According to analysts at global financial giant JP Morgan, bitcoin miners will face headwinds as the hash rate hits new record highs ahead of the upcoming halving next spring, with volatile electricity costs and competition among miners driving up production costs.
Hash rate refers to the computing power used to mine a cryptocurrency. The halving event, which takes place roughly every four years, will cut miner rewards in half.
“The upcoming April/May 2024 Bitcoin halving could be a stress test for Bitcoin miners,” write JP Morgan analyst Nikolaos Panigirtzoglou and colleagues in the company’s latest Flows and Liquidity report, which the company shared with Decrypt.
“[It] would reduce issuance premiums from 6.25 BTC to 3.125 BTC, which would mean a decrease in miners’ revenue while effectively increasing the production cost of Bitcoin,” the report explains he poses a challenge for bitcoin miners.”
According to the analysis, and based on a global average electricity price of $0.05/kWh, it costs about $20,000 per CoinGecko to mine one bitcoin, which is currently worth about $30,000. But JP Morgan said hash rate volatility indicates the use of different energy sources, meaning miners with access to cheaper electricity are at an advantage.
In fact, according to the company, a one cent increase in the cost per kilowatt-hour equates to a $4,300 increase in the cost of bitcoin production.
“After the halving, this sensitivity would double to $8,600, increasing the vulnerability of higher-cost producers,” the firm noted.
However, there is some good news for miners.
“Institutional interest in bitcoin mining has offered support to struggling miners by investing in mining rigs from companies such as Galaxy Digital and Grayscale Investments,” it said. Galaxy Digital recently acquired Argo Blockchain and Grayscale spun off a company focused on bitcoin mining hardware.
“Tether, the world’s largest issuer of stablecoins, is also planning to invest in a bitcoin mining site in El Salvador,” the report reads.
Still, Bitcoin’s price and transaction fees need to increase significantly to offset the lower block reward.
JP Morgan also noted that “the fall in cryptocurrency hype poses an additional challenge to miner revenue,” including “the fall in hype about ordinals.”
The number of daily ordinal inscriptions recently hit an all-time high, but bitcoin fees failed to maintain their previous highs.
“Looking forward, post-April/May 2024 halving, the bitcoin hash rate is unlikely to continue to increase at the same pace without a sustained increase in the price of bitcoin via its cost of production or a sharp increase in transaction fees , which could offset the reduction in issuance premiums,” concluded JP Morgan.
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