One of the largest Bitcoin mining facilities, Riot Platforms, has warned shareholders that there is "no guarantee" the Bitcoin halving will have a positive impact on its profitability.
Roughly every four years, Bitcoin is programmatically set for a "halving" which cuts the reward for mining new blocks in half as a way to keep inflation in check. Bitcoin is set for its next halving sometime in April with some speculators thinking that it will increase the price of Bitcoin.
But Riot Platforms is warning investors to not get overhyped.
"While Bitcoin prices have historically increased around these halving events, there is no guarantee that the price change will be favorable or would compensate for the reduction in mining rewards." Riot said in its 2023 annual report.
“The revenue we earn from our Bitcoin mining operations would see a decrease,” Riot added, “which could have a material adverse effect on our results of operations and financial condition."
For a miner to get a block reward, it must solve a complex cryptographic puzzle that requires a lot of electricity—one of the biggest enduring criticisms of the blockchain’s proof-of-work consensus mechanism. The halving will increase this demand for electricity, it’s believed, in turn increasing expenses.
"Many miners now find it infeasible to remain profitable at current electricity rates," Aki Balogh, co-founder & CEO of Bitcoin smart contract provider DLC.Link, told Decrypt. "The halving will essentially double the amount of electricity to make the same amount of Bitcoin. The rate stays the same, but miner profitability is halved."
As a result, miners are worrying about their profit margins. Experts are especially worried for the lower-level miners with inefficient machines.
"Miners with efficient operations—i.e. low energy costs and the latest generation of ASICs—will continue to operate while previous generations of ASICs will most likely be unprofitable and be shut down for economic reasons." Matthew Niemerg, co-founder of layer-1 blockchain network Aleph Zero, told Decrypt.
"How to prepare? Get ready to shut down unprofitable machines,” he added.
Since the last halving in May 2020, more miners have entered the space, which increases the hashrate—a measure of how much computer power is mining at any given time.
"With increased competition in the miner space, we saw the hashrate increase more than fivefold since the last halving," Greg Beard, CEO and chairman of Stronghold Digital Mining, told Decrypt. "So while everyone is excited about the halving, we’ve already seen a quartering of mining economics as miners added capacity with their machinery without the Bitcoin price keeping pace."
This means that now, more than ever, mining efficiency is a huge priority.
"The halving will be most favorable for miners with a low cost of power," Beard explained. "Miners who can keep costs low are the miners set to win out the halving as Bitcoin price increases."
Despite predictions from experts suggesting that the least-efficient miners may have to close their operations, Riot Platforms predicts that the global hashrate will continue to rise.
"We expect the demand for new Bitcoin will likewise increase as more mining companies are drawn into the industry by this increased demand," Riot’s report said. "Therefore, as new and existing miners deploy additional hashrate, the global network hashrate will continue to increase, meaning a miner’s share of the global network hashrate (and therefore its chance of earning Bitcoin rewards) will decline."
As miners look for more efficient options, the industry could accelerate a shift towards renewable energy to lower energy costs, or foster innovation for new low-cost mining machines.
Edited by Andrew Hayward