Summary The bitcoin halving event in April 2024 reduced the block reward for miners, which is expected to increase bitcoin’s price over time due to reduced supply and steady demand. Miners face revenue challenges from the reduced block reward, especially if bitcoin’s price does not rise quickly, compounded by high electricity costs and the need for specialized hardware. The mining industry is adapting through mergers, improving operational efficiency, and diversifying revenue streams, with well-capitalized firms better positioned to thrive. By Christopher Gannatti, CFA & Blake Heimann We just passed the 20th of July 2024, and approximately 90 days have passed since the pivotal bitcoin halving event in April. As a reminder, when we say "halving," we are referring to the reward paid to miners for correctly solving the proof-of-work algorithm. Roughly every four years, the bitcoin protocol specifies that the reward paid to miners is cut in half (50, 25, 12.5, 6.25, 3.125, etc.). Why is the block reward reducing? Well, there will only ever be 21 million bitcoin, so for that statement to be true, there needs to be a mechanism to create the new supply, but not to do so indefinitely, and to ultimately wind down as the system gets closer and closer to this level. While Bitcoin was flirting with all-time high price levels earlier in the year, nearing $74,000, it is clear that the near-term trend in the price of this asset has changed. The hypothesis: If there is less new supply coming online, but the demand remains at a similar level, then there is a rationale-as is the case with any commodity-for the supply/demand balance to exert upward pressure on the price. Historically, there has been significant price appreciation following halving events, but this has not been "immediate." We have seen three halving events so far, and we also caution any investor that the past is not an exact guide to the future-we recognize that we do not know with certainty what may happen after this fourth halving. Two of the last three halving events saw delayed price appreciation in bitcoin. In figure 1, there is a reason why the chart is showing the behavior of the bitcoin price over a period roughly 1,000 days post-halving, which would equate to something like 2.5 years. We do this predominantly in recognition that bitcoin's price volatility is very high, so looking at things over any short-term horizon makes it difficult to glean any worthwhile insights. Over the short term: Many different macroeconomic variables can influence the price of bitcoin. For example, in 2024, many riskier, more speculative assets are trading in a manner where prices appreciate when interest rates are expected to fall, and prices fall when interest rates are expected to rise. Over a longer time, the fact that bitcoin is known as a "hard" asset-meaning no entity can increase the supply on a whim-can have a bigger influence. We know that the supply of fiat currencies can be increased whenever the respective governments decide to do so-so the further printing of money plus the degree of debt and deficits currently employed by Western governments can have a bigger impact on driving bitcoin's price higher-but these details would likely have little to no influence in shorter time horizons. To keep things in context, bitcoin closed just under $67,000 on the halving date of April 20, not too far from the current price of $63,000 as of the time of writing. Figure 1: Bitcoin Price Performance Post Historical Halving Events Sources: Glassnode, WisdomTree, as of 6/26/24. Rebased to 1 in from halving date. The vertical red bar indicates where we are as of June 26, 2024. Each halving date is different, but the chart is measuring roughly 1,000 days after each halving event, except for the most recent, where we are limited only to what can be seen up to June 26, 2024. Bitcoin is highly speculative and involves a high degree of risk, including the potential for loss of the entire investment. An investment in bitcoin involves significant risks (including the potential for quick, large losses) and may not be suitable for all investors. Challenges for Miners Bitcoin is a network, and bitcoin miners perform an important function to secure the network and ensure its capability to run effectively as designed. If one is looking at bitcoin, one should also understand the basics in terms of how miners are incentivized. It is often reported that the bitcoin network requires a lot of electricity. It is the miners who are paying for that electricity in order to run specialized hardware designed to solve the bitcoin protocol, securing the network and creating the new blocks in the blockchain. In a sense, the electricity or energy is the cost, and the block reward is the revenue. A halving of the block reward for the general miner, all else being equal, means potentially less revenue per block mined. We say "potentially" because if bitcoin's price is appreciating quickly, the value of 3.125 bitcoin (the reward) can be higher. The number of bitcoin in the reward is