6.25 bitcoins per block created, this must soon drop to 3.125 bitcoins (more than $230,000 if we take the peak of bitcoin in March as a reference). Since the last halving on May 11, 2020, the price of the digital token has indeed been catapulted to new heights, reaching a record of $73,797 in March, partly making up for the future shortfall of miners.

But smaller margins could prevent some from investing in the newest machines, or force them to pause some because the cost of running them exceeds the estimated earnings.

It’s a “vicious circle”, notes Simon Peters: “their chance of mining a block decreases due to the reduction in computing resources”, in turn reducing their income.

The mining company Hut 8 Corp already announced in March the closure of its Canadian site in Drumheller. If he admits that “this decision slightly reduced” the production of bitcoins, “it allowed us to reduce our energy costs”, invokes his boss, Asher Genoot, who explains to AFP having relocated the efficient machines elsewhere.

Race for performance

In order to remain competitive, the giants of the sector are working to tighten their costs, invest in more efficient machines, and find cheap and more ecological energy sources to cool and power their army of computers.

In anticipation of the halving, “we have increased the efficiency of our fleet”, by purchasing 160,000 state-of-the-art “Bitmain S21” machines, intended to replace those of an older generation, explains to AFP Taylor Monnig, in charge of halving operations. mining at CleanSpark. Its Canadian competitor Bitfarms claims to rely 80% on hydroelectric energy, “not only green but also economically viable”, argues its mining manager, Ben Gagnon.

Other companies also buy capital from competitors, or even merge like the two titans Hut 8 and Bitcoin Corp at the end of last year. The new entity founded, Hut 8 Corp, has diversified its sources of income to cover its fixed costs which will not drop after the halving, and offers, for example, hosting or mining operation management services on behalf of third parties. .

Marathon Digital, one of the heavyweights in the sector, has for its part accumulated a war chest, the equivalent of around $1.5 billion, and announced the acquisition this year of three new centers in the United States. in order to increase its capacity.

Questioned by AFP, Adam Swick, one of the company’s managers, confirms that the funds could be used in particular for future acquisitions: “if there is a site in difficulty”, “this could be an opportunity for Marathon to buy (it) back” to modernize it. This battle of the strongest could be fatal to smaller operations, creating a vacuum in the network that could benefit those who remain.