In brief
- Bitcoin’s third halving will first wash out small miners and big, over-leveraged farms.
- Many Chinese mining operations operate on heavy leverage, so hashrate will likely migrate outside of China, especially as next-gen mining hardware comes on outside China.
- North America, already seeing increasing investment into the mining sector, is positioned to capitalize the most on this hashrate diaspora.
The halving is certain to flush out inefficient miners and recalibrate the global share of hashrate. Will miners in North America benefit from a collapse in China?
Chinese mining pools currently account for 65% of Bitcoin’s hashrate, while their North American counterparts make up roughly 15 percent of hashrate, according to data from CoinShares. But industry experts tell Decrypt that China's beleaguered mining sector—whose problems will be exacerbated by the halving next week, when miners' rewards are cut in half—has created a hashrate tug-of-war that could shift the balance of power to North America.
While Chinese miners are financially over leveraged, and suffering from supply-chain shortages affecting next-gen ASIC equipment, miners in North America are enjoying new sources of cheap and renewable energy—and increased appetite from North American investors.
Flight of the hashes post halving
The halving will likely impact how over-leveraged Chinese miners (those who took out loans for most of their operational capacity instead of paying in cash) do business, driving many of them out of the market or forcing them to restructure their operations to compete.
Depending on the Bitcoin price going into the halving, these miners will risk bankruptcy, even those with next-generation hardware.That’s because they will have to spend most of their mining rewards on their debt obligations, so they’ll be the first to be washed out when their revenue is cut in two.
“Chinese miners are generally more leveraged than North American,” Ethan Vera, a pool operator at North American Luxor Mining Pool, told Decrypt. “It's clear that they are highly levered because during the fall in crypto prices in March, almost all of them margin called.”
Matrix Port, the newest venture from Bitmain co-founder Jihan Wu, also makes loans to many of China’s biggest miners, Vera confirmed. These miners may have access to the cheapest electricity in the world, but that won’t matter if all of their revenue goes toward paying off their debt.
As these operations implode, mining firms in North America (especially when they finally rig up new machines) will fill the gaps in hashrate.
North America miners could benefit
Denis Rusinovich, who operates an 80-megawatt mining operation in Kazakhstan, expects that, once many more new generation ASICs come on line, this “will [have a] major impact [on] hashrate redistribution for the next 12 months.” He elaborated that, if the Bitcoin price is high after the halving (around or above $8,000), then inefficient miners will have a reprieve, but if Bitcoin is trending towards $4,000, then he expects we could see “price wars” wherein larger farms come out on top over smaller ones, something that could risk centralizing mining in China further.
Even with Bitcoin at $9,000, it’s likely that this halving will hurt North America “pretty bad in the near-term,” Vera told Decrypt, “but it will be good in the mid-term.”
Samson Mow, the Chief Strategy Officer of Blockstream, agreed, adding that “[w]e’re already seeing a large segment of Bitcoin mining move to North America.” These include Blockstream’s operations, a 300 MW joint-operation between its Quebec and Georgia facilities. Munich-based Data AG (formerly, Northern Bitcoin AG) has established its own 300MW facility in Rockdale, Texas. With 300 MW total capacity, these are some of the largest Bitcoin mining facilities in the world.
Other examples of North America’s burgeoning mining sector are not too hard to find. One firm, Upstream Data, is selling mining rigs to oil drillers to help them make better use of flare or vented gas. Another company, VBit, is establishing a 200 MW facility in Alberta, Canada.
Mow expects this wealth to run over into the ASIC’s chip manufacturing business, as well, saying “it’s inevitable” that “major ASIC companies setup manufacturing facilities in North America in the coming years.”
Despite this activity, Mow does not expect any immediate “shakeout” that will redistribute hashrate. Instead, the process will be gradual. But it will mean that North American will continue to emerge as China’s primary rival, and he anticipates that this competition will be in the hardware manufacturing realm as well as the mining industry itself.
“The least efficient and least capitalized miners will struggle and possibly shut off,” Mow said. “We saw this happen during the March drop in Bitcoin’s price. Hashrate dropped, difficulty dropped, and the more efficient miners mined more Bitcoin. When the price recovered, the hashrate also started to recover. The system works just as intended and it favors the most efficient players.”
This hashrate diaspora could come from a widespread bust in over-leveraged mega-mining farms in China. Accustomed to the rapid growth that has come to define China’s perpetually-booming economy over the past few decades, Chinese investors have a higher risk appetite than their American counterparts, Vera said.
But American investors are increasingly perceiving Bitcoin as more of an opportunity than a risk. As this perception changes, and over-leveraged operations in China come apart at the seams, both factors will contribute to North America gaining a foothold on China in this new mining economy.
Scaling for the future
Still, Bitcoin’s boom and bust cycles leave a sour taste in the mouths of legacy investors who help bankroll these operations; they pour money into infrastructure and machinery only to see their dreams for the digital gold rush be turned (quite literally) into scrap metal.
Perhaps this is the greatest challenge facing the nascent Bitcoin mining industry: how to properly scale and hedge for volatility.
Mining insurance policies don’t currently exist at scale, something Rusinovich pointed out when he spoke to the lack of “collar hedging strategies” (an investment tactic involving options contracts that are meant to limit losses) in the Bitcoin mining market.
One Canadian miner we spoke to, who was wiped out on Black Thursday in March, plans to do just that: The crash caused him to rethink his former day job as an insurance broker. Now he wants to offer insurance policies to complement the hedging strategies Rusinovich discussed.
Until then, miners will have to stick with the playbook they’ve had so far: turning off inefficient miners, planning efficiently well beforehand, and as Samson Mow aptly put it, “believing in Bitcoin.” If North American investors keep believing, perhaps the halving is the beginning of the mining industry’s decoupling from China.