Darwinism could soon pummel some bitcoin (BTC) miners as the halving, a once-every-four-year event that cuts the reward for creating new BTC gets cut by 50%, unleashes a “survival of the fittest” battle in April.
Just ask Marathon Digital (MARA), the largest publicly traded miner by hashrate (industry jargon for the computing power it can direct toward running the Bitcoin network). The firm said this week that it’s got a hoard of money – more than $800 million of cash and bitcoin – and will seek to grow that to “capitalize on strategic opportunities, including industry consolidation” ahead of the halving.
Meanwhile, another large miner, Hut 8 (HUT), just completed its all-stock merger with a privately held US Bitcoin. CleanSpark (CLSK) has been collecting cheap assets since the start of the bear market and said it has almost $170 million shored up to “take advantage of opportunities the halving may present.” And Riot Platforms (RIOT), another institutional-grade miner, has just ordered 66,560 new mining machines for $290.5 million to stay ahead of the competition.
The scene is set for a dog-eat-dog competition.
“Leading up to the halving and in its aftermath, miners will need to place substantial emphasis on strategic planning. The adage, ‘If you aren’t growing, you are dying,’ holds true,” said Amanda Fabiano, the former head of Galaxy Mining who started her own consulting services company for the industry.
In fact, mining consultancy firm Blocksbridge said that a dozen public mining companies have already committed over $1.2 billion so far this year to buy mining machines, with about $750 million signed over the past two months.
So, how did we get here and why are the miners racing to gear up for the halving?
The bitcoin halving – also known as the halvening – in simple terms will make obtaining or mining new bitcoin much harder. The halving is part of the Bitcoin network’s code to reduce inflationary pressure on the cryptocurrency and will cut the rewards in half for successfully mining a bitcoin block.
A useful analogy that might resonate with the non-crypto crowd: think about extracting a finite natural resource, such as gold or oil, from the ground. The more that’s obtained, the less that’s left, making the remaining resource more valuable yet more expensive to extract.
Now, swap out whatever traditional commodity you had in mind, and replace it with bitcoin and and crypto mining. That’s the halving: a classic example of the supply-and-demand cycle creating scarcity-driven value for an asset. It’s something Bitcoin creator Satoshi Nakamoto believed in. In fact, bitcoin might actually be even more scarce than gold.
For a deeper understanding of the halving, read CoinDesk’s explainer here.
Historically, the event has increased bitcoin prices exponentially, creating generational wealth for investors – but a presenting challenge for the miners that actually create BTC. During the third halving, which occurred in 2020, bitcoin’s price went from around $8,500 to nearly $18,000 within a few months, while the reward for successfully mining a block was cut to 6.25 BTC from 12.5 BTC.
This time, the reward will sink to 3.125 BTC, making mining even more competitive.
In previous cycles, there weren’t many large-scale miners and even fewer publicly traded ones. During the lead-up to the bull market of 2021, a swath of miners jumped into the sector to reap nearly 90% profit margins at the peak. As bitcoin neared $70,000, miners were making money hand over fist and many were spending and taking on debt to grow faster. Investors, including traditional financial firms, lavishing miners with cash to fuel grow also incentivized breakneck spending and growth at any cost.
It all came crashing down during the 2022 bear market. Profit margins got crushed, some big miners filed for bankruptcy and access to capital markets was shut. Many miners still operating are barely surviving, waiting for the next bull run to save them.
The rally in bitcoin prices in 2023, fueled mostly by the optimism that U.S. regulators will approve spot bitcoin exchange-traded funds (ETFs) from the likes of BlackRock, has helped miners somewhat. But with the Bitcoin network’s hashrate at an all-time high (a sign of high competition), the difficulty mining a single block also at a record, high energy prices (crypto mining rigs use a lot of electricity), intense regulatory scrutiny and still-bone-dry capital markets, the mining landscape remains tough.
Miners who grew too fast are now cash-strapped and looking for a light at the end of the tunnel. Struggling miners need to cut costs, shore up their balance sheets and require more capital – all potential catalysts for mergers and acquisitions in the industry.
Cutting “costs will likely be a major drive of an upcoming wave of consolidation in the mining industry. Executive salaries, insurance and other expenses benefit from economies of scale in the post-halving environment,” said Ethan Vera, chief operating officer at mining services firm Luxor Technologies.
M&A can take many shapes and forms and can be complicated. However, one of the trends that might be prominent, according to Vera, is private miners merging with public companies. “Off the back of bitcoin price momentum, shareholders of private and public mining companies will look for avenues to liquidate parts of this position through publicly listed vehicles. As such, many private companies will merge with public operating companies or shells to gain access to this liquidity,” he said.
They will likely follow Hut 8’s merger and use that as a “case study to combine entities that have both strong balance sheets alongside high growth opportunities,” Vera added.
Fabiano echoed this when asked about how this will play out. “Mid-tier and small-scale miners should prioritize positioning themselves on the lower end of the cost curve, one likely path is M&A given the capital-constrained market. Meanwhile, larger miners should concentrate on growth narratives that set them apart from their rivals,” she said.
It seems the rule of the jungle is about to be unleashed on the mining industry, perhaps best expressed by a Japanese idiom: “Jakuniku-kyoushoku,” which loosely translates to English as “the flesh of the weak is the food of the strong.”