constantly up until the next halving, but the price per bitcoin is not. On the other hand, the price of electricity is market-driven and largely dependent on where the mining operation is located. If bitcoin's price is not appreciating quickly and electricity is expensive, it is possible that the general miner, with a lower block reward, will see their profit margin compress or even disappear. This does not mean that miners immediately go out of business, but it is important to keep the general economics in mind as we all continue to watch how the market evolves. Post-Halving Mining Industry Developments May's bitcoin production saw a decrease compared to April due to the reduction in rewards resulting from the halving. Breaking this down in figure 2: Bitdeer ( BTDR ), Marathon Digital ( MARA ), Iris Energy ( IREN ), CleanSpark ( CLSK ), Bitfarms ( BITF ), Riot Platforms ( RIOT ) and Terawulf ( WULF ) are all major mining operations. When we see that Bitdeer is associated with a -31%, this means that the supply of bitcoin that Bitdeer was able to mine in May 2024 relative to April 2024 was 31% lower. Each of the other numbers in figure 2 can be interpreted analogously. Figure 2: May 2024 Month-over-Month Production of Bitcoin (BTC) Sources: WisdomTree, Blockworks, https://blockworks.co/news/who-mined-most-btc-since-bitcoin-halving. These seven miners were shown due to data availability. Bitcoin is highly speculative and involves a high degree of risk, including the potential for loss of the entire investment. An investment in bitcoin involves significant risks (including the potential for quick, large losses) and may not be suitable for all investors. The miners are responding to the challenges that they are currently facing. Mergers and Acquisitions Activity: The sector is seeing increased M&A activity, best exemplified by Riot Platforms' attempted hostile takeover of Bitfarms. 1 This is arguing for the path of greater scale leading to a better ability for miners to weather the storm of greater pressure on their potential profit margins. Operational Efficiency Focus: Mining firms are investing in improved computing infrastructure to improve their hash rate , 2 increasing their chances of success in receiving block rewards. If we think of M&A activity leading to individual miners with bigger operations-more systems designed to generate those new blocks-then increasing the hash rate could be interpreted as getting more out of each piece of hardware. Diversification of Revenue Streams: Companies like Terawulf and Iris Energy are exploring new avenues, such as offering their computing infrastructure for AI model training, capitalizing on high demand in this sector.3,4 This is very interesting, recognizing that bitcoin mining is really just one application for an accelerated computing platform, and it could be interesting if certain firms can dial up or dial down their exposure to something like training AI models during times when this could be a better source of revenue than bitcoin mining. There is a notable divergence in performance within the mining space. Well-capitalized and efficient firms are better positioned to thrive in an increasingly competitive ecosystem. Those that have been nimble and quick to adjust to the changing market dynamics have so far outperformed their peers. In figure 3, we see how the miners shown in figure 2 have done in terms of share price performance over the past three months. Bitcoin mining company share price performance, we should note, can be extremely volatile, but we show these figures predominantly to emphasize that different miners have been able to respond differently to a challenging set of circumstances. Figure 3: Three-Month Share Price Performance of Respective Bitcoin Miners Source: Bloomberg, as of 6/26/24. These seven minders were shown due to data availability. Bitcoin is highly speculative and involves a high degree of risk, including the potential for loss of the entire investment. An investment in bitcoin involves significant risks (including the potential for quick, large losses) and may not be suitable for all investors. Conclusion As we navigate the post-halving landscape, consider a long-term perspective. Historical patterns suggest that significant price appreciation may not be immediate but has tended to evolve over several months following the halving event. Bitcoin's deflationary nature and transparent monetary policy make it a compelling, in our opinion, with each halving event presenting an opportunistic entry point into the asset class due to the supply constraints it introduces, which has historically led to upward pricing pressure over the course of the following two-and-a-half years. As a result of this event, the bitcoin mining industry is adapting, with efficient and innovative firms poised for growth ahead, amidst increased pressure from reduced bitcoin block rewards. While patience is required in the short term, the long-term prospects for bitcoin and the mining sector remain promising. Footnotes 1 https://www.bloomberg.com/news/articles/2024-05-28/riot-platforms-pursues-takeover-of-rival-bitcoin-miner-bitfarms 2 A measure of computational power that is being used to mine and process transactions on a proof-of-work blockchain, such as bitcoin. 