Will Bitcoin miners' profitability improve after the halving?

Amidst the impending Bitcoin halving, miners are strategizing to navigate income cuts. Despite stock struggles, leaders in the sector remain bullish, adopting new financial tactics. Industry consolidation looms; Marathon Digital Holdings and Riot bolster capacities to stay competitive.

Despite a challenging year for Bitcoin miners, CEOs of major mining firms remain optimistic as the next Bitcoin halving approaches.

Halving: Bitcoin mining stocks struggle in 2024

This year, Bitcoin miners like Riot Platforms (RIOT), Marathon Digital Holdings (MARA), and Hut 8 Corp (HUT) have seen significant drops in their stock values. Since the beginning of the year, these stock prices have fallen by at least 47%.

Conversely, CleanSpark (CLSK) has enjoyed an exceptional 33% increase in share price since January 2024. Despite these differences, a common strategic preparation and a thread of adaptation highlight the sector's dynamism.

In an industry marked by cyclicality, the upcoming Bitcoin halving is a pivotal event that halves miners' rewards. This event fundamentally affects the revenue streams of Bitcoin miners.

However, according to Bernstein's findings, major mining companies have strengthened their financial positions to effectively tackle this challenge. The analysts wrote: “CEOs point out that mining revenues in dollars are at all-time highs, providing a solid cushion for miners before the halving and also noted the relatively low debt on the balance sheet.”

Additionally, developments in the Bitcoin network architecture, including upgrades in applications and Layer 2, have introduced revenue sources through increased network fees. These revenues are crucial for miners, as they provide additional financial inflows amid increasingly stringent economic conditions.

Will only four Bitcoin mining companies survive?

Nevertheless, these companies have significantly focused on consolidation and strategic expansion. Specifically, CleanSpark's CEO anticipates that the industry will eventually consolidate around four main players, with RIOT, MARA, CLSK, and Cipher Mining (CIFR) leading the way.

Furthermore, CleanSpark's recent activities underscore this strategy. The company expanded its operations by acquiring three turnkey Bitcoin mining facilities in Mississippi for $19.8 million and a construction site in Georgia.

These acquisitions are expected to substantially increase CleanSpark's hash rate capacity, doubling its current rate to over 20 exahashes per second (EH/s) in the first half of 2024. Additionally, Riot expects to double its capacity by year-end.

This increase is crucial to mitigate potential revenue impacts due to the upcoming Bitcoin halving, ensuring that their operations remain profitable and competitive. However, challenges persist.

Will miners' profitability improve after the Bitcoin halving?

According to TakingAlpha analysts, Riot Platforms, for example, faces increasing production costs, which have significantly risen from $44,400 per Bitcoin in the fourth quarter of 2021 to $110,000 in the third quarter of 2023. Analysts suggest these costs could potentially triple after the halving.

According to this analysis, Riot's profitability would be severely impacted unless Bitcoin prices unexpectedly rise. A Seeking Alpha analyst explained:

“We only expect Bitcoin to reach $90,000 in the next bull market (averaging $66,000 during the bull market period). Unless Bitcoin surprises to the upside beyond $180,000, we do not expect any distributable income for [Riot] shareholders.”

The overall Bitcoin mining ecosystem is also undergoing significant changes. The total hashrate of the Bitcoin network has surged to around 600 exahashes per second (EH/s), up from 116 EH/s since the last halving.

This increase indicates greater competition and higher operational demands, pushing miners to invest more in advanced equipment.