TokenInsight, leading data and tech-driven blockchain technology company, has released its new report: Bitcoin Mining Special Edition – The Third Halving. The report includes discussions on miner’s profit margin, mining derivatives, bitcoin price and popularity, bitcoin network difficulty, average block time, miner’s income and future development and evolution of mining.
June 10, 2020 by Johnson Xu
Head of Research & Analytics, TokenInsight
The Bitcoin Third Halving
As of May 11, 2020, Bitcoin has officially completed its third block reward halving at the block height of 630,000. The first halved block was broadcast by AntPool, and the block reward has now been set to 6.25 BTC, and the transaction fees approximately 0.91 BTC.
The impact of the halving on the Bitcoin mining ecosystem has a longlasting impact, short term mining costs have risen sharply, miner revenue from fees has risen sharply, some inefficient mining machines have been eliminated during the third halving, upstream and downstream mining operations such as mining farms, mining pools, and mining machine manufacturers will accelerate the reshuffle, and 2020 is a key year for the progressive transformation of the mining industry.
China’s average monthly hash rate may decline, the United States seizes market share. TokenInsight believes that Bitcoin’s estimated power consumption can reflect the emotions of miners to a certain extent. The main factors affecting Bitcoin mining are Bitcoin price and mining rewards. When the market is negative, the attitude of the miners will also be negative. In addition, due to the impact of the halving, there will be a gradual shut off of the older generation miners, resulting in a slow decline in Bitcoin mining power consumption.
Miner’s Profit Margin
Post halving, the older generation mining machine reached its end of the lifecycle, gradually phasing out from the Bitcoin network.
Taking the Antminer S17 + as an example, if the electricity cost is $ 0.08, the marginal production cost (operating cost ratio of 15%) was $ 5,300 before halving, and rose to about $ 9,300 post halving. The miner’s profit margin (operating cost ratio of 15%) remained at around 40% before halving. Post halving, the miner’s marginal income fell to around 3%, which is basically at a non-profit state.
Taking the previous generation mining machine Antminer S9 series mining machine as an example. If the electricity fee is $0.035, the marginal income of miners (operating cost ratio is 15%), the marginal income of Antminer S9 series miners maintained at about 45% before the halving, but after the halving, it will fall and breakthrough 0, and will not be maintained until the market is stable.
Which means, if miners are mining with Antminer S17 +, they need to control electricity costs below $ 0.08 or reduce operating costs to maintain profitability; if they are mining with Antminer S9, they need to control electricity fees below $ 0.035 or reduce operating costs to maintain profitability.
TokenInsight believes that the profit margin falls below 0 does not mean that miners must shut down their operations immediately. Different miners have different mining machine purchase prices, electricity costs, and operation and maintenance costs. For miners, frequent switching opportunities bring greater pressure on the mining machine and power supply system, increase the damage rate, and affect revenue. On the other hand, it will also cause greater losses in extreme market conditions. When the profit margin falls below 0, miners are suggested to take into account the near future market outlook, and then to consider adjusting the operations strategy such as to adopt liquid cooling technology, underclock, reduce operation and maintenance costs and various other measures, thereby reducing overall production costs. In addition, to consider using financial instruments to hedge and stables mining income.
Mining Derivatives
The rise of mining derivatives not only uses Bitcoin as the underlying asset but also on the hash rate. The mining industry is gradually becoming mature, and the industry is currently in the process of shifting from home miners to institutionalization. At present, the cryptocurrency market has developed various financial products to match the production cycle and meet the needs of professional miners.
Hash rate futures can be used to build various financial products for miners. Derivatives exchange FTX recently announced the launch of the Bitcoin hash rate futures contract. At present, FTX has launched three Bitcoin hash rate futures contracts, which have maturity on Q3, Q4 2020 and Q1 2021. The launch of the Bitcoin hash rate futures contract means that the industry can also analyze the hash rate futures in different settlement periods to make reasonable predictions on future changes in hash rate and difficulty, thereby protecting its own interests through such financial products. TokenInsight is optimistic about future cryptocurrency derivatives, especially when institutions are increasingly interested in such innovative and diversified financial products. The significance of these derivatives is not only to provide trading methods, but the most important thing is to obtain greater liquidity and improve market structure.
Halving Popularity
Google Trends shows that the popularity of the halving surged before halving, and the most search interests were based in Africa and Europe. According to Google Trends data, the search volume of Bitcoin Halving has reached a peak of 100 within a week of halving, and the search volume exceeds more than 9 times of the previous halving (July 3-6, 2016).
Bitcoin Price
Prices rebound, and market sentiment is relatively optimistic post halving. In the 2,000 blocks before and after Bitcoin’s halving, its price fluctuated violently, reaching a peak near the block height of 629,950, but then it fell sharply. After the halving, the Bitcoin price rose slowly, completely recovering the previous decline, and trying to hit the $ 10,000 major price level again.
Perpetual funding rates also demonstrates a positive sentiment in the market. Before Bitcoin halving, the perpetual funding rate ended its negative trend for two months and rose to the positive territory. Despite subsequent slight changes due to price fluctuations, it maintained positive values post halving.
Bitcoin Network Difficulty
On May 20, the difficulty of Bitcoin mining was adjusted for the first time post halving. The difficulty decreased by 6%, making it the 16th largest adjustment in the Bitcoin network history.
As of May 21st, Bitcoin’s entire network has maintained hash rate of about 94.37 EH / s and a mining difficulty of 15.14T. The second difficulty adjustment post halving saw a decrease of roughly 9.3% in difficulty to 13.73 T. As the network tries to rebalance itself, the mining sector has seen some older generation miners such as S9s switching back on due to 2 conservative downward adjustments in difficulty and providing suffcient relief to the miners.
Average Block Time
Post halving, the average block time dropped by about 20%, and the network hash rate saw a short term decline but will be revert back up again in the mid-term.
The Bitcoin average block time in 2020 fluctuated at around 600 seconds before March; after March, the average block time showed a large increase, reaching 800 seconds after the sharp decline in March; with the follow-up positive action on the Bitcoin price, the block time returns to the interval of about 500 seconds, and post halving, it dropped again to around 800 seconds.
Miner’s Income
From the perspective of the number of transactions on-chain, although the number of on-chain transactions fluctuated greatly immediate pre and post halving, the overall trend shows a slow rise. Since Bitcoin did not experience a strong downward trend post halving based on the, after digesting the halving information, investors in the market that were originally in a wait-and-see state are gradually entering the market, and the overall market sentiment is optimistic.
The transaction fee increased as expected after halving, but it is still a long way to go for miners to heavily rely on transaction fees for mining revenue. The income of miners is still heavily based on block rewards rather than transaction fees.
From the view of average transaction fee per 50 blocks, in the 2,000 blocks before and after the halving, the transaction fee for Bitcoin rose from an average of 0.00025 BTC to 0.00046 BTC, an increase of 84%
After the halving, the miners’ mining revenue decreases, but the transaction fee income increases by 200% immediate post halving. With the stable operation of the Bitcoin network after the halving, the average transaction fees of miners rose from 4% before the halving to about 15%.
Future Development and Evolution of Mining
Although China occupies the absolute dominant position of the Bitcoin network, with the advantages in further developing the cryptocurrency mining and related policy support, more and more traditional financial capital and secondary market financial service providers will enter the industry at home and abroad. TokenInsight believes that with the conclusion of the Bitcoin third halving, there would be a sell-off of old mining machines in the market. Therefore, 2020 will be a key year for the progressive transformation of the mining industry, and the unstructured mining operation will be gradually replaced by efficient, professional and structured management strategies.
In the medium to long term view, the opportunities for cryptocurrency mining development outweigh the challenges, and the release of market forces has boosted mining development. But in the next one to two years after the halving, the upstream and downstream of the mining industry will face a reshuffle:
- The mining farms will continue to improve automation and refined management and enhance the overall operating capabilities.
- Without a relatively complete layout and risk management strategies pre halving, small-scale mining miners, farms or pools would face great risks, and competition in the top tier mining pools will become more intense.
- Mining machine manufacturers will invest in signifcant resources in the production and development of 5nm chips and other differentiated products. In addition, under the influence of Canaan’s successful IPO in the States, there will be an increasing number of mining-related companies try to be publicly listed in the future.
- Financialization is also a key step in the mining iteration. Hash rate or ASIC hardware can be capitalized and financialized in the future to lower the industry threshold. In the future, the industrial chain around cryptocurrency mining will spawn more sub-sectors and further expand the scope of services.