Part 1 of this two part article provided an understanding of the halving and how the North American publicly listed miners are preparing for the event, in terms of:

  • Low cost energy
  • Utilizing the most efficient machines
  • Diversifying revenue streams

In part 2, we consider how the miners may use additional opportunities to reduce the risk, as rewards drop by 50% including mergers and acquisitions, cost management, hedging and building a cash runway to provide support post halving.  Finally, we look at the impact of the Bitcoin price on mining profitability, and the implications for some less efficient miners post halving.

Merger and Acquisitions

In 2022, the downturn in the market battered Bitcoin miners, resulting in industry consolidation and acquisition opportunities. While some miners, at the time, were saddled with significant debt, like Argo Blockchain (ARBK), Bitfarms (BITF) and Greenidge Mining (GREE).  Core Scientific (CORZ) actually faced bankruptcy, voluntarily entering the Chapter 11 process in December 2022.

Other Bitcoin miners like Hut 8 and U.S. Bitcoin Corp. decided on merger, as a mechanism to grow organically, finally gaining approval from the SEC in November 2023.  Having completed the process, Hut 8 are now able to relocate miners to many more locations, while USBTC, having significant access to infrastructure and low power costs in the US, gained a financially strong partner. The move has provided diversified mining sites across North America and furthers opportunities to access capital, potentially leading to inclusion in U.S. indexes.

Cost Management

As Bitcoin mining companies prepare for the forthcoming halving, implementing effective cost management processes becomes crucial to maintain profitability. The previous article dealt with  the use of energy optimization through efficient hardware, strategic location selection (preferably where energy costs are low), and leveraging renewable energy sources, allowing companies to mitigate operational costs.

The purchase of the latest miner machines can help reduce energy consumption while increasing hash rates, thereby improving mining efficiency and lowering operational costs.  Companies must strategically plan their capacity to ensure optimal utilization of resources and avoid overinvestment in mining infrastructure.

Collaborating with other mining companies or joining mining pools can also provide economies of scale, reducing individual operational costs through shared resources and collective bargaining power.

Adhering to regulatory requirements and industry standards is another potential saving as it not only mitigates legal risks but also fosters investor confidence, potentially lowering financing costs and improving access to capital.  The continuous monitoring of key performance indicators and market trends is also essential for Bitcoin mining companies to change circumstances, as required.

By implementing these cost management processes, Bitcoin mining companies can better navigate the challenges posed by the forthcoming halving and position themselves for long-term success in the evolving cryptocurrency ecosystem.

Hedging and Derivative Techniques

In the volatile world of Bitcoin mining, where market uncertainties loom large, hedging and derivative techniques emerge as vital tools for managing risks and maximizing profits. Hedging involves offsetting potential losses by taking opposite positions in correlated assets. In the context of Bitcoin mining, miners can hedge against price fluctuations by entering into futures contracts or options contracts.

Futures contracts allow miners to lock in a future price for their Bitcoin, mitigating the risk of price drops. By selling futures contracts, miners can secure a predetermined price for their mined coins, ensuring a predictable revenue stream regardless of market fluctuations. Similarly, options contracts provide miners with the right, but not the obligation, to buy or sell Bitcoin at a predetermined price, offering protection against adverse price movements.

Moreover, derivative techniques like swaps can also be employed in Bitcoin mining. Miners can engage in swap agreements to exchange cash flows with other parties, thereby reducing exposure to fluctuations in Bitcoin prices. These derivative instruments enable miners to hedge against price risks while focusing on their core operations.

Overall, in the dynamic landscape of Bitcoin mining, leveraging hedging and derivative techniques is crucial to safeguard profitability and confidently navigate uncertain markets.

Bitcoin Price

The Bitcoin price has experienced a notable resurgence over the past 15 months, witnessing a remarkable 293% surge since January 2023 and hitting an unprecedented peak of $73,000 in March 2024. This surge has coincided with an influx of new mining machines, contributing to a 138% increase in the global hash rate during the same period.

The impending Bitcoin halving event carries substantial significance. Historical analysis underscores the correlation between previous halving occurrences and significant bullish trends in Bitcoin's price trajectory. For instance, following the 2016 halving, Bitcoin's value skyrocketed from around $650 to an astonishing $20,000 by the end of 2017. Similarly, after the 2020 halving, Bitcoin surged from approximately $8,800 to an unprecedented peak nearing $69,000 in November 2021. The halving will  trigger a reduction in supply that could potentially drive further upward price momentum.

While the future price of Bitcoin remains uncertain, historical data offers insights into potential patterns within Bitcoin cycles. Analysis of price performance in the year leading up to and following previous halving events reveals impressive increases in Bitcoin's value post-halving, reinforcing the anticipation surrounding the upcoming event.

With the halving scheduled for April 19, 2024, Bitcoin's price has already surged by 136% over the past 12 months. Considering the historical trend of price surges following each halving, there's reasonable speculation that the current price trajectory may continue.

The introduction of several new spot Bitcoin ETFs globally has had a mixed impact on the digital asset landscape. While these ETFs have expanded access to Bitcoin, allowing a broader range of investors to engage with the asset class, the transformation of Bitcoin from a speculative asset to a respected component in institutional portfolios is notable. Rob Chang, CEO of Gryphon Mining, cites increased institutional investment, the influence of ETFs, and the upcoming halving as factors contributing to his revised price projection for Bitcoin, now set at $150,000 to $200,000 by year-end.

Furthermore, the valuation of Bitcoin mining companies has historically exhibited a strong correlation with Bitcoin's price movements. Bullish market cycles tend to create favorable conditions for miners, leading to increased profit margins per mined coin. Conversely, during market downturns, profitability may be constrained, emphasizing the close relationship between Bitcoin's value and the entities involved in its mining operations.

Summary

The upcoming Bitcoin halving presents significant challenges for less efficient miners. Reduced block rewards directly impact their revenue, intensifying competition with more efficient counterparts. Difficulty adjustments may render solving complex puzzles harder, leading to longer confirmation times.

To remain profitable, miners must enhance operational efficiency through hardware upgrades and energy optimization. However, the overall impact hinges on Bitcoin's price and transaction fee revenue. Miners must strategically adapt by diversifying revenue streams and upgrading equipment. Less efficient miners face the need to innovate and adapt to the evolving landscape to ensure sustainability post-halving.