How Investors Should Approach Bitcoin Miners As The Halving Draws Near

Overview

Every four years, the Bitcoin halving cuts rewards for mining bitcoin in half. It will happen again in April 2024, when the block subsidy will drop from 6.25 bitcoin (worth $221,000) to 3.125 units ($110,625). Miners will also continue to receive transaction fees paid by network participants, but those are a de minimis part of their compensation. While the practical effect of the halving will be to double production costs for bitcoin miners, bitcoin mining shares may still be a great fit for some crypto portfolios.

Key Background

The Bitcoin network uses a process known as mining to add transactions to the network. As compensation for expending computing power and incurring energy costs, each block’s miner is currently allowed to create 6.25 new bitcoins. This is the only way that new bitcoins are generated, and halvings serve as a way to slow down the pace of inflation, making existing assets more scarce. The process will continue until the 21 millionth unit is minted in the year 2140.

When bitcoin launched 15 years ago, and bitcoins were worth just a few cents, mining could be done on a basic laptop computer. Today, it is big business where top miners combine to run more than 450 EH/second. In fact some estimates put the annual energy consumption of the bitcoin network on par with a middle income country.

With this arms race comes millions of dollars in annual costs (such as the procurement of specialized hardware, energy bills, and general overhead), so many miners have evolved into multinational corporations with global supply chains. In fact, there are 15 major miners listed on major stock markets such as Nasdaq and the Toronto Stock Exchange with above 0.5 EH/s of realized hashrate in October 2023. Here are the ten largest.

It is also worth noting that the bitcoin halving has historically been an extremely bullish marker for the asset. In the 12 months following the halving in 2016, bitcoin surged by 287%. In the midst of the covid-driven financial boom, bitcoin surged by 542% in the 12 months-post halving. Back when bitcoin was still in its toddler stages, it surged by a staggering 8,256% in the year after its first halving in 2012.

Outlook and Implications

As demonstrated above