360 Mining and the April 2024 Halving

As 2024 comes into focus, 360 Mining has received many inquiries about the Bitcoin Halving and its impact on mining revenues within the 360 Mining business model. After numerous emails, meetings, and phone calls on the subject, we felt it is best to provide a comprehensive explanation of our stance.

In Summary:

360 Mining and our customers are well prepared for the upcoming halving. Through the vertically integrated mining strategy, 360 Mining and our customers are generating power at costs in the bottom 5% of Bitcoin miners globally. Additionally, 360 Mining and our customers are operating newer and more efficient mining servers than most of the network. Bitcoin mining is ruthlessly competitive, and only the strongest survive. As the halving reduces revenues for Bitcoin miners globally, an estimated ~70% of miners will no longer be profitable. This will drastically reduce global competition as these miners are forced offline. Less competition means more revenue for miners that are still online. We anticipate a temporary reduction in revenue followed by a recovery after the halving. 

The 360 Mining business model was designed to thrive in the most draconian Bitcoin mining scenarios. We are not fearful of the halving; instead, we are excited about the opportunities it presents. As we approach the halving, the cost to purchase miners has hit rock bottom, decreasing the capital expenditure budget for deployments. Our doomsday economic models, assuming revenue is cut in half and stays there forever, combined with current capex costs, still yield an attractive return on investment. While preparing for the worst, we believe market factors will cause Hash Price to recover from the decline caused by the halving.We discourage a "wait and see" approach, as deploying capital now at rock bottom miner prices sets up a favorable return profile if/when Bitcoin enters another bull market. It's akin to buying a low opex oil well at $20: a good return if prices stay flat, minimal risk of prices moving much lower, and a significant chance of price appreciation for an outsized return.

Long Form:

Before diving into the implications of the Halving, it’s crucial to understand how Bitcoin mining revenues are derived.

Revenues for Bitcoin miners are measured in a metric called Hash Price, representing payment for the output (hashes) produced by mining servers. Hash Price is analogous to the clearing price for natural gas in a pipeline.

4 Variables Determine Hash rate:

Network Difficulty

Network difficulty is set by the total sum of Bitcoin miners across the globe that are all competing for a slice of the daily Bitcoin revenue pie (which is made up of the block reward + transaction fees). The more total miners are mining across the network, the smaller your piece of the revenue pie is.

Block Reward

Currently 900 new Bitcoins are awarded per day to miners through the block reward. The block reward is programmatically set and is cut in half every four years until all 21 million Bitcoin have been mined in the year 2140. As of today, 19.6 million Bitcoin have been mined via the block reward. This is where the halving comes into focus. The block reward cuts to 450 Bitcoin per day in late April. All else equal, this will cut revenue to miners roughly in half.This deflationary and predictable issuance schedule is probably the single biggest reason people ascribe value to Bitcoin (i.e. a store of value or "digital gold").

Transaction Fees

Transaction fees are paid to miners on top of the block reward. These transaction fees fluctuate and are determined by real-time demand on the Bitcoin network. When someone wants to send Bitcoin, they pay a fee to miners to process this transaction. This is not “new” Bitcoin like the block reward, this Bitcoin already exists. There is a finite amount of "space" in each block on the Bitcoin blockchain, you can only fit so many transactions in a block. As Bitcoin adoption increases, transaction fees will rise as people are willing to pay more to get their transaction processed by the miners.

Bitcoin Price (in USD)

The U.S. dollar to Bitcoin exchange rate (currently ~$40,000 per coin)

If any one of these variables change, Hash Price is impacted. For example, if Bitcoin's price doubles and everything else stays the same, Hash Price doubles. When the Block Reward is cut in half and everything else stays the same, Hash Price cuts in roughly half. Network Difficulty, Transaction Fees and Bitcoin's price are all constantly fluctuating therefore so is Hash Price. The Block Reward is the one fixed variable seeing a "halving" once every 4 years.

Now that we understand the components that determine revenue for Bitcoin miners, let's examine the halving in more detail and what the expected fallout will be:

At the halving, Hash Price will be cut roughly in half, that is a guarantee, but what will happen to the other three components that make up miner revenue?

