Remember the days when Bitcoin (BTC) mining difficulties were in the single-digit billions, there were nearly as many Bitcoins to be mined as there were in circulation, and you could run a highly profitable operation with one off-the-shelf device [graphics processing units] and a civilian outlet without a yawn from regulators?
Yes, those days feel like ancient history despite being less than a decade ago.
Samir Tabar is the CEO of Bit Digital.
Everything is harder with bitcoin mining today, from overhead to competition to the looming scrutiny from lawmakers and the wrath of climate activists. But there are still good days ahead when the industry revolutionizing finance can adapt to a new environment. These days call for a different kind of bitcoin mining business and different kind of business leaders. Everyone in the industry has a few months to decide if they’re up to the challenges of mining in a very different reality, and we all have a role to play in securing the future of bitcoin mining.
Halvening is an endogenous challenge
“Halving” will reduce the amount of Bitcoin that can be mined per day from around 900 to 450, making the asset even more scarce while also providing a deflationary measure to bolster it as a store of value. Bitcoin investors own Bitcoin because they believe it will appreciate in value, and next year’s halving – if history is any guide – may very well provide it. Historically, Bitcoin has rallied in the year leading up to halvings; Bitcoin surged 19% in the 12 months leading up to its last halving May 11, 2020, while the previous halving in 2016 saw a 142% surge.
Even a year from now, Bitcoin appears to be pricing in this next four-year event and is up about 25% since early March. Bitcoin has not fully decoupled from traditional financial markets to the extent many in the industry had hoped, and its current rally may only reflect temporary relief in stock markets as war and inflation remain risks. Still, it’s nice to have some respite from all the post-FTX carnage fueled by the US Federal Reserve’s aggressive rate hike.
The same halving that is likely to increase the value of Bitcoin will also reduce mining profitability. Fewer minable bitcoins mean less profit. Increasing costs of ongoing operations pose a bottom-line challenge, straining miners on both ends. Even sitting on sizable bitcoin reserves, with a higher post-rally price and new underlying support levels for the asset, miners need to prepare for a lower-margin, reduced-cash flow environment. This will break the miners who have run good, lean businesses with clean balance sheets and the miners who have only optimized for short-term profits.
Bitcoin’s price drop in the second half of 2022 caused a cascade of bankruptcies from companies that have taken on too much debt and pursued high-priced growth, and similar dynamics are likely on the horizon. Miners need to prepare for the upcoming formulaic turmoil by trading cautiously, having more cash on hand, and leaner operations.
The mining industry can also mitigate our exogenous challenges
The halving will reduce the amount of Bitcoin that can be mined per day from around 900 to 450, making the asset even more scarce while providing a deflationary measure to bolster it as a store of value. Bitcoin investors own Bitcoin because they believe it will appreciate in value, and next year’s halving event — if history is any indication — could very well provide that. Historically, Bitcoin has rallied in the year leading up to the halving; Bitcoin surged 19% in the 12 months leading up to its last halving on May 11, 2020, while the previous halving in 2016 saw a 142% surge.
Even a year from now, Bitcoin appears to be pricing in this next four-year event and is up about 25% since early March. Bitcoin has not fully decoupled from traditional financial markets to the extent many in the industry had hoped, and its current rally may only reflect temporary relief in stock markets as war and inflation remain risks. Still, it’s nice to have some respite from all the post-FTX carnage fueled by the US Federal Reserve’s aggressive rate hike.
The same halving that is likely to increase the value of Bitcoin will also reduce mining profitability. Fewer minable bitcoins mean less profit. Increasing costs of ongoing operations pose a bottom-line challenge, straining miners on both ends. Even sitting on sizable bitcoin reserves, with a higher post-rally price and new underlying support levels for the asset, miners need to prepare for a lower-margin, reduced-cash flow environment. This will break the miners who have run good, lean businesses with clean balance sheets and the miners who have only optimized for short-term profits.
Bitcoin’s price drop in the second half of 2022 caused a cascade of bankruptcies from companies that have taken on too much debt and pursued high-priced growth, and similar dynamics are likely on the horizon. Miners need to prepare for the upcoming formulaic turmoil by trading cautiously, having more cash on hand, and leaner operations.
Healthy, responsible businesses have good days ahead
Miners can control their own destiny in the next cycle. Not only should wealth creators have strong balance sheets, they must also resist the temptation to overexpand and take unnecessary risks. Given how quickly market conditions can change with broader economic uncertainty and the volatile regulatory environment, it is important to remain conservative. Miners need to build for the mid-cycle rather than the peak, providing enough flexibility to thrive in the up cycles and weather down cycles comfortably.
Bitcoin miners can also take inspiration from the rapid innovations on the Web3 and find ways to diversify revenue beyond just mining. With toxic maximalism behind us, the Ethereum network offers a number of possibilities, including the flywheel model, where bitcoin block rewards earned through mining can be converted into ether [ETH] and used for rewards. Rather than simply viewing them as competitors, Bitcoin and Ethereum can work together to create a future where prosperity is less dependent on cycles and regulatory whims.
By securing our opportunities, staying lean and agile, and diversifying our revenue streams, miners will adapt to the next iteration of crypto and further establish us as a critical pillar of the crypto community. The responsibility for building and maintaining a healthy industry rests solely with us. Miners need to stop toxic maximalism, hold bad industry players accountable, and continue to show the communities in which we work that our businesses benefit them and the country.
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