By the end of Friday, the size of the reward for mining bitcoins will have been halved. The event, known as a halving, occurs about once every four years and can be fatal for mining companies competing for the newly minted cryptocurrency.
“You don’t see that in any other industry,” says Charles Chong, chief strategy officer at Foundry, a company that mines bitcoins and provides services to other miners. “You’re on a treadmill. If you don’t keep running, you will be left behind.” The only grace, he says, is that “you have a lot of time to prepare.”
In each halving, mining companies that can no longer cover their expenses have turn off your machines. Smaller and backyard operations have completely closed. As unprofitable mining rigs leave the network, the Bitcoin system recalibrates, reducing the amount of computing power (and therefore the cost) needed to earn new coins. Over time, an equilibrium is reestablished whereby mining becomes profitable again for those able to absorb the initial blow.
But this time it’s different.
In March, the price of bitcoin. rose to a record level of more than 70,000 dollars per coin, thus reducing the danger for mining companies. In this case, although mining revenue will be halved, the associated profits will still exceed the cost of running the hardware, several mining companies say.
“Yeah [the price of] “If bitcoin hadn’t worked out recently, we would have had a very different environment after the halving,” says Asher Genoot, CEO of mining company Hut 8. “Right now, the price is bailing out a lot of people.”
After each previous halving, the price of bitcoin has increased, leading to speculation about the prospect of another rebound. But the economic design of the system does not alone guarantee that this pattern will repeat itself. Problems for miners will arise if the price of bitcoin moves in the opposite direction. Because bitcoin defies conventional valuation methods, its price is prone to sudden and violent swings. Mining companies must ensure that they are not caught by surprise.
In 2021, when the price of bitcoin last hit a record high, many mining companies got it terribly wrong. they assumed large amounts of debt to finance the expansion and placed their mining equipment as collateral. The following year, when the price of bitcoin fell and energy costs rose, had difficulty making debt payments and were forced to auction of its facilities at reduced prices and deliver hardware to your lenders. some were spoiled.
Mining companies are following different strategies to protect themselves against this eventuality. Genoot says Hut 8 has built a large treasury of bitcoins and, instead of exchanging the coins for dollars after mining them, is betting on a further rise in price. The money is not a “crutch” to help offset a decline in unprofitability, Genoot says, but rather a reserve fund to be used perhaps to purchase discounted hardware or facilities from struggling competitors.