Network Difficulty

Hash price getting cut in half will have a severe negative impact on miners and will cause many miners to be unprofitable given their electricity costs.

If the Halving happened tomorrow, over 70% of Bitcoin miners would be instantly unprofitable and forced to power off, because their operating costs exceed the revenues they can generate. A large portion of the network is running older less efficient miners at electricity rates higher than $0.06/kWh. These miners are only marginally profitable today and, after the halving, many will shut down. A reduction in network difficulty (competition) by ~50% would reestablish Hash Price to pre-halving levels. You can read more about the state of the network and the incoming hardship for many Bitcoin miners here.

Transaction Fees

Transaction fees are not directly impacted by the halving. This is why the halving cuts Hash Price by roughly half and not perfectly in half. Volatility in Bitcoin’s price around the halving usually means more traffic on the network and higher transaction fees paid to miners. In the long run, more adoption of Bitcoin increases transaction fees.

Bitcoin Price (in USD)

A good report on past halvings and the expected price action after this halving is here. When the issuance of new Bitcoin is cut in half, and demand stays flat, the price of Bitcoin should double. Past halvings have been the catalyst for a sustained increase in Bitcoin’s price. As it relates to Hash Price, if the halving happened tomorrow and Bitcoin's price doubled, Hash Price would be the same as it is today.

In summary, revenues will go down on the date of the halving, but the expectation is that Hash Price should increase through some combination of reduced mining competition, increased transaction fees, and appreciating Bitcoin price.

So what does this mean for 360 Mining and our Customers?

“Survival of the fittest” is coming into focus. Bitcoin miners only can control two things: their cost of electricity and the efficiency of their mining fleet.

The fittest Bitcoin miners survive by operating at the lowest possible cost with the newest and most efficient machines.

The beauty of the 360 Mining business model is the emphasis on vertical integration in Bitcoin mining. By vertically integrating, we (360 and our customers) cut out the middle men who buy, mark-up and sell energy as it travels across the supply chain. We collapse the entire energy supply chain right at the pad site where we are able to produce power at ~$0.025/kWh. Our power costs are cheaper than 95% of other miners producing the same commodity (hash rate). Because our operating cost is 3x cheaper, and because we are running newer generation and more efficient miners, we can stomach the cut in Hash Price. Said another way, 95% of the Bitcoin mining network will be unprofitable before we are. We can wait out the storm and watch the highest cost, least efficient miners shut off above us, reducing network difficulty and reestablishing Hash Price.

If you are not a customer of 360 Mining, should you wait for the Halving to deploy?

In our opinion, the answer to that question is a resounding NO. Here’s why:

  • The business model was built for the worst possible cases. We are excited about the opportunity as it exists today. The great Warren Buffet once said, “Be fearful when others are greedy and be greedy when others are fearful”. There is a lot of fear in the market, which makes sense given the majority of miners are about to be underwater.
  • Why is that good for us? Because it is driving down the capital cost to deploy projects. In our business model, our customers can generate a 15%+ return assuming they deploy projects at current capex levels with mining revenues cut in half and staying there. This is preparing for the worst, however, this draconian Hash Price scenario is extremely unlikely to play out given the factors discussed above. By deploying at rock-bottom capex costs, and seeing Hash Price improve, our customers will capture outsized returns.
  • Some readers might think prices will plummet further after the halving, but that is an unlikely scenario. The reality is that miner prices can’t go much lower from here. Currently, miners are selling for close to their production cost. Furthermore, miner manufacturers do not sit on massive inventories so the “need” to move product is not there.
  • We have learned that anything can happen in Bitcoin mining and changes happen quickly. With the Spot Bitcoin ETF approvals behind us and the halving on the horizon, we think there is a strong setup for Bitcoin price appreciation. If that happens, Hash Price will increase and so will the required capex. If the model makes sense in "doomsday" mining scenarios then it makes sense to deploy now. Blood is in the water and deploying capital at attractive capex prices will generate impressive returns if/when we enter another bull market.

We hope this helps and are always available to answer any questions you may have.

The 360 Mining Team