3 https://investors.terawulf.com/news-events/press-releases/detail/79/terawulf-announces-may-2024-production-and-operations-update 4 https://www.afr.com/technology/how-this-aussie-bitcoin-miner-is-cashing-in-on-the-nvidia-ai-boom-20240616-p5jm6w Important Risks Related to this Article Crypto assets, such as bitcoin and ether, are complex, generally exhibit extreme price volatility and unpredictability, and should be viewed as highly speculative assets. Crypto assets are frequently referred to as crypto "currencies," but they typically operate without central authority or banks, are not backed by any government or issuing entity (i.e., no right of recourse), have no government or insurance protections, are not legal tender and have limited or no usability as compared to fiat currencies. Federal, state or foreign governments may restrict the use, transfer, exchange and value of crypto assets, and regulation in the U.S. and worldwide is still developing. Crypto asset exchanges and/or settlement facilities may stop operating, permanently shut down or experience issues due to security breaches, fraud, insolvency, market manipulation, market surveillance, KYC/AML (know your customer/anti-money laundering) procedures, noncompliance with applicable rules and regulations, technical glitches, hackers, malware or other reasons, which could negatively impact the price of any cryptocurrency traded on such exchanges or reliant on a settlement facility or otherwise may prevent access or use of the crypto asset. Crypto assets can experience unique events, such as forks or airdrops, which can impact the value and functionality of the crypto asset. Crypto asset transactions are generally irreversible, which means that a crypto asset may be unrecoverable in instances where: (i) it is sent to an incorrect address, (ii) the incorrect amount is sent or (iii) transactions are made fraudulently from an account. A crypto asset may decline in popularity, acceptance or use, thereby impairing its price, and the price of a crypto asset may also be impacted by the transactions of a small number of holders of such crypto asset. Crypto assets may be difficult to value, and valuations, even for the same crypto asset, may differ significantly by pricing source or otherwise be suspect due to market fragmentation, illiquidity, volatility and the potential for manipulation. Crypto assets generally rely on blockchain technology, and blockchain technology is a relatively new and untested technology that operates as a distributed ledger. Blockchain systems could be subject to internet connectivity disruptions, consensus failures or cybersecurity attacks, and the date or time that you initiate a transaction may be different than when it is recorded on the blockchain. Access to a given blockchain requires an individualized key, which, if compromised, could result in loss due to theft, destruction or inaccessibility. In addition, different crypto assets exhibit different characteristics, use cases and risk profiles. Information provided by WisdomTree regarding digital assets, crypto assets or blockchain networks should not be considered or relied upon as investment or other advice or as a recommendation from WisdomTree, including regarding the use or suitability of any particular digital asset, crypto asset, blockchain network or any particular strategy. Christopher Gannatti, CFA, Global Head of Research Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he was based out of WisdomTree's London office and was responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. In November 2021, Christopher was promoted to Global Head of Research, now responsible for numerous communications on investment strategy globally, particularly in the thematic equity space. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU's Stern School of Business in 2010, and he received his bachelor's degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst Designation. Blake Heimann, Senior Associate, Quantitative Research Blake Heimann is a Senior Associate on the Quantitative Research & Multi Asset Solutions team at WisdomTree, based in Europe. He initially joined WisdomTree in 2020 as an Analyst on the Research team in the U.S. In his current role, he is responsible for supporting the creation, maintenance, and reconstitution of equity and digital asset indices. Blake's finance career began in 2017 at TD Ameritrade, where he started as an Analyst before transitioning to a role as a Quantitative Analyst. During this time, he focused on research and development of machine learning applications in finance. Blake holds bachelor's degrees in Mathematics and Economics from Iowa State University, and he has completed his Master's in Computer Science with a specialization in Machine Learning at Georgia Tech. Original Post
