Analyzing bitcoin mining profitability following ‘The Halving’ and its indication for price

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The Bitcoin network halving is a pre-set inflation adjustment in the network that occurs every four years. The next halving will occur at block height 630,000 or approximately mid May 2020, which would see the new issuance supply of bitcoin decline by 50%. With this new supply reduction set to occur, we estimate the breakeven cost to mine one bitcoin before and after the halving for newly released mining devices.

 

Bitcoin Network Halving

Bitcoin is a decentralized digital currency that enables a near instantaneous transfer of value to anyone in any location with no centralized entities acting as middlemen. The network is secured by miners who receive transaction fees and newly created bitcoins for their work in the network’s proof-of-work ecosystem. Every four years the network undergoes a new supply reduction, with the third reduction, called ‘the halving’, set to occur in May of this year.

Currently 144 blocks per day are mined on average in the Bitcoin network, with 12.5 bitcoin corresponding to each block, resulting in 1,800 new bitcoins mined per day. After the halving date, the mining reward will decline to 6.25 bitcoins per block, resulting in 900 new bitcoins mined per day. Block data, network activity, and charts can be concisely viewed on the TradeBlock platform.

 

Bitcoin miner profitability

In our latest estimates, we projected that commercial mining operators were likely operating at healthy profit margins as the price of bitcoin increased throughout 2019 (albeit with bouts of volatility over the year). However, the network hash rate has continued on a record run, making new highs nearly each week. Hash rate increases as the number of resources, in aggregate, committed to securing the network through mining activities rises. As resources dedicated to mining rise over time, efficiency gains and/or mining costs rise. As such, in order to maintain healthy profit margins for miners, a rising hash rate is typically needed to correspond with a rising bitcoin price.

Figure 1: Bitcoin network hash rate and difficulty hit new all-time highs

Screenshot sourced from the TradeBlock platform

In order to reduce bitcoin mining costs, newer and more efficient mining devices are continuously being developed. The largest manufacturer of mining rigs, Bitmain, is scheduled to ship its highly efficient Antminer s17+ in March 2020. Assuming commercial operators transition 30% of their rigs over to newer models such as the s17+ from existing models, we estimate the breakeven cost to mine one bitcoin before and after the halving. First, we estimate that the majority of rigs operated by commercial miners have similar device specifications as demonstrated below. In order to estimate breakeven costs, we make the following assumptions based off device type specifications:

Assumptions Existing Model Antminer s17+
Cost $1,000 $1,600
Hash rate 40 TH/s 67 TH/s
Useful lifespan 2 years 2 years
Power consumption 2200 W 2680 W
Electricity cost $0.06 kWh $0.06 kWh

You can utilize TradeBlock’s bitcoin mining page to generate your own assumptions for calculation.

 

Breakeven costs before the halving

Using our above assumptions and the current network hash rate of (~113,000,000 TH/s) and the number of bitcoin mined per block (~12.73, which includes transaction fees), the gross cost to mine one bitcoin at current levels with current device types would be $6,851. Our breakeven price estimate of $6,851 is inline with similar breakevens calculated in other reports: Cost to breakeven $8,000 (11/11/19); Cost to breakeven $7,600-3,600 (12/5/19).

 

Breakeven costs after the halving

If we assume the network hash rate increases over the next three months at the same growth rate over the last three months, we arrive at a network hashrate of ~135,882,500 TH/s around the time the halving is set to occur. Additionally, let us assume that commercial operators transition over their fleet to newer models, such as the antminer s17+, for 30% of their rigs, while 70% remain older devices. Following the halving, the number of bitcoin available for miners will decline by nearly half (~6.37–coinbase rewards will fall, but transaction fees will remain).

Using these assumptions, the gross cost to mine one bitcoin at projected levels following the halving would be $15,062. If we adjust our assumption on hash rate, and assume hash rate stays nearly flat from current levels then the cost to mine one bitcoin would fall to $12,525. It is important to note however, that large scale commercial mining pools such as those operated by Bitmain will likely have a lower device price point as they will be utilizing Antminer devices at cost. As such, this would allow breakeven costs to be somewhat lower than the above estimates.

Figure 2: Estimated cost breakdown
Timeframe Hashrate Breakeven cost Coinbase reward
Pre-halving 113 EH/s $6,851 12.5
Post-halving 135 EH/s $15,062 6.25

Our estimated breakeven costs indicate that miners are continuing to increase resources towards the network despite what is set to become a cost (per mined btc) increase following the halving. This suggests that miners are likely expecting the price of bitcoin to rise to higher levels (above ~$12,000-15,000 per BTC) around the halving allowing them to continue to generate a profit, or they likely will look to reduce resources following the halving resulting in a hash rate decline as profitability falls.

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