Mass Bankruptcies Among Miners? Bitcoin Rally Could Be Over

As part of the highly anticipated halving event, the reward for mining the cryptocurrency Bitcoin has been reduced by half. What was still quite calmly acknowledged by the market could force miners to give up in the medium term, as their business will now become significantly less profitable.

Does the market regulate events itself?

Miners now only receive 3,125 BTC when they add a new block to the chain. This is exactly half of the reward they received before the halving for making their computing capacity available to continue the blockchain. But the costs are rising: According to a calculation by CoinShares, the average production and cash costs in the third quarter of 2023 were around $16,800 to $25,000 per Bitcoin. Costs are now expected to be between $27,900 and $37,800.

A look at the past shows that this is not financially feasible for all miners: the pressure on the mining community increased after the past halving events, some miners were forced to react to the lower income by selling their reserves, others gave up mining completely.

At the same time, the market itself also had possible solutions: transaction fees regularly increased after a halving. This was also the case at this year’s halving event: transaction fees rose sharply at times and rose to a new record high for the first time since spring 2021. This created an additional source of income for Bitcoin miners, but it didn’t last long: shortly afterwards, transaction fees fell again – in connection with falling demand again.

There remains a second market-regulating process to keep Bitcoin mining profitable: a higher Bitcoin price. In the past, a halving event was always followed by a price increase. Although there were repeated price drops as a result, in the long term the original cryptocurrency increased in value. For miners, this means in particular that they should be so well capitalized that they can ride out a possible price correction.

Negative Bitcoin price reaction to the 2024 halving event

The hope of many crypto investors that the halving event on April 20th would be accompanied by spectacular price fireworks for Bitcoin was disappointed. On the contrary: the cyber investors are cashing in and taking their profits from the previous months with them. Bitcoin lost 12.63 percent in the last four trading weeks to now 62,053 US dollars (as of April 30, 2024).

The record high of March 14th at $73,798 is now more than $10,000 above the current price level. The price drops in Bitcoin are unlikely to please miners in particular, as this reduces the profitability of Bitcoin creation, which has already been reduced due to the halving event.

Halving not surprising for miners

However, given that the Bitcoin halving was an event that surprised neither investors nor miners, the mining community is likely to have prepared for the various possible consequences – also with a view to learnings from past halving events. Asher Genoot, CEO of the listed Bitcoin mining company Hut 8, sees no acute risk of bankruptcy in the crypto mining sector in an interview with “Bloomberg”.

“I think the dynamics that exist today are different than in 2022,” he said. In 2022, many miners were not prepared for rising energy costs and were unable to service their debts after the Bitcoin price collapse. However, a lot has now changed in the industry and, according to Genoot, Bitcoin miners have increasingly switched from debt financing to equity financing, which has reduced the risks of insolvency, he emphasizes.

More consolidation in the market

Even if a widespread wave of bankruptcies is not expected, smaller miners in particular could still get into difficulties after the block reward is halved. Accordingly, the market could continue to consolidate and M&A activities could increasingly shape the mining landscape.

__

(Featured image by QuinceCreative via Pixabay)

DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.

This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.

First published in finanzen.ch. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

Although we made reasonable efforts to provide accurate translations, some parts may be incorrect. Born2Invest assumes no responsibility for errors, omissions or ambiguities in the translations provided on this website. Any person or entity relying on translated content does so at their own risk. Born2Invest is not responsible for losses caused by such reliance on the accuracy or reliability of translated information. If you wish to report an error or inaccuracy in the translation, we encourage you to contact us