Smaller bitcoin miners likely won't survive after the halving

The third bitcoin halving is fast approaching. The event, expected to occur in about 15 days, will see the reward for mining a bitcoin block cut in half from 12.5 BTC to 6.25 BTC.

This drop in revenue likely means that only miners with efficient operations and economies-of-scale will be able to survive the reward cut, say market participants.

"Inefficient mining operators are at danger of being swallowed up by more efficient miners," Chun Wang, co-founder and managing partner of F2Pool told The Block. F2Pool mined the second-highest number of blocks in the past four days, according to data from Blockchain.

"Often, larger farms have better economies of scale and therefore are able to survive reductions in the mining reward or price volatility," Wang added.

Alejandro De La Torre, vice president for Poolin – which mined the most blocks in the past four days – echoed Wang’s views, telling The Block:

"Miners who are using old machines and have high electricity cost will have a difficult time staying afloat after the halving. They will likely need to shut down."

The cost of mining bitcoin depends on two key variables: the cost of electricity and the equipment in use. Mining farms with upgraded machines and access to cheap power need not worry about the halving,  experts say. Labor and regulatory costs also factor in, but power and hardware expenditures are far more impactful.

"Mining really comes down to power cost," Ibrahim Alkurd, CEO of New Mine, a firm which helps setting up bitcoin mining farms, told The Block. Giving details of the on-the-ground situation, Alkurd said miners who have the cheapest electricity "are not too worried about the halving as their machines will remain to be profitable."

Smaller-scale miners, on the other hand, will find it difficult to survive, said Alkurd. "The 2016 halving stopped home mining from being profitable. The 2020 halving will cause smaller mines to struggle to stay afloat."

F2Pool and Poolin together control over 36% of Bitcoin's hash rate or the network's processing power as of April.

The reward halving is an integral element of the network's economic underpinnings, and most miners have been planning for this event for months, said Poolin's De La Torre.

"The farms I've been to, all have new equipment. But I go to advanced farms in Europe," De La Torre told The Block, adding that these miners have sourced or already have access to low-cost electricity.

New Mine's Alkurd said that recently "some very large" mining operations have been built in North America, where miners are getting "very cheap power, under 3 cents per kilowatt-hour (kWh)."

But not all miners are prepared. Some are sitting on the sidelines and watching to see what happens to bitcoin’s price post-halving, said Alkurd, who added: 

"If a miner is counting on BTC price to pump after the halving in order to remain profitable, then those are the miners that are in trouble."

Alkurd said he does not expect the halving to cause "an immediate surge" in bitcoin's price. Historically, the price of bitcoin has seen a surge in the year-and-a-half or so after the halving.

F2Pool’s Wang said it all depends on the cost of bitcoin production. "At the current growth in mining difficulty, it is likely that any farm that can produce a bitcoin for less than $3500 will survive," Wang told The Block.

Bitcoin is currently priced at about $7,680 per coin.

Sense of optimism

There remains a general sense of optimism among mining players about the halving.

Wang said the event may lead to "more consolidation in the mining industry." There will also be more movement of second-hand machines as farm owners in countries that have high electricity prices will need to sell their hardware to farms in other locations with more competitive prices, said Wang.

Poolin’s De La Torre said the mining industry would grow more professional after the halving. "The equilibrium of price, hash rate, and difficulty is a beautiful thing. That equilibrium will be reached, and the system will continue forward,” said Poolin’s De La Torre, adding:

“We’ll also see new players, new ways to fund farms, and efficient farms."

Poolin, therefore, plans to expand its services globally. It has recently opened an office in Berlin and intends to expand it by the end of this year, De La Torre told The Block. Poolin currently employs a total of 60 employees across its offices.

"We also will be expanding our mining pool with new coin and tools. Long-term plans include financing options for our miners and a stronger foothold in all aspects of the mining sector," said De La Torre. F2Pool is also hiring developers and analysts, said Wang. 

New Mine's Alkurd, however, is concerned that the halving could lead to mining becoming "even more centralized."

The event "is likely to play out in favor of the big players. The common saying definitely springs to mind here, 'Go big or Go home'," said Alkurd.