Bitcoin miners face ‘stress test’ in upcoming halving: JP Morgan

[ad_1]

Bitcoin miners will face headwinds as the hash rate hits new highs ahead of the next halving event next spring, with volatile electricity costs and competition among miners driving up the cost of production, according to analysts at global financial giant JP Morgan.

Hash rate refers to the computing power used to mine a cryptocurrency. The halving event, which occurs roughly every four years, will halve miner rewards.

“Bitcoin’s next halving event in April/May 2024 could be a stress test for Bitcoin miners,” writes JP Morgan analyst Nikolaos Panigirtzoglou and colleagues in the company’s latest Flows and Liquidity report. , which the company shared with Decrypt.

“[It] would reduce issuance rewards from 6.25 to 3.125 BTC, which would imply a reduction in miner revenue, thereby increasing the cost of producing Bitcoins at the same time,” the report explains. “As a result, while the Bitcoin halving is seen to have a positive effect on the price of bitcoin given that the cost of production historically served as a floor, this poses a challenge for bitcoin miners.”

According to the analysis, and based on a global average electricity cost of $0.05/kWh, it costs around $20,000 to mine one Bitcoin, which is currently worth around $30,000, per CoinGecko. But JP Morgan said hash rate volatility indicates the use of a variety of energy sources, meaning miners with access to cheap energy have an advantage.

In fact, the company said, a one-cent increase in cost per kilowatt-hour translates to a $4,300 increase in the cost of producing Bitcoin.

“A halving of this sensitivity would double to $8,600, increasing the vulnerability of higher cost producers,” the company noted.

There was, however, good news for miners.

“Institutional interest in bitcoin mining has provided support for struggling miners, with investments in mining rigs from companies such as Galaxy Digital and Grayscale Investments,” he observed. Galaxy Digital recently acquired Argo Blockchain and Grayscale created an entity focused on Bitcoin mining hardware.

“Tether, the world’s largest stablecoin issuer, is also planning an investment in a bitcoin mining site in El Salvador,” according to the report.

Nonetheless, the Bitcoin price and transaction fees will need to increase significantly to compensate for the lower block reward.

JP Morgan also observed that “declining hype surrounding cryptocurrencies poses an additional challenge for miner earnings,” including “declining hype around ordinals.”

The number of daily Ordinal signups recently hit an all-time high, but Bitcoin fees haven’t sustained previous highs with them.

“Going forward, it seems unlikely that the Bitcoin hash rate will continue to rise at the same rate after the April/May 2024 halving event without any sustained increase in the price of Bitcoin above its cost of production or a sharp increase in transaction costs that could offset the reduction in issuance rewards,” JP Morgan concluded.

[ad_2]