Bitcoin miners may face significant challenges due to the upcoming halving event, according to a new report by analysts from banking and finance firm JP Morgan.
The report suggests that Bitcoin's price and transaction fees need to rise substantially to balance the reduced block reward.
The analysis predicts potential difficulties for Bitcoin miners as the hash rate, representing the computational power used to mine cryptocurrency, hits new highs. Factors such as fluctuating electricity costs and intensified competition among miners are expected to increase the cost of production.
The halving event, which takes place approximately every four years, will cut miners' rewards by half. "The upcoming bitcoin halving event in April/May 2024 could be a stress test for Bitcoin miners," states the report, co-authored by JP Morgan analyst Nikolaos Panigirtzoglou.
This event will lower the issuance rewards from 6.25 to 3.125 BTC, effectively reducing miners’ revenue while concurrently increasing Bitcoin’s production cost. The report explains that while Bitcoin halving typically has a positive impact on the Bitcoin price given that the production cost has historically acted as a floor, it presents a considerable challenge for miners.
"[The halving] would reduce the issuance rewards from 6.25 to 3.125 BTC, implying a reduction in miners’ revenue, effectively increasing Bitcoin’s production cost at the same time [...] As a result, while Bitcoin halving is seen as having a positive effect on the bitcoin price given the production cost acted historically as a floor, it poses a challenge for bitcoin miners," the report indicated.
Hash Rate Volatility and Energy CostsBased on a global average electricity cost of $0.05/kWh, it presently costs around $20,000 to mine a Bitcoin, currently valued at around $30,000 according to public blockchain explorer data. JP Morgan highlighted the hash rate's volatility, suggesting a range of energy sources and potential advantages for miners who have access to lower-priced power.
The firm revealed that a one-cent increase in the cost per kilowatt-hour translates into a $4,300 increase in Bitcoin production costs. After the halving event, this sensitivity is expected to double, thereby escalating the risk and susceptibility for higher-cost producers (in simpler terms, they will effectively be "priced out" of the competitive sphere for Bitcoin mining).
Institutional Support and the Importance of Rising Bitcoin PricesThe report also points to growing institutional interest in Bitcoin mining as a source of support for struggling miners, citing investments in mining rigs from companies like Galaxy Digital and Grayscale Investments.
The report stated:
"It seems unlikely that the Bitcoin hash rate will continue to rise at the same pace post the April/May 2024 halving event without any sustained rise in the Bitcoin price above its production cost or a large increase in transaction fees that could offset the reduction in issuance rewards."
Despite this, however, to offset the lower block reward, JP Morgan stresses that Bitcoin's price and transaction fees must see substantial growth. The analysts furtherl noted that declining enthusiasm around cryptocurrencies could pose an additional challenge for miners' revenues, if indeed the trend in terms of declining interest in crypto proves to be a long-term trend.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
