are the miners ready?

Halving Bitcoin means increased mining. In other words, miners will have to spend more energy to qualify for rewards.

The history of Bitcoin mining began when the Bitcoin blockchain collected enough transactions to fill its first block. Initially, a simple computer could determine the hash of the block and earn what is called a block reward.

However, as new miners joined the network, the algorithm made solving blocks more difficult. This is when miners started investing in more powerful hardware and processors specifically dedicated to crypto mining.

The only downside: these processors turned out to be very energy-intensive, which increased miners’ costs. True, their profits may increase when the Bitcoin price increases, but the opposite is also true. As a result, miners must always prepare for the worst.

After more than a year and a half of bear market, most miners are drowning in debt. While some of them agreed to be acquired by larger companies, others chose to diversify their activities in order to survive.

Unfortunately, some miners had to part with their equipment to pay back their debts. Others, like Core Scientific, were unable to survive the spiral of debt and the fall in the price of Bitcoin. So they had no choice but to file for bankruptcy.

But those who managed to do well are already preparing for one of the most important events on the Bitcoin calendar: the 2024 halving.

To educate its readers on this topic, BeInCrypto spoke with Didar Bekbauov, CEO of Xive, a mining company based in Texas.

Riot Platforms and Marathon Digital, two of the five largest publicly traded mining companies, have adopted different strategies to survive the bear market. Riot Blockchain, which was renamed Riot Platforms in January, acquired equipment manufacturer ESS Metron.

How do miners prepare for the bear market?

In its latest quarterly report, Marathon Digital revealed that it sold an additional 1% of its shares to Bank of New York Mellon Corporation. For his part, Private Advisor Group LLC invested an additional $495 million in the company. In the third quarter, the company increased its BTC production to 1,242, a 245% increase compared to September 2022.

Last month, Riot and CleanSpark produced 362 BTC and 642 BTC, respectively, capping a quarter that exceeded expectations, according to CleanSpark. Of course, increased BTC production increases the capital of these companies, allowing them to weather market downturns.

According to Didar Bekbauov, capital accumulation is one of the most used strategies by Bitcoin mining giants.

“In addition to machines and facilities, large mining companies such as Riot Platforms and Marathon also have capital. On average, they keep almost $700 million in BTC and USD to survive drops in the Bitcoin price and increases in mining.

BeInCrypto has not been able to independently verify this figure.

According to Didar Bekbauov, many large companies are considering acquiring smaller mining companies that may not survive the bear market, either due to insufficient capital, inefficiency of ASICS or failure to optimize power purchase contracts (power purchase agreements or PPA).

What is the impact of power purchase agreements (PPAs) on the profitability of Bitcoin mining companies? Power purchase agreements appear to reduce risks for both power producers and consumers. This by giving them the opportunity to pre-negotiate prices based on expected energy consumption.

PPA, a golden opportunity for Bitcoin miners

In the US, Texas lawmakers recently objected to power purchase agreements that Bitcoin miners signed withEnergy Reliability Council of Texas (ERCOT). Under these agreements, ERCOT agrees to pay miners who agree to turn off their ASICs during peak hours.

For example, by turning off its equipment on June 23, 2023, between midnight and 4:00 p.m., Riot made more than $42,000. By 2023, the company saved $27 million by turning off 99% of its ASICs and another $18 million by suspending its Bitcoin mining and selling electricity to other consumers.

With its savings and its $150 million in Bitcoin mining revenue, Riot survived a double crisis: the rise in mining problems and the drop in Bitcoin price. CleanSpark, which earned 6,904 bitcoins in the fiscal year ending Sept. 30, also performed well.

By comparison, New York’s stricter energy consumption policies have made power purchase agreements less attractive. E.g, Greenidge Generation Holdings, a company that uses natural gas to mine Bitcoin, has changed its expansion plans in several regions. This follows the adoption of a moratorium prohibiting the renewal of permits to convert fossil fuel plants into Bitcoin mining units.

Kazakhstan, which took in dozens of Chinese miners after crypto was banned in the country, recently banned miners from using non-surplus electricity. In fact, miners’ peak consumption rose to more than 7% of national demand, moving the power grid from a surplus state to a deficit state.

Not surprisingly, this decision forced several miners, such as Enix and BTC.kz, to fold. They left behind multi-million dollar mining equipment and some of the most lucrative energy deals in the world.

Buying Hardware, the Only Way to Survive the Next Bitcoin Halving?

To survive the bear market expected to follow the next Bitcoin halving, miners will also need to invest in new hardware. Older machines are more energy intensive and produce fewer rewards per kilowatt-hours of energy consumed.

Blockstream, one of the key players in the Bitcoin mining market, recently bought several mining rigs from Canaan, a Chinese equipment manufacturer. The company’s CEO, Adam Back, said he expects the Bitcoin halving to increase demand for these new machines.

In August, CleanSpark purchased 45,000 Antminer S19 XP mining machines. These are considered to be the most effective on the market.

According to Jaran Mellerud, cryptomining specialist at Hashrate Index, machines need to cost 6 cents per kilowatt-hour of energy for miners to break even. Thus, miners whose costs are higher than 8 cents per kilowatt hour will have a hard time surviving even if the Bitcoin price remains the same after the next halving.

Wolfie Zhao, researcher at the consulting firm BlocksBridge, agrees with Jaran Mellerud.

“All told, the total fees for some miners are much higher than the Bitcoin price. The net result will be negative for mining companies with less efficient operations.”

Undoubtedly, some miners will have to shut down their machines if the Bitcoin price remains unchanged after the next halving. This is an option that Xive has already considered, according to Didar Bekbauov.

Bitcoin ETF, the element that could change the game?

The situation could become much more favorable for miners if institutional investors get what they want: a Bitcoin exchange-traded fund (ETF). In fact, the approval of a spot Bitcoin ETF could increase the BTC price and, by extension, improve the profitability of Bitcoin mining.

BlackRock, Bitwise, Franklin Templeton and Fidelity have all applied to launch Bitcoin ETFs. If they are approved by Securities and Exchange Commission (SEC) in the United States, these ETFs can increase institutional demand for Bitcoin and help miners survive. At least Didar Bekbauov thinks so

“BlackRock has $8 trillion or $9 trillion in assets under management and has a lot of investors. If their application is approved, this will allow many investors to invest directly in Bitcoin. Therefore, companies like BlackRock will need to have BTC on their balance sheet .

They will buy these bitcoins even if the halving reduces the supply. If demand increases, prices will increase. Any ETF approval could increase demand for Bitcoin. So that’s a good thing”.

Smaller Bitcoin mining companies can also leverage their data center management expertise to seek other sources of revenue, Bekbauov continues. For example, miners can focus on artificial intelligence (AI) using the same management strategies they use for Bitcoin mining data centers.

But unlike Bitcoin mining, which generates revenue as blocks are solved, AI data centers must secure revenue streams before launching, Xive’s CEO concluded.

As a reminder, the next Bitcoin halving should happen in April 2024.

Moral of the story: To avoid the worst, miners must leave nothing to chance.