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3 Ways Bitcoin Miners Could Recover Lost Revenue After Halving
Key points
- The next bitcoin halving is scheduled for the end of next week.
- In the past, bitcoin halvings have been followed by increases in the value of bitcoin reaching new all-time highs.
- Miners could increase revenue through higher transaction fees on Ordinals and Layer 2 transactions.
- Some miners like Marathon are considering alternative sources of revenue, as future halvings will further reduce incentives and mining costs are unlikely to decrease.
The next bitcoin (BTC) halving, in which the amount of new bitcoins rewarded to miners with each new block found is cut in half, is expected to happen next week. However, higher bitcoin prices, technological developments, and slight changes to business operations could help ease some of that pressure on miners’ revenues.
Bitcoin Rally May Offset Post-Halving Subsidy Drop
Bitcoin miners are rewarded in bitcoins for successfully mining a block. After this halving, the reward will drop to 3,125 bitcoins. Over time, miners build up a reserve of bitcoins that they receive, and these are often sold before halving events to cover the costs of operations and equipment as mining becomes more competitive.
This time, miners sold fewer bitcoins before the halving—all thanks to the recent bitcoin rally. And if the price of bitcoin increases further, as it often does after a halving, the value of bitcoin in miners’ reserves will also increase. That could go some way to offsetting some of the lost revenue.
For example, the price of bitcoin was around $9,500 at the time of the previous halving on May 11, 2020, when the block subsidy was reduced to 6.25 bitcoin. The price eventually reached an all-time high of around $69,000 in December 2021. This means that if a miner wanted to sell their block subsidy at that peak, they could theoretically make $431,250, compared to $59,375 at the time of the halving.
While past price trends may not guarantee future results, this halving is different due to a factor that increases demand and, consequently, the price of bitcoins:bitcoin spot exchange traded funds (ETFs).
According to Bloomberg data analyzed by Bitwise Asset Management, since spot bitcoin ETFs began trading on January 11, 212,852 bitcoins were purchased through the end of March, while miners produced 74,756 bitcoins over the same period.
With a limited supply of bitcoins of 21 million and over 19 million already in circulation, successful bitcoin mining requires sophisticated equipment and significant energy costs. This also means that an imbalance between supply and demand could push bitcoin prices higher.
Higher transaction fees could offset some of the lost revenue
There are two developments in the Bitcoin blockchain that did not exist at the time of the previous halving and that could support Bitcoin miners’ revenues through higher transaction fee volumes: Bitcoin ordinals and Level 2 networks.
Historically, transaction fees have been a tiny portion of bitcoin miners’ revenues.
Order Bitcoin
Order Bitcoin I’m a bit like Non-Fungible Tokens (NFTs)—unique digital assets, popular on the Ethereum and Solana blockchains. Although unlike NFTs, ordinals are fungible. Additionally, the data associated with the Ordinal (usually an image) is stored directly on the Bitcoin blockchain. Storing this data on the blockchain can take up a lot of block space, which is expensive and also increases transaction fees for those who want to make payments on the network.
In the long run, the network will need to generate enough transaction fees to replace newly created bitcoins as the supply limit approaches. Ordinals could be a way for miners to increase their revenue through transaction fees. According to Blockchair, ordinals have on more than one occasion led to blocks being created with fee revenues greater than the block subsidy itself.
Layer 2 Networks
Layer 2 Networks—chains built on the Bitcoin network—allow users to make transactions and gain access to new features outside the core Bitcoin blockchainwhile ultimately such transactions are still settled on the Bitcoin blockchain.
This allows fees on the base chain to increase enough to incentivize miners to secure the network long-term, while keeping fees manageable for end users on Layer 2 networks. It’s effectively a form of transaction batching that increases the economic density of each transaction from a Bitcoin blockchain perspective, according to Castle Island Ventures partner Nic Carter.
In addition to increasing the flat fee amount miners collect with each new block, these Layer 2 networks also have the potential to increase Bitcoin’s overall value proposition, and thus its price, by bringing many of crypto’s alternative use cases back to the home network of the world’s largest and most liquid cryptocurrency.
Diversifying revenue streams to keep mining sustainable
Some bitcoin miners, such as Marathon Digital Holdings (MARA), are considering diversifying their revenue streams to finance rising mining costs.
Bitcoin miners are getting more expensive as the block subsidy is cut in half, while mining is getting harder as supply dwindles. And cutting equipment or operations is not an option.
“Today, 900 bitcoins are being allocated per day. If I don’t run my miners, someone else will take my share of those bitcoins. So you have an incentive to keep your machines running,” Marathon Digital CEO Fred Theil said recently in a Fidelity Digital Assets webcast.
That means higher energy costs. Thiel said his company is not only looking for ways to lower energy costs through more efficient machinery, but also by investing in “energy harvesting.”
This program, piloted last year, Thiel said, would theoretically involve the company getting paid to collect unused methane gas or biomass, some of which it uses to generate electricity. That electricity then powers its mining operations, which in turn generate a lot of heat. The heat and gas, the production of industrial components for things like ethanol, could then be sold by Marathon to other industrial producers, like alcohol companies, that need it.
Thiel said that, ahead of the next halving in 2028, Marathon wanted to eliminate mining costs.
“So we get to the point where bitcoin mining is just a means to an end, not the end itself,” Thiel